When you’re a business owner, there are going to be days when your company is at risk of losing profit. The trick is not to let any of those days turn into months or years.
But what should you do if your business is losing money and you're not sure why? You’re going to want to take hold up a mirror to your business and start analyzing what’s going wrong. These steps can help.
1. Study your cash flow.
Many businesses fail because money is being mismanaged, according to Ted Gavin, managing director and founding partner at Gavin/Solmonese, a corporate consulting firm in Wilmington, Delaware. And to fix that money management, “we need to know why we’re losing money,” Gavin says. “For that, there is nothing like a 13-week cash-flow model.”
He suggests breaking down your business revenues by the type of revenue and timing.
“Once you can visualize what’s coming in and when, and what’s going out and when, aberrations will become clear. This provides actionable information – are revenues off? Are expenses high? Is the business leaking cash inexplicably?”
If that’s the issue, Gavin says, then you should be able to fix the problem. As long, of course, as you act fast.
2. Analyze your prices.
Maybe your cash flow is fine, but your prices need adjusting. That can be harder to figure out than it might seem, because of profit margins, says Chris Arndt, CEO of ORBA’s Cloud CFO Services, based in Chicago. Arndt says that he recalls one client whose business was going to stop working with a retailer because they bought their products at a lower price than others. Meanwhile, they were very happy with a second retailer, who purchased their products at a higher price.
But Arndt says that when they analyzed the client’s books, “we were able to show our client that they were actually losing money on this second retailer. As a result, our client was able to negotiate substantial price increases with this second retailer to make the sales profitable. This higher price resulted in lower sales to this retailer, but there was now more profit coming from less sales, which let our client simplify operations.”
As for that first retailer who paid cheaply for the client’s products, Arndt says that with a simple change in how the product was shipped to them, they were able to widen their profit margins.
“Our client was shocked by this because it was so easy to sell to this retailer and they didn’t think that easy work could be profitable work,” Arndt says, adding that the client’s profits and cash flow improved almost immediately.
3. Check your contracts.
Think of all the business contracts you sign within a given month or year, from employment agreements to contracts with suppliers and clients.
You may want to take a closer look at some of those contracts, says Min Hwan Ahn, an attorney in Philadelphia. He is primarily an immigration attorney, but he and his partner often represent immigrants with commercial law issues.
“When a business segment is underperforming, it's usually profitable to meticulously scrutinize the associated contracts and agreements," Ahn says. "There might be room for negotiating better conditions, or maybe there's a potential for voicing a less risky liability. Primarily, it's mandatory to confirm that all actions taken comply with federal and state laws to avert potential hazards.”
4. Take a look at your business model.
Matt Sweetwood, based out of Boca Raton, Florida, owns two companies – a consulting firm called Standing Man LLC and industrial emissions management company Greener Process Systems. But from 1987 to 2015, he owned a photographic supply company, a family business that sold products such as film, cameras, and camera accessories. Sweetwood says that his company had a “5 share” of the traditional market, “meaning we sold 5% of all the rolls of film sold in the US. Our business was mostly B2B, where we sold to small stores such as 1-hour labs, independent pharmacies and gift shops.”
But as smartphones became more common and the market changed, Sweetwood didn't abandon photography. He just changed the business model.
“I sold our 60,000-square-foot industrial building and bought a similar sized building on a major highway – 100,000-plus cars per day pass by – got us retail approval, and opened a camera superstore," Sweetwood says, adding, "Folks thought I was crazy or stupid."
But shifting from a business-to-business model to a business-to-consumer model worked.
“All of our salespeople were photographers. The store looked like a huge, high-end jewelry store, it had a gourmet coffee bar, and we opened a photography education program,” Sweetwood says.
When Sweetwood sold the store to family members in 2015, he had 110 employees, and it was one of the biggest camera stores in the country.
Not every business should change its model, of course, but if you are leaning in that direction, Sweetwood says, “You should be looking at new directions constantly. The best time to reinvent a business is when it's at its peak. If you wait until the downslide, it could be too late. The graveyard is littered with companies that waited too long.”
There could be a myriad of reasons why a company is losing revenue besides needing a new business model or needing to analyze contracts, price margins, and cash flow. The problem may be that you need to lower overhead or cut costs. Maybe your customer service needs improvement. Or maybe you and your team are great, but you need a better marketing plan. Unfortunately, there is almost no shortage of reasons why a company could be losing money.
But that also means there are a lot of paths and fixes to helping your company bounce back. In the world of business, paying attention can pay off.
Photo: Getty Images
