Operating at a loss simply means you’re spending more money than you’re making. And while it’s not uncommon, especially for new businesses, it’s still not an ideal situation and one that shouldn’t continue in the long term. Otherwise you will eventually run out of cash reserves and be out of business.
So the first thing you need to identify is why you’re operating at a loss. If it’s because you’re still in the start-up phase, then you might not need to worry too much as long as you’ve got enough cash to meet your costs. But if the losses are due to a decline in sales, then it’s time to review your business and, if necessary, get professional help.
You’re operating at a loss if you:
- Don’t have enough money to pay your bills;
- You’re in overdraft without a plan to pay it off;
- You’re not selling as much as you anticipated.
Do any of the above apply to you? Let’s look at ways you can remedy the situation.
What you can do
The first step you need to take is to work out if you’ve got any revenue coming in, in the near future. This could be in the form of a large account being paid, or if your business is a seasonal one, seeing your returns at the end of the season. If this is the case, then the issue you’re facing is a cash flow one. Talk to your bank or our advisors about the possibility of a short-term loan until this money comes in.
One of the best and most effective ways of improving your cash flow so that there’s more money in your business is to find ways to reduce costs. All it takes is a bit of creative thinking. For instance, you could:
- Look at your economies of scale. Consider buying stock in bulk, as you’re often able to get good deals from suppliers this way. However it’s also important that you’re not hanging on to stock that’s not needed, so if you do decide to buy in bulk, make sure you’ll be able to sell it all. Buying stock right before its actually needed is also a cost-saving method that’s worth considering.
- Lower your staff costs. Consider outsourcing tasks like payroll and look at using contractors for project-related jobs.
- Streamline your processes. Look at ways you can use technology to make your processes and systems more efficient. There might be administrative tasks that you can ditch altogether.
- Reduce your overheads. See if you can cut down on energy costs or look around to see if other service providers can give you better deals than the ones you have. Do you really need to be paying commercial rent on an office, when you could work from home? Can you cut down on your travel costs by using Skype for meetings instead?
Once you’ve looked at all the ways you can reduce your spending, it’s time to get more money coming into the business and the best way to do this is to find ways to increase your sales. This will improve your cash flow and you’ll start to see a profit, which means you’re no longer operating at a loss.
Some of the best ways of increasing sales are:
- Learning the art of cross-selling. This means suggesting to customers that whatever they’re buying from you would be of more value if they purchased a complementary item.
- Increasing prices. You should always be seeking to increase your prices over time, so that you can improve your profit margins and keep up with inflation.
- Be proactive on social media. Are you using it to your advantage? Effective use of social media platforms like Facebook and LinkedIn will help drive more traffic to your website, which in turn can help increase the number of your customers.
It’s also important to review your debtors. Are you owed money? If so, start chasing them up. It’s no good selling to customers who aren’t paying, so you might even look at ditching habitually late or non-paying customers.
Short term solutions
There are some things you can do to give yourself a life-line while waiting out the current drop in sales, such as:
- Contributing some of your savings to your business account
- Taking out a short-term loan or an overdraft
- Borrowing from friends or family
- Using crowd funding to raise capital
- Consider seeking out investors
- Selling any un-used stock or assets.
In the end, turning your business around from operating at a loss to showing a profit comes down to common sense and not having your head in the sand. It’s important to review your business practices carefully and honestly so that you can pinpoint where you’re going wrong. Once you’ve identified why you’re operating at a loss, putting a plan in place to deal with it, and sticking to it, is the best way to turn things around.
Want to chat to our advisors? Get in touch today.