Turn Losses into Profits

What do you do when your company begins to lose money? The answer or answers will determine if you profit in the future or continue to lose. Actually, the title of this article is a little misleading since a loss remains a loss. But the actions prompted by a loss are the critical thing.

You Lost Money. Now What?

In the posting Making the Best of Bad Financial Results I touched briefly on this topic. To review, the idea is to not just accept a loss as something out of your control. If you are going to turn losses into profits you have to dig deeper to see why your company is losing money. This means taking certain steps.

Analyze Your Financial Statements

Financial analysis involves determining why the numbers on a financial statement are what they are. For example, imagine you are now experiencing losses or declining profits in months where you had been profitable in past years. Take the time to compare current year results of the income statement to the prior year results. Are there specific expenses growing disproportionately? Have sales declined while expenses have remained the same or even increased. Let me share a particular example which I have used in some prior articles as it demonstrates the importance of looking behind the raw numbers.

I had a client several years ago whose sales remained relatively the same year after year. Yet, the company suddenly began to lose money. I decided to do exactly what I suggested above; compare the current year to previous years. In this particular case it turned out that the culprit was the growth in payroll expenses. It turned out that the headcount in production had increased by a considerable amount, without any significant increase in productivity or sales. What this meant was that the cost of sales for essentially the same level of sales was growing unnecessarily. When I showed this to the company owner he was surprised at just how much impact this one thing was having. In short order he made changes to reduce the head count and within a couple of months the company was once again profitable. All it took to turn losses into profits was a willingness to find the actual cause of the losses and make changes to eliminate the cause.

The Status Quo is Dangerous

As a rule most people don’t like change. I’m a bit of an exception but even I have times when I don’t want to put forth the effort to make changes. As you know, change is hard. However, unless we are willing to change we cannot make progress. Companies can easily get caught-up in the trap of continuing to operate the way they always have. Unfortunately things change and unless that reality is accepted and acted upon, eventually changes will make your existing practices obsolete. Imagine a doctor who refused to use modern diagnostic techniques. It wouldn’t be long before patients began to move to a doctor who could better serve them. Likewise, imagine a manufacturer that is unwilling to invest in the equipment and training to improve production techniques, reduce the cost of production, and produce better products. They would soon find themselves at a competitive disadvantage, much like a company who never adapts their product offerings in accordance with changing consumer demands and tastes.

The Main Point

I love the Latin term carpe diem which means seize the day. That is exactly what this requires. From right where you are, identify the changes needed.

That is the main point. Losses have causes. If you are willing to change, they can prompt changes for the better. True, you won’t really turn losses into profits, but you can prevent losses from increasing and hopefully return your company to profitability.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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