Are you a profitable business? Or are you somehow losing more money than your actual profits but can’t seem to put a finger on why?
Well, every business starts with “building wealth” as one of the key goals. For businesses, profits are not limited to gaining a particular sum of money by the end of every quarter, rather it is being financially sound year after year as a it continues to grow and strive.
However, maintaining profitability and avoiding losing money can be a hardship to sail for businesses, especially the new, small, and medium-sized enterprises with limited resources.
Enterprises can lose money because of various reasons and there’s no particular textbook remedy that might prevent it from happening.
In this blog, we have covered the possible reasons for businesses losing money and 4 tips to prevent it.
Reasons Why Businesses Lose Money
“The word accounting comes from the word accountability. If you are going to be rich, you need to be accountable for your money.” —Robert Kiyosaki
Paying attention to your numbers is extremely important to run a successful business. Most businesses lose money due to poor accounting. For example, if you have accounts payable for the duration of the next 30 days, but you haven’t put them in your books then it will create an illusion of you having more money than you have.
Properly reporting transactions is the first step to efficiently managing your finances. Faulty accounting is where businesses lose the most money.
Absence Of A Streamlined System For Accounts Receivable
Another reason why businesses lose money is that they haven’t created a stern system for accounts receivable. A huge part of maintaining a proper cash flow is dependent on your accounts receivable and accounts payable. Accounts receivable is all the money that customers and other vendors need to pay you. It’s a typical business process to not ask for payments upfront as it is considered an important stepstone for building long-term relationships with customers, vendors, and suppliers alike.
However, not having a fixed period for accounts receivable not just messes up your overall cash flow but also leads you to lose cash.
Absence Of Investments
A business can become stagnant and register negative growth if you stop investing in the business or investing excess corporate cash into some capital appreciation tools like mutual funds. When businesses keep their surplus cash lying idle in their bank accounts, the money tends to lose its value over time due to inflation.
Here are some historic data on inflation in India for your reference. You can see that inflation has more often than not registered an upward trend. To keep up with inflation, businesses need to generate good returns so that their current surplus cash won’t devalue in the coming months.
4 Top Tips To Stop Your Business From Losing Money
Losing money can be an absolute nightmare for any business. Even though businesses strive to make more profits, acquire more customers and establish their dominance in the marketplace, they tend to overlook certain gray areas that cause them to lose money.
To overcome these slip-ups, here are 4 tips that businesses can consider:
Put Your Idle Cash To Work
As we already mentioned, the surplus cash sitting idle in your bank accounts will eventually lose its value to inflation. To prevent that from happening, businesses can consider putting their idle cash into short-term or long-term investment options based on their goals. This way, businesses can keep on receiving fair returns (mostly higher than bank interest rates) and have easy access to their money in case of emergencies.
Investment works as an additional income stream that generates periodic returns. A sound investment can provide a safety cushion to your business in many ways and protect you during the economic downturn.
However, while investing in mutual funds, businesses need to make sure to choose those funds that are relatively less risky, more liquid, and have flexible or shorter lock-in periods. Some of the considerable investment options for businesses can be overnight funds, liquid funds, ultra-short term funds, balanced-advantage funds, etc.
You can use online investment or treasury management software to help you identify idle cash in your bank accounts and invest it.
Understand The Right Duration For Investing
Now that we have talked highly about the importance of investment, let’s not overlook another crucial aspect; the duration of the investment. While making an investment decision, business owners must understand the right duration.
Especially in the case of a business’ surplus cash, which you might need when an unexpected expense comes up, for paying ahead of your vendors or during an emergency. Hence, it becomes even more crucial to carefully consider the tenure of investment.
While talking specifically about financial investments like mutual funds, you get the option of investing either for short-duration (24 hours to several months) or long-duration (a couple of years). Long-duration funds usually include a variety of equity funds that look fancier on the surface because of their ability to generate higher returns.
However, with potentially higher returns come potentially higher risk and a long, rigid lock-in period. It’s not always wise for business investors to go for riskier investment options that reserve the money for longer periods. Instead, a wiser business wealth management move will be, to begin with investing for shorter periods to stay immune from market volatility.
To understand more about short-duration investments, you can read our blog; Low Duration Mutual Funds – Here Is Your Complete Guide.
Have A Better Understanding Of Your Cash Flow
Cash flow simply refers to the money that comes in and goes out of your business during a financial year. A lot of emphasis is placed on cash flow by financial institutions & experts to determine the actual position of your company in the market.
For businesses, it is important to maintain positive cash flow to avoid losing money and improve profitability. Positive cash flow is when more money flows into your business than going out of it.
To avoid any monetary losses, businesses need to have a hard look at their cash flow statement to understand where they are actually losing money. Once you have analyzed your cash flow statement and found the areas where losses are occurring, you can take corrective actions to ensure positive cash flow.
To understand more about cash flow and how to improve it, you can read our detailed blog; Cash Flow 101: An Effective Guide For CEOs and CFOs To Manage Business’s Cash
Correctly Price Your Products/Services:
Pricing is one thing that every business needs to get right. If your products/services are overpriced, you’ll lose potential customers. On the other hand, if your products/services are underpriced, it will mess up your profit margins.
Businesses usually apply the formula of cost of production + profit margins to decide the pricing of their products and services. However, that shouldn’t be the only variable while deciding the price. Thorough market research, backed by competitive analysis and industry insights is necessary to define the pricing strategy for your products and services.
Another important consideration in analyzing your current positioning in the market is the point of differentiation and consumer loyalty toward your brand.
While deciding the pricing strategy, businesses need to understand all the above-mentioned aspects, make the right use of their buyer personas and customer surveys and completely avoid guesswork.
Shootih: A Tool To Bring Efficiency In Business Wealth Management
These are the 4 top tips that can help your business stop losing money and increase profitability. Automation and Artificial Intelligence (AI) can help businesses to avoid inaccuracy in accounting, predicting income and expenditures, and idle cash investment planning. Shootih is one such AI-based online business wealth management platform that is helping businesses to bring more efficiency, accuracy, and simplicity to their everyday financial management.
With Shootih, businesses can:
- Get immediate notifications for any looming holidays and upcoming expenses.
- Get AI-based suggestions for investing your idle cash over holidays or weekends.
- Invest/Redeem in various asset classes with just a few simple clicks.
- Invite financial advisors, CFOs, CA, and other team members to collaborate on a single platform to ensure maximum transparency.
With Shootih, you can make your idle cash work as hard as you do!
Why wait then, book a demo call with our expert today to see how Shootih works –
- Businesses can lose money because of various reasons like; inefficient accounting, not having a streamlined system for accounts receivable, absence of investment, incorrect pricing, etc.
- Putting a business’ surplus cash to work can be one way of avoiding losses and increasing income streams.
- While investing, it is important for businesses to understand the right duration.
- It is essential to have a clear understanding of the business’s cash flow.
- Price the products and services correctly crucial to maintain profitability.