12 ways to reduce costs for an organization with confidence

Published Wednesday 3 Septemeber 2025

Table of Contents

• Why you may need to cut business costs
• The problem with cutting business costs
• Types of cost reduction strategies
• How to prioritize cost reduction efforts
• Where the best cost saving ideas come from
• 12 business cost saving ideas
• Measuring the impact of your cost reduction efforts
• Smart cost cutting for sustainable business growth
• FAQs on cost reduction strategies

Key Takeaways

• Prioritize high-impact, low-effort cost reductions by focusing on discretionary spending like unused subscriptions, excessive travel, and non-essential office perks that can be eliminated without affecting core business operations.
• Engage front-line employees and department managers to identify cost-saving opportunities since they work directly with business processes and can spot inefficiencies and waste that management might miss.
• Implement strategic cost restructuring by negotiating longer payment terms with suppliers, converting fixed costs to variable costs through outsourcing, and refinancing high-interest loans to improve cash flow without reducing business quality.
• Automate administrative tasks and optimize inventory levels to reduce labor costs and free up cash flow while maintaining operational efficiency and customer service standards.

Why you may need to cut business costs

Cost cutting is the process of reducing business expenses to improve profitability when revenue growth isn't possible. Most businesses need to cut costs at some point due to inflation, declining sales, or economic pressure.

Start by gathering your expense data:

• Review bank statements: Check the last 3-6 months for recurring costs
• Examine receipts and invoices: Identify discretionary spending patterns
• Use accounting software: Tools like Xero provide comprehensive expense reports

Focus on reducing unnecessary costs while maintaining the quality of your business.

The problem with cutting business costs

Strategic cost cutting means reducing expenses without damaging business operations or quality. Poor cost reduction can harm your business in several ways.

Watch out for these risks when cutting costs

• Quality decline: Cutting essential materials or processes reduces product/service standards
• Customer impact: Lower quality leads to reduced satisfaction and customer loss
• Team efficiency: Removing necessary tools or resources creates workflow bottlenecks
• Employee morale: Inadequate resources stress teams and reduce productivity. Conversely, companies with engaged employees are often 23% more profitable, highlighting the financial risk of poor morale.

The goal is smart cost reduction that eliminates waste while preserving what drives your business success.

Types of cost reduction strategies

There are different ways to reduce costs. Some changes, like cutting travel, save money quickly. Others, like investing in new technology to improve efficiency, help you save in the long run. Choose the approach that fits your business goals.

How to prioritize cost reduction efforts

• With a list of potential savings, where do you start? A simple way to prioritize is to weigh the impact against the effort. Look for high-impact changes that are relatively easy to implement – these are your quick wins. For bigger projects, like changing suppliers or investing in equipment, you'll need to do a more detailed cost-benefit analysis to make sure the long-term savings are worth the upfront effort.

Where the best cost saving ideas come from

Employee insights often reveal the most effective cost-saving opportunities because your team works directly with business processes and sees waste firsthand.

Best sources for cost-saving ideas:

• Front-line employees: Ask staff who handle daily operations about inefficiencies
• Department managers: They spot resource waste and process bottlenecks
• Accountants and bookkeepers: Financial professionals identify spending patterns and tax advantages
• Business mentors: Experienced advisors suggest strategic cost reductions

If you do not already have one, you can find an accountant or bookkeeper in the Xero advisor directory.

12 business cost saving ideas

1. Reduce discretionary spending

Discretionary spending includes non-essential expenses that do not directly affect your core business. These are usually the easiest costs to reduce.

Review these common discretionary expenses

• Travel and entertainment: Replace in-person meetings with video calls
• Subscriptions: Cancel unused magazines, software, or memberships
• Office perks: Reduce premium coffee, catered meals, or luxury supplies
• Marketing extras: Pause non-essential advertising or promotional materials

Check if each expense directly contributes to revenue or essential operations. If it does not, it is likely discretionary.

2. Review and renegotiate supply chains

Supply chain negotiation involves securing better pricing on essential business materials and services. This directly reduces your cost of goods sold.

Use this three-step approach

• Research alternatives: Get quotes from 3-5 suppliers for comparison
• Negotiate with current suppliers: Ask for volume discounts or loyalty pricing
• Evaluate bulk buying: Lower per-unit costs but requires higher upfront investment

Bulk buying means you pay more upfront but save over time. Only do this if you have enough cash flow and storage space.

3. Carry less inventory

Inventory optimisation means carrying just enough stock to meet demand without tying up extra cash. The days sales of inventory (DSI) formula shows how long it takes to turn inventory into sales and helps you see how much cash is tied up in stock.

Reducing inventory can help you

• Improved cash flow: Less money locked in unsold stock
• Lower storage costs: Reduced warehouse or shelf space requirements
• Decreased shrinkage: Less risk of theft, damage, or obsolescence

Smaller orders may mean you lose bulk discounts from suppliers. Check if your storage savings are greater than the lost discounts before you make changes.

4. Optimise logistics

Check your courier and freight bills for waste. Buy supplies locally if possible. Consider using slower transport options. If you deliver to customers, see if you can share delivery costs with them. For example, you could charge for express delivery while offering a slower, free service.

5. Develop economy products and services

If customers cannot pay more, offer lower-spec options that still meet their needs at a lower cost. Keep your high-value products or services for customers who want and can afford them.

6. Go remote

Review your office space needs. Mobile office tools let your team work productively from home. If remote work suits your business, you can reduce your office size and rent. Research shows that companies can save $11,000 per employee on average by going remote, mainly through lower real estate costs. Shop owners can also save by moving more sales online.

7. Share resources

Look for other businesses you can partner with to share the costs of workshop space, equipment, or consultants. You can also share staff across organisations, such as administrative staff, front of house, labourers, or sales people.

8. Conserve energy and minimise waste

Do an energy audit to find ways to save. Energy is a major expense, especially for manufacturers. For example, one plant saved over $99,000 a year by removing an unnecessary heating oven. Watch for other types of waste, as they all add up.

9. Automate administrative work

Use software to automate admin tasks. This can save you money on overtime and increase your team's productivity. Keep your apps up to date to support your team.

10. Refinance to lower-cost loans

High interest on business loans adds up quickly. Structure your debt to save money. Consider rolling high-interest short-term loans into a lower-interest long-term loan.

Get a bookkeeper, accountant or trained broker to review your finances. You can find one in the Xero advisor directory.

11. Restructure costs

Restructure your costs by changing when you pay expenses instead of reducing them. This spreads costs more evenly and improves cash flow.

Try these payment timing strategies

• Supplier terms: Negotiate longer payment periods or staggered due dates
• Order scheduling: Place orders at different times to avoid payment clusters
• Employee compensation: Spread bonuses and commissions across quarters

Consider these financing options

• Equipment leasing: Convert large purchases into monthly payments
• Payment plans: Choose quarterly or monthly insurance premiums instead of annual
• Low-cost credit: Use business credit lines to smooth payment timing

Use cash flow forecasting to spot payment bottlenecks and spread your expenses more evenly.

12. Outsource to reduce fixed costs

Outsourcing turns fixed costs into variable costs. Instead of buying expensive equipment or hiring extra staff for occasional tasks, pay an external provider only when you need the service. Your costs rise when sales go up and fall when sales are down.

Measuring the impact of your cost reduction efforts

After you make changes, check if they are working. Track your results by reviewing your profit and loss statement in your accounting software. Watch your profit margins and cash flow to see the impact of your efforts.

Smart cost cutting for sustainable business growth

Cutting costs helps you build a stronger, more efficient business. Smart choices free up cash for growth, innovation, or a better work-life balance. Try Xero for free to see how easy it can be.

FAQs on cost reduction strategies

What are the main types of cost reduction?

There are two main types of cost reduction. Short-term changes, such as cutting discretionary spending, save money quickly. Long-term changes, like automating processes or renegotiating supplier contracts, improve efficiency over time.

How can I cut costs without hurting my business?

Cut waste, not value. Look for inefficiencies, automate repetitive admin tasks, and review unused subscriptions. Keep the things that support your product quality and customer experience to protect your reputation and profits.

What's the first step to reducing business costs?

Start by reviewing where your money goes. Use your accounting software to run an expense report. This shows every cost, from major supplier payments to small subscriptions, so you can see where to make changes.