13 Ways Your Business Could Be Hemorrhaging Money (And How To Fix Them!)
Most small business owners would agree that keeping their business profitable is not as easy as it may appear. There are countless, constant pressures of things like chasing sales, paying creditors, managing staff and so many other day to day tasks and responsibilities required to run a business, that it can be easier than you think for time and money to slip through the cracks. It doesn’t take long for this to start eating into your profit margin and ultimately your bottom line.
Many consider small businesses to be the backbone of America but that doesn’t mean that every small business is actually profitable. Responsibilities like retaining employees, keeping customers happy and paying vendors/suppliers on time means that it takes a lot just to keep the doors open. If you want to be a successful business owner, then paying extremely close attention to all your operational details is not just suggested, It is a non-negotiable requirement.
Any business owner has the obligation to make enough money so that not only does the business itself survive, but also so you can support not only your family but your employees as well. If all of the financial aspects of your business are not closely tracked, you risk not only losing money but also the chance to increase profits. Keeping your business in good health requires continually both assessing and improving every aspect of your business finances.
It can be a very somber and harrowing moment when you realize that the bottom line of your business is actually losing money instead of generating it. This can be especially frustrating if you don’t understand what you are doing wrong. However, finding the reason (or reasons) for your money loss is the first necessary step in plugging the cashflow leak. Bookkeeping errors are usually the first to blame in situations such as this but many times there are far more reasons beyond that a company might not have the bottom line they would hope for. Thankfully, the solutions to these problems are often as straight forward as the problems themselves. The difficulty lies in identifying the problems to begin with at first.
The cold reality is that there could be a plethora of reasons why your business may be losing money. Your biggest (and most important) job as a business owner, is to both identify and address as many of these issues as you can before they get even worse. Read on below to learn about the ten reasons your business is losing money (and even more importantly, what you can do about it).
#13
Ignoring The 80/20 Rule
You might have heard it called the 80/20 rule but it is also known as the Pareto Principle. This principle states that for many events, roughly 80% of the effects come from 20% of the causes. Or in other words, 80% of your results comes from 20% of your actions. If you take this principle and actively apply it to your business, you will start to notice some extremely beneficial changes when it comes to your efficiency. This means making sure that you always focus on what is currently working best, as well as what is taking you the least amount of time. This will allow you to always optimize your time and efforts in order to get more income.
#12
Poorly Priced Products and/or Services
You need to learn to find a middle ground when setting the prices for your products and/or services. If you wind up either selling your product or service for too much or too little, your business will lose money. This is simply due to supply and demand. On one hand, if you set your prices too high, fewer customers will buy your products. People will view your product or service as unaffordable0. This will cause them to seek out cheaper alternatives from your competition. On the other hand, if you set your prices too low, more customers will buy your product or service. Yes, a lot of people buying product or service is a good thing. However, you need to take into consideration that the prices might be so low that you are having a hard time turning a profit. You also have to consider that people might actually be willing to pay more than your ultra-low price you have set.
Learning how to select the best price points for your product or service might be difficult, but it’s not impossible. Conduct a market analysis to learn about the kind of customers you have. Study your competitors to find out what they charge for the same products. You can even ask customers and potential customers how much they would be willing to pay for your products.
Products priced too high or low spell out trouble for small businesses. If you’re undervaluing your stock, you’re missing out on obvious chances to turn a profit; but did you know that charging too much could be hurting your pocketbook, too? Both consumers and clients are far less likely to buy if they feel what you are offering is of poor value or overpriced. Evaluating your price points should be one of your first lines of defense against vanishing profits and a dismal bottom line.
#11
Never Outsourcing Labor Where Possible (And When It Makes Sense)
When your business grows, it usually requires hiring more employees to handle the additional tasks. Before making any new hires however, think carefully and discern what work can be done by freelancers and/or contractors instead. In many cases freelance workers are a better fit for specialized jobs such as marketing, accounting, bookkeeping and social media management.
Now it is true that you may likely pay contractors more per hour than you would a typical employee, you will most often need them for less than full-time. Here is something else to consider: because they are their own business owners, freelance contractors are not eligible for overtime, insurance and other benefits that make having traditional employees much more expensive in the long run. Outsourced labor is a good way for businesses to keep labor costs low, and it allows you to baby step into a full-time hire in a much more cost-effective method. A lot of small business owners will actually limit the growth of their company by not hiring. But here is the thing: you don’t actually have to hire more full-time employees in order to be able to grow your business. You can simply hire independent contractors instead. Independent contractors set their own hours, so when they “show up” to work, they are there because they want to be. This is great for productivity as well as employee morale.
#10
Procrastination.
Quick decisions in business are crucial. Sitting on things and worrying too much about which way to go will harm your business more than deciding on a course of action and pursuing it. This could not be more true when it comes to your company finances. Bills need to be paid. Employees need compensation. The lease money needs to be sent in and so much more. This all needs to be taken care of in a timely and punctual manner or else it can get even more costly really quick. Part of a business being financially successful is taking care of their finances in a timely manner. In most cases, procrastinating with your business finances will almost always cost you more in the long run bringing down your bottom line.
#9
You’re not managing cash flow effectively.
Cash flow problems can sink any business in a relatively short amount of time. You may not be able to control when cash comes in the door, but you can at least have control over how you plan for it. Unfortunately, many business owners fail to make such cash flow projections. This can lead to some really tough decisions that can easily be avoided.
For most companies, the largest source of cash flow issues is receivables. If your business is like most, your clients and customers want to pay you as late as possible. The creates an obvious problem because you need that capital to keep your business running. Try taking some form of action to get them to pay a bit sooner. You can always offer discounts if invoices are paid within X many days of invoicing. You could also start the collection process after 15 days instead of after 30 days. In either case, be proactive. That immediate cash flow is too important for you to be passive about it.
You also want to resist the urge to use cash flow management solutions that can end up extremely costly. Invoice lending may seem like a convenient solution, but the interest costs alone will eventually bury you alive. If you find yourself in a cash crunch, you can try alternative solutions, like negotiating payment relief with some of your vendors. But, whatever you do, don’t put pressure on your bottom line with unnecessary interest payments.
#8
Nonexistent Investing
At some point, your business won’t be able to grow without investing more money into it. Operations will stagnate. You need money to expand, buy more equipment, offer more products or services, and market to new customers. The only way to gain more profit at this point is by investing in your business. Without investing, your business will miss out on it’s true growth and earning potential.
You have many options when financing a small business. You can invest your personal money, ask friends and family for help, or use a bank loan, among other options. But, when is the right time to do this? And further more, if it IS the right time, which route makes the most sense? The answer to these questions will obviously vary quite a bit from business to business. Talking to a professional in these matters is usually the best course of action in these scenarios because every person and business have a completely different situation.
#7
Not Reviewing your operating expenses
Some of these operating expenses can get carried away a lot faster than one might think. Let’s say for example, that one of your operating costs is bringing in bagels from the best bagel shop in town. Is there another bagel shop close by that would offer you a slightly better rate? Perhaps a bulk rate or loyalty discount? Have you ever looked into it? Never be afraid to negotiate when you have something to negotiate with. In this case, your loyalty and volume of purchases are a lot to bargain with and you should realize it as such. Operating expenses on the everyday simple things like bagels, coffee, maintenance, supplies and utilities all add up shockingly fast. Try committing to a block of time to go through and analyze your every day operating expenses and find out where you might just be paying a little more than you need to. Just as the little expenses add up, these small savings can add up fast and are beneficial in the long run.
Business coaches often suggest comparing vendor pricing and getting quotes at least once a year in order to make sure that everything you’re paying for is a fair market rate. This includes things like your merchant card services as well. Another important thing to note is just like the amount of purchase give you more clout with the bagel shops when bargaining, it is extremely similar when it comes to processing fees. The more money you process, the more clout you’ll have to negotiate a more favorable contract when it comes to transaction fees.
#6
A Flawed Business Model
If you failed to take the time to properly construct a thorough business model before opening day, you’re probably running into trouble about now. Business models which are clear and concise offer much better guiding principles than those that aren’t (or are, in fact, nonexistent). Revisit your entire business model with a professional and try to determine the root cause of profit loss. More importantly, once they are identified, you can minimize your losses and perhaps even turn it into profit!
#5
Disorganization
Modern commerce moves very quickly and businesses need to be agile and flexible to meet fluid consumer demands. Without any organization, no business will be able to move at the pace it needs in order to remain competitive. It’s important to have a business and operational strategy in place to meet current and future market needs. It should come as no surprise to learn that monetary mistakes and issues with funds become much more common in disorganized spaces. Catching these mistakes and issues becomes much harder, as well. If your business finances are disorganized (physically or structurally), it’s undoubtedly costing you big somewhere along the line. It boils down to determining where and remedying the problem.
Never underestimate the power of organization when it comes to your business. Finding a way, for example, to categorize, label, and store all your receipts will give you a better idea of exactly where your money is spent and on what.
#4
Inefficiency
This could be your own inefficiency. It could be inefficiency by your employees or it could be inefficiency from your supply chain. The list goes on and on, but inefficiency within any part of your business model will cause cracks to emerge and leaking of profits almost immediately. If your business has consistently struggled with losing money, start addressing opportunities for improved efficiency ASAP. This goes back to the 80/20 rule when it comes to efficiency. A costly inefficiency can be anything from poor employee performance to an unreliable point-of-sale provider. In any case, it will end up hurting your bottom line quite a bit.
#3
Not Tracking all expenses with software
Every business needs to keep track of its expenses. That goes without saying. But don’t consider this task as an extra aggravation just to keep your accountant happy. It is also a very crucial tool for both saving money and increasing profit. Tracking the expenses of your company with technology can help save money with accounting fees, but also by making it easier to document expenses and save money where it counts. It’s true what they say about a penny saved being a penny earned.
#2
Bad Accounting
In order for your business to have any chance at success at all, you absolutely have to know your small business financial numbers inside and out. If you neglect this, then how can you know exactly how much money is coming in and going out of your business? When you run a business, regardless of the size, there is no room for unorganized or inaccurate accounting. If you are slow to log transactions, for example, you won’t have a clear idea of how much money your business has at any given point in time. For example, if you buy a lot of supplies but don’t enter the transactions into your accounting books right away, your books will show that you have more money than you actually do. As a result, you might spend more, creating a negative cash flow for your business.
Accurately recording your transactions is very important. Small clerical errors like mixing up numbers or recording items in the wrong spot can absolutely devastate the finances of your business. How can you avoid these errors? Regularly closing and reconciling your books, conducting internal audits, and using a professional accounting service to keep your business records is a great start! Regardless of if it’s overlooking expenses, missing crucial rules, confusion about taxes, or struggling to keep track of your books professional accounting is a quick road to profit loss in just about any business. If fall into one of the categories mentioned previously it could be costing your company greatly. If a lot of your money loss is caused by bad accounting, there is a good chance you are trying to tackle your finances by yourself rather than relying on professional accountants or bookkeepers to properly handle your finances for you. The simplest and most cost-effective solution is to hire a professional accounting firm to take over your books. The money you spend on an accountant will likely cost less than the money you’ve already lost!
#1
Failure to set a Strategic Budget
It’s a straightforward bit of advice, but when you’re in the middle of the every day stress that is running your business, it’s easy to neglect giving your budget strategy a ton of thought. If you haven’t done so already, you have to schedule and take some time away from your daily tasks and operations to build a budget that will guide both your spending and savings over the next year. You have to estimate how much revenue you expect to earn and examine your current expenses at the same time. At that point, you can determine the impact of any pending changes on both. Once you know this, you can build your budget accordingly. In addition to this, it is also a good idea to set aside an emergency fund if you can. This way, if there is any unexpected financial hit, you’ll have a cushion that protects you from tapping into either credit cards or taking more dramatic measures. Establishing a good line of credit and increasing insurance policies can also be smart as well.
Stop Losing Money Now—Work with TITAN
Sometimes, despite our best efforts, turning around a business that’s losing us money proves to be a very difficult task. If you’ve found yourself in a position of frustration when it comes to your business finances, you may stand to benefit tremendously from investing in a professional financial consultation. Looking to take the plunge and partner up with a pro? We can help with every single issue mentioned above and so much more. Contact TITAN Financial Pros today for intelligent, professional business CFO services that work for you!
