As a busy business owner it is easy to lose sight of your business’s health – but what if your business makes a loss?
No one starts a business to lose money but a number of factors can lead to making a loss. From unexpected or rising expenses to sales orders that fall through or regular clients closing their doors.
It can be a real issue if you do not analyse your figures regularly and neglect to prepare a cash flow forecast. That’s because even if you’re very busy, you could not be selling enough goods or services to cover your costs. At the year-end you’ll discover that it’s too late to make any adjustments to how you run your business.
Making an unexpected loss is one of the causes of business closure in the UK. In the first quarter of 2022, official figures show more than 135,000 UK businesses closed their doors.
Closure is a drastic measure, especially if the future order books are looking good. But there are steps you can take to increase your company’s profitability.
Being disorganised can be a big drain on your time and income. Investing a few hours to develop a system and processes for your business saves time. The result is you can save time and potentially avoid losing money.
From document templates to spreadsheets that track expenses, they will help you keep track of funds going in and out.
Cash flow forecast
We’ve already looked at cash flow forecasts and how they are so important to a business’s health. By forecasting, you will see the flow of money in and out. It helps predict future expenses and helps you anticipate earnings to manage your cash better.
If there are any gaps, you can take measures to address to start filling them. This way, it has less chance of having a negative effect on your business.
If you are facing tight cash flow, grab every opportunity to increase your liquidity. You could offer early payment discounts to encourage your clients to pay faster. There’s also the option of using invoice finance to release capital tied up in your unpaid invoices. We’ve looked at invoice finance here [Link to business loans blog]. Getting money in quickly is important if you want to avoid a major loss.
It sounds obvious, but the more you sell the higher your operating profit will be. According to Harvard Business Review, most businesses need to increase sales by just 1% to increase operating profit by 3.3%.
You can increase sales by expanding your current customer base or sell more to existing customers.
That could include up-selling to your clients or offering bulk buying discounts.
To increase your customer base, try marketing to attract new clients. You could offer limited-time discounts to get those goods or services moving out and cash coming in.
When was the last time you reviewed your prices? With rising inflation, you may have passed on rising costs. But it’s surprising to discover that business owners are reluctant to increase prices as they fear they’ll lose customers.
A study by marketing and sales giant McKinsey & Company says that increasing prices by 1% can result in profits increasing by 8%.
The right pricing strategy depends on your industry and business circumstances. You might be able to increase all prices or you may need to be more selective. So make sure you do your research.
Cut your costs
Again, this sounds obvious, but cutting your costs means less cash is flowing out. Review all your expenses and see what can be cut back. Do you really need to pay a monthly sum to be a member of lots of professional bodies? Can you cut back on business travel? It’s great to be able to see clients in person, but we all got used to Zoom meetings during the pandemic. Look at what you’re spending and what can easily be reduced without affecting your service to customers.
Buying from suppliers is essential for almost every business. Look at what you are spending and, if necessary, negotiate payment terms with your suppliers. You may not be able to reduce the spending but if you can agree terms to pay in 30 days rather than 14, it leaves liquidity in your business for a little longer. If a supplier can’t negotiate, then consider moving to another supplier.
It sounds tough but even a short change in terms can give you the breathing space to cut losses.
What should I do if my business makes a loss?
While you don’t want to close the gate after the horse has bolted, speak to a chartered accountant if you think your business is facing a loss. While you will need to pay for their time, you could end up with a plan that puts more money back in your business.
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