Making a loss is an issue for any business. When your expenses exceed your income, your business will fail to turn a profit.
But it doesn’t mean your business model is broken. Sometimes, a few simple changes can turn it around and bring you back into profit.
In this guide, you’ll learn the strategies and measures you can implement to reduce losses in business.
Forecast Cash Flow
The first step to reduce business losses is to gain a better understanding of your financial situation. The best way to get to grips with your finances is to create a cash flow forecast.
A cash flow forecast shows you the money flowing in and out of your business. It helps you predict your upcoming expenses and anticipate earnings to better manage working capital.
You’ll be able to see potential cash flow gaps before they happen and take measures to address the shortfall before it affects your business.
If you need some help creating a cash flow forecast, download our free cash flow forecast template as a guide.
When cash flow is tight, you need to seize every opportunity to increase liquidity. If you provide net payment terms to your customers, consider offering an early payment discount to encourage your clients to pay faster.
This can help you to keep money flowing into your business and avoid cash flow gaps.
If industry payment terms are restricting your business, you should also consider Invoice Finance.
Invoice Finance is a type of funding that allows you to release capital tied up in your accounts receivables. Instead of waiting for your customers to pay, you can submit your unpaid invoice for financing and receive a cash advance of up to 95% of the invoice value.
When your customer pays the invoice, you receive the remaining balance, less fees.
Revise Your Financial Plan
Most businesses start with a financial plan that details how the company will cover expenses and generate profits. However, businesses grow over time, and circumstances can change.
If your business is suffering from losses, it could indicate that your financial plan is out of date and no longer fulfils its purpose.
Revisit your financial plan and see what has changed and what is causing your business losses. For example, you may find that employee costs have risen, you are struggling to generate new leads and sales, or your pricing hasn’t increased in line with your outgoings.
Compare your current performance with your financial plan and take appropriate action to restore the balance.
One of the best ways to increase revenue and generate profits is to increase sales volume. For the average business, increasing sales volume by just 1% results in a 3.3% increase in operating profit.
There are two ways to increase sales volume. You can expand your customer base, or you can sell more to your existing customers.
For your existing customers, think about potential up-selling and cross-selling opportunities. Bulk buying discounts and package deals can be great strategies for shifting more inventory and increasing sales volume.
For new customers, there are lots of marketing tactics you can implement to attract new clients. A simple strategy that can generate quick returns is to ask your existing customers for referrals.
If you aren’t increasing your prices annually, you are effectively reducing your pricing due to inflation. Increasing your pricing can generate more revenue and improve your financial situation.
According to a study of the S&P 1500 by McKinsey, increasing prices by 1% can result in an 8% increase in profits:
Source: McKinsey & Company
The right pricing strategy will depend on your industry and unique business circumstances. The key is to increase pricing without harming sales. You may be able to implement a slight increase across all of your products and services, or you may need to be more selective.
Even a small price increase can result in significant gains if it doesn’t affect sales volume.
Business losses indicate that there is an imbalance between your costs and your revenue. To bring your business back into profit, you need to increase revenue or cut costs.
You should review all of your business costs and determine which expenses are necessary and which can be reduced. Some expenses may be cut entirely without lowering the standard of service you provide to your customers.
With the restrictions caused by the global pandemic, many companies have reduced business travel and adopted work from home policies. Keeping some of these practices post-pandemic can be a great way to cut costs without impacting your ability to generate revenue.
Negotiate With Vendors and Suppliers
Every business lives as part of an ecosystem of third-party companies. From utilities to raw materials, your business needs to pay out a certain amount each month to continue to operate.
These costs are usually unavoidable, but you may find you can reduce the amount you spend by negotiating new deals with your suppliers. It rarely pays to stay loyal to a vendor, so shop around and see if there is a more affordable alternative on the market.
You may also be able to reduce costs by utilising a Trade Finance facility.
With Trade Finance, you can access a line of credit to pay your domestic and international suppliers. The extra purchasing power can help you negotiate early payment and bulk buying discounts with suppliers. As a result, you can increase your margins and release capital tied up in the supply chain.
Finance Growth and Expansion
Cash flow is a significant challenge for growing businesses. When you take on new customers, you need to invest in new equipment, staff, and materials to facilitate orders. But the upfront investment can create a cash flow gap that can impact your ability to cover overheads.
Growth without access to credit can affect profitability and even cause losses.
If you need to increase your capacity to meet customer demand, you should consider Equipment Finance.
Equipment Finance is a type of funding that allows a business to purchase new machinery, vehicles, and equipment without the upfront investment. You can get the equipment you need to expand and spread the investment cost over a more extended period.
You can avoid the growing pains and protect working capital, so you have the resources to meet demand and fulfil orders.
There are many pros and cons to outsourcing, but it can be an effective way to cut costs and streamline your operations.
The tasks you will be able to outsource will depend on your industry and unique circumstances. It’s generally most effective when you outsource time-consuming tasks that distract from your core business operations.
For many businesses, outsourcing account management and collections can increase efficiency by allowing you to concentrate on the dollar-productive areas of your business.
With Debt Factoring, account management and collections are included as part of a full-service Invoice Finance facility. You can get paid faster by financing your unpaid invoices, and the funding provider will also chase invoices and collect payment.
This can be an excellent way to cut admin costs and ensure that working capital increases in line with your sales volume.
Every business owner knows that time is money.
Investing some time into developing efficient processes and workflows can cut down on wasted time and resources.
For example, you can use software to automate customer payment reminders, organise appointments, and respond to customer queries.
If you regularly work with subcontractors, consider creating guidelines that you can use to make the onboarding process more efficient. You can also create an established onboarding system for hiring new employees.
There are lots of ways you can improve productivity and reduce wastage by getting organised.
Take Back Control of Your Business Finances With ScotPac
It’s not unusual for a business to operate at a loss during the first year of operations. But every business needs to turn a profit to survive and be successful.
The first step is to identify the reasons why your business is losing money. Then, you need to create a plan to address those issues and reduce costs or increase revenue.
Here at ScotPac, we help businesses like yours to grow sustainably. You can get hassle-free, straightforward business funding to help you overcome challenges and get your finances back on track.
Contact our team of friendly business finance advisors today to see how we can help and receive a no-obligation funding quote.