Cost reduction strategies to cut business expenses

Published Friday 16 January 2026

Table of contents

• Why you may need to cut business costs
• How to prioritize cost reduction efforts
• How to create a cost reduction budget
• How to cut business costs without hurting performance
• Where the best cost-saving ideas come from
• Short-term cost reduction strategies
• Long-term cost reduction strategies
• 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.
• Restructure your main costs by negotiating longer payment terms with suppliers, turning some fixed costs into variable costs through outsourcing, and refinancing high-interest loans to improve cash flow without reducing quality.
• Automate administrative tasks and optimize inventory levels to reduce labour costs and free up cash flow while maintaining efficiency and customer service standards.

Why you may need to cut business costs

Cost cutting is the systematic process of reducing business expenses to improve profitability without harming operations. You might focus on cost reduction during periods of inflation, declining sales, or economic downturns when revenue growth alone cannot maintain healthy margins.

Start by gathering your expense data:

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

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

How to prioritize cost reduction efforts

Cost reduction prioritization helps you focus on the most effective savings first. Start by weighing impact against effort required.

• Quick wins: Look for high-impact changes that are easy to implement.
• Major projects: For bigger changes like supplier switches or equipment investments, conduct detailed cost-benefit analysis to ensure long-term savings justify upfront costs.

How to create a cost reduction budget

A cost reduction budget helps you plan and track your savings. It turns ideas into an actionable plan. Creating one gives you a clear roadmap for reducing expenses without guesswork.

Follow these four steps to build your budget:

1. Review all expenses: Use your accounting software to list every outgoing cost. Group them into categories like rent, supplies, payroll, and marketing.
2. Set clear targets: Decide on a realistic savings goal for each category. For example, aim to reduce supply costs by 10% or marketing spend by 15%.
3. Assign responsibility: Make specific team members responsible for the savings in each area. This creates accountability and encourages ownership.
4. Track your progress: Regularly check your spending against the new budget. This helps you see what's working and where you might need to adjust your plan.

How to cut business costs without hurting performance

Strategic cost cutting means reducing expenses without damaging business operations or quality. This approach preserves what drives business success while eliminating waste.

Unplanned cost reduction can put your business at risk. Focus on these areas to protect performance when you cut 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 see significant business advantages, including a median difference of 23% in profitability, highlighting the financial risk of poor morale.

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

Where the best cost-saving ideas come from

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

Best sources for cost-saving ideas:

• Frontline 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.

Short-term cost reduction strategies

Short-term strategies offer quick wins by cutting non-essential or inefficient spending. They can free up cash flow almost immediately without disrupting your core operations.

Reduce discretionary spending

Discretionary spending includes non-essential expenses that don't directly affect your core business operations. These costs are typically the easiest to reduce because they won't impact product quality or customer experience; in fact, a recent survey found a net 58% of UK corporations are expected to cut discretionary spending amid a broader squeeze on spending.

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

Eliminate wasteful spending

Wasteful spending often hides in plain sight. Ask your team where they see inefficiencies, like paying for premium services that aren't fully used or ordering supplies that go to waste. Small changes here can add up quickly.

Renegotiate supplier contracts

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

Use this three-step approach:

• Research alternatives: Get quotes from three to five 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

Optimise inventory levels

Inventory optimization means carrying just enough stock to meet demand without tying up excess cash. The days sales of inventory (DSI) formula shows how long it takes to turn inventory into sales, with a good DSI of 30–60 days being a common industry benchmark, depending on your business size and sector.

Reducing inventory delivers these benefits:

• 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

Review and cancel subscriptions

Check your bank statements for recurring payments for software, publications, or memberships. Cancel any services you no longer use or need. Many businesses find they are paying for subscriptions that have been forgotten.

Automate administrative work

Use software to handle repetitive tasks like invoicing, data entry, and scheduling. Automation saves time and reduces the need for overtime. In some cases, robotic process automation (RPA) can slash operational admin costs by up to 30%, letting your team focus on more valuable work.

Long-term cost reduction strategies

Long-term strategies require more planning but create sustainable savings that strengthen your business over time. These changes often involve restructuring how you operate to improve efficiency.

Go remote or downsize workspace

If your business can operate remotely, you could reduce or eliminate rent, one of the biggest fixed costs. Even downsizing to a smaller office or a shared workspace can lead to significant savings.

Share resources with other businesses

Partner with other local businesses to share costs. You could share a delivery driver, rent equipment together, or split the cost of a consultant. This gives you access to resources you might not afford on your own.

Develop economy products and services

If some customers are sensitive to price, consider offering a more basic version of your product or service. This allows you to capture sales you might otherwise lose, without discounting your main offerings.

Conserve energy and minimise waste

Conduct an energy audit to find savings. Simple changes like switching to LED lighting or turning off equipment when not in use can lower utility bills. Also, look for ways to reduce material waste in your production processes.

Refinance to lower-cost loans

If you have high-interest business loans or credit card debt, look into refinancing. Consolidating your debt into a single, lower-interest loan can reduce your monthly payments and save a lot of money over the life of the loan.

Restructure costs and payment timing

Improve your cash flow by changing when you pay bills. You can negotiate longer payment terms with suppliers, or conversely, ask if they offer reduced pricing for early payments. You can also switch from annual to monthly insurance premiums. This doesn't reduce the total cost, but it makes payments more manageable.

Outsource to reduce fixed costs

Outsourcing tasks like IT support, bookkeeping, or marketing converts a fixed cost (like an employee's salary) into a variable one. You pay only for the services you need, which gives you more flexibility as your business needs change.

Measuring the impact of your cost reduction efforts

Cost reduction measurement tracks whether your changes are delivering expected savings. Monitor these key metrics to assess your progress:

• Review profit and loss statements: Use your accounting software to track expense changes
• Monitor profit margins: Watch for improvements in gross and net margins
• Track cash flow: Measure increased available cash from reduced expenses

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

Check out these questions and answers on ways to reduce costs for your small business.

What are the main types of cost reduction?

Cost reduction falls into two main categories based on implementation timeline:

• Short-term changes: Cut discretionary spending, cancel unused subscriptions, and reduce travel expenses for immediate savings.
• Long-term changes: Automate processes, renegotiate supplier contracts, and restructure operations for sustained efficiency improvements.

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.