Q&A - How can a business handle a loss?

A loss arises when total costs are more than total revenues in a period.

Over time, losses generally result in a cash outflow from a business. If the business does not have sufficient sources of finance to fund these losses, then it will not survive.

It is important to remember that losses are fairly common in business – particularly for start-ups or for businesses that are investing in a new product or market.

It is often the case that a business has to incur substantial costs (e.g. research, design, promotion) before it is able to generate revenues for a new business or product.

However, sustained or substantial losses place a business in trouble. A high proportion of start-ups go out of business because they fail to reach profitability. In other words, they do not manage to reach the break-even output.

Why might a business experience a loss when the business plan or budget expected a profit? The main reasons are:

• Revenues are lower than expected (the most likely) – entrepreneurs tend to be over-optimistic with their forecasts for revenues
• The business proves to be less productive or efficient than planned – e.g. it suffers from a higher degree of wastage during production, or suffers from too much capacity
• Unexpected costs arise – ether costs that were not planned at all (e.g. a customer or supplier dispute) or where costs turn out to be much higher than expected
• The business suffers from unexpected changes outside its control – e.g. a rise in bank interest rates, a sudden change in consumer confidence, poor weather

The response to a loss should include:

- Reviewing the profit and cash flow forecasts to ensure that the business has sufficient cash to remain viable
- Looking at all major cost categories to see where savings can be made which do not damage revenues
- Renewed marketing activities to boost revenues – particularly in the short-term if cash flow is a problem