What to do if your business is operating at a loss

Running a business can be both rewarding and challenging. For many entrepreneurs, one of the most daunting challenges is managing a business that’s operating at a loss. This is a common occurrence, especially for new ventures, or during times of economic uncertainty such as recessions. While it may seem overwhelming, it's not the end of the road. With the right strategies and a clear understanding of your financial position, you can steer your business towards recovery.

Here are the key steps to take if your business is operating at a loss:

1. Evaluate and Understand the Cause

Before making any drastic changes, take a step back and assess why your business is operating at a loss. Is it due to high expenses, a drop in sales, poor cash flow management, or market shifts? Understanding the root cause is crucial to finding the right solution.

Some common reasons businesses operate at a loss include:

• Overestimating revenue projections

• Underestimating costs

• External factors such as economic downturns or changes in industry regulations

By conducting a thorough financial review, you can pinpoint the issues. Look at your profit and loss statements, cash flow reports, and key performance indicators (KPIs). Bringing in an accountant or financial advisor can help you gain a clearer picture of your financial health.

2. Review Your Expenses

Once you’ve identified why your business is making a loss, it’s time to control what you can. A detailed review of your expenses can uncover areas where you can cut costs. Start by categorising your expenses into fixed and variable costs. Fixed costs, such as rent and salaries, are harder to adjust, but variable costs like advertising or supplies may offer more flexibility.

Possible areas for cost-cutting:

• Renegotiate contracts with suppliers for better rates

• Look at automating tasks to reduce labour costs

• Switch to energy-efficient solutions to cut utility bills

• Consider downsizing unnecessary expenditures such as underperforming marketing campaigns or non-essential staff

While cost-cutting is important, be cautious not to cut back on areas that directly impact product quality or customer satisfaction, as this could cause long-term damage.

3. Increase Revenue

Boosting revenue can help balance out losses. This may involve reassessing your pricing strategy, launching new products or services, or focusing on upselling to your existing customers. Start by analysing your current sales channels and seeing where improvements can be made.

Some revenue-boosting tactics include:

• Offering discounts or limited-time offers to encourage immediate sales

• Diversifying your product or service offerings to reach a broader audience

• Focusing on customer retention and loyalty programmes to ensure repeat business

Additionally, look into new sales channels, such as expanding into e-commerce if you’re primarily brick-and-mortar or vice versa. Exploring new markets, either locally or internationally, may also offer untapped revenue streams.

4. Address Cash Flow Issues

Cash flow problems are often a leading factor in business losses. Even if your business is profitable on paper, if you lack the liquid cash to cover day-to-day operations, the business can quickly falter.

Improve your cash flow by implementing strategies such as:

• Tightening up your invoicing process to ensure faster payments

• Offering discounts for early payments to clients

• Extending payment terms with suppliers

• Regularly monitoring your cash flow to avoid surprises

Consider implementing cloud accounting software to track your cash flow in real time, giving you a clearer view of your financial standing at any moment.

5. Utilise Tax Relief Options

If your business is operating at a loss, there are tax benefits you may be able to claim. In New Zealand, for example, tax losses can be carried forward to future years, reducing taxable income when the business becomes profitable again. This allows businesses to offset current losses against future profits, which can be a valuable tool for long-term planning.

You might also be eligible for loss carry-back provisions, allowing you to apply current losses to past income and potentially receive a refund.

Not sure what you're entitled to? That’s where we come in, our team can help identify which relief options apply and how to make the most of them.

6. Seek Professional Help

If your business is consistently operating at a loss, it might be time to bring in some extra support. Working with an accountant, financial advisor, or business consultant can give you a fresh perspective and help uncover areas you may have overlooked. We can offer guidance on restructuring, refining your financial strategies, and planning a more sustainable path forward.

If you're looking for tailored advice, our team is here to help. Get in touch to chat about how we can support your business with expert accounting and tax guidance.

7. Have a Recovery Plan

If your business is operating at a loss, it’s essential to develop a clear recovery plan. This plan should include realistic short-term and long-term goals for getting your business back on track. Outline specific actions you’ll take to reduce costs, increase revenue, and improve cash flow. Regularly revisit and adjust this plan as necessary.

For some businesses, recovering from losses may also involve seeking external financing. This could be in the form of a loan, government grants, or attracting new investors. Before pursuing additional financing, make sure you have a solid repayment plan in place and are confident that the extra capital will turn your business around.

8. Stay Positive and Focused

Lastly, remember that operating at a loss is not unusual, especially in the early stages of a business.

Many successful companies have faced periods of loss before finding their footing. By staying focused, being adaptable, and implementing the right strategies, you can move your business from a loss to profitability.

Business is a journey, and the road to success often involves learning from challenges. Stay informed, remain proactive, and don’t be afraid to ask for help when you need it.