The Number 3 Reason Why Businesses Fail is:
Trading Losses
Many businesses will experience trading losses at some point.
It’s how you deal with them, that matters.
will take about 7 minutes to read….
In our 4th year of trading, we made a 6 figure trading loss. Partly because of fierce competition and partly due to being caught off guard. It was one of the biggest learning curves in our history of operating. By the 6th year we were back to making a profit and never looked back again.
BEWARE of your success. Don’t become complacent.
Things can change very fast from being successful to losing money. You need to stay on top of things, see the signs and react quickly. Here’s an example of how things can go wrong:
After 3 years of booming sales and a gradual and steady growth of our business, everything seemed to be working like clockwork. There was nothing to suggest that there was a downturn in sales, or that there were any signs of the business failing in any aspect. In fact that fourth year seemed to be following the previous three years in terms of sales and growth. So what happened that caused a sudden 6 figure loss in our 4th year of trading?
Quite simply we were expecting to see the same numbers come through on our profit and loss – but only they didn’t! We were completely blindsided when our advertising costs had spiralled out of control. We didn’t realise the spike until those invoices came through – which was every 45 days; and when the first invoice came through, the second one was about to be issued – Holy Crap!- that was 90 days worth of advertising costs that were occurring simply because we didn’t monitor these daily! Even weekly could have saved us!.
This was a tap that needed to be switched off, but it wasn’t so simple, because it also meant that sales would reduce drastically; but there was no choice. It was not sustainable and we had to re-group and find other ways and selling platforms to get our product out. This however took time, and time was not on our side. So we lost even more money simply by retaining staff that were no longer required, and expenses that were no longer justifiable.
We had to scale the whole thing down and rebuild it from scratch – and we did, and this time we came out wiser and stronger. We overcame the set backs and the challenges and became resilient. It taught us how to manage change in the workplace. We had to lay off staff, upskill and reskill others, and scale down. It was the biggest learning curve in the history of our business. I cannot even begin to tell you the level of crankiness!
Profit & Loss
If you are running a loss – figure out why? Go through your profit & loss statements with your bookkeeper and start trimming the fat. You will be surprised at how much everything adds up to and how much you can cut by simply knowing your costs & operating expenses.
Meet with your Accountant and review your cost structures. Your Accountant is key to your business; together you will assess the causes and they may show you a way to turn your business around.
At this point you should only be investing in something that generates a direct sale until you are able to build your business up again. For example don’t invest in upgrading equipment, but rather create a promotional offer to motivate your customer to buy and inject money into your business. Don’t panic – react.
Scaling Down
You may need to scale down your business. This can be due to a number of factors, including economic downturns looming, which can be out of your control. Its important to know how to recession proof your business.
Salaries can form one of your biggest expenses you may need to let go of staff. This is one of the most difficult tasks at hand, because there is both an emotional investment here and a monetary investment. Do it carefully and use the best practices of letting go of staff possible. It takes a lot of time and effort to train staff, and when you have to let them go, other than the devastation it causes, it may also feel that you have lost a massive asset from your business. With the great resignation unfolding post Covid, many businesses are keen on retaining their staff, at any cost. But this can have terrible financial implications. It may be time to reset, re work it and rebuild it with the resources that you have and can afford, to get you back to making profits again.
Carrying Forward Your Losses
Talk to your accountant about the possibility of carrying forward your losses and claiming a deduction in the following year. There are rules and requirements and certain tests, that will determine if you are able to do so, but in the simplest of terms, if you are a company and you maintain the same control and majority ownership you will be pleasantly surprised that you may be able to carry forward your losses indefinitely. This means that you will be allowed to offset your losses from a previous year against the profits of your current year, so that you will reduce the amount of future tax you pay.
Trading Whilst Insolvent
There are many businesses that will keep trading even when running losses, due to their inability to pay their debts. Trading whilst insolvent can have serious legal ramifications for Directors.
When you are trading insolvent it basically means that you keep trading even though you know that you cannot pay your debts and you keep adding more debts to your business.
In fact creditors (the people you owe money to) can bring legal action against you.
Calling It Quits
A smart business person knows when to call it quits.
Beware of cognitive dissonance which goes hand in hand with confirmation bias. There can be a discomfort that arises from the conflict between the belief that the business should be successful and the evidence that it is consistently losing money. To reduce this discomfort, individuals might engage in cognitive dissonance by finding excuses or justifications to maintain the belief that the business is viable.
Don’t keep throwing good money after bad. You are never going to recuperate the money you have thrown at your business by throwing more at it. If it’s not working and you simply can’t turn the business around – cut your losses and walk away. You are not failing for doing this. It is the smart thing to do, as difficult as it may be.
Trading Losses are the number three (out of the top four)reasons why businesses fail.
Let’s check out the other reasons why businesses fail & see more information on each:
It’s essential to understand these four reasons as they have critical information to the success of your Finances and Strategic Management which is one of the most important steps in the 5 basic step guide to running a successful business.
