I often get asked by my clients “why am I losing money?” They feel like they are managing their expenses but they are not seeing the profit they desire. Here are 3 reasons you may be losing money.
Inventory – Many people don’t realize that inventory has a direct effect on net income. If you are not accurately managing and accounting for inventory, more than likely you are losing money. Many factors can affect your inventory value. I suggest initially focusing on two areas to see if they are the cause of your company losing money. First, make sure you are using the best inventory valuation method (FIFO, LIFO, etc.) for your company. Second, ensure you have accurate inventory numbers through managing inventory movement (receipts, production, and shipping) and having routine physical inventory counts.
Overhead – This one gets business owners every time. Most business owners do not have a full understanding of all the “other” cost that goes into their business. They understand items such as labor, rent, utilities, and loan payments. But they don’t consider that bank fees and taxes may be the reason they are losing money. It is imperative that you gain an understanding of ALL of your cost; and then make sure you take them into consideration when determining your prices.
Inflation – Now there is not much a business owner can do about inflation. However ask yourself this one question. Do my current prices reflect inflation? If everything you are paying for has increased in price, you should really consider increasing your prices. Many companies are hesitant to increase prices. They fear losing current customers and not being competitive to new customers. However, you must find a balance of competitive prices and accounting for inflation. Yes, you must have customers but you also must make a profit.
Image used under Creative Commons from Tax Credits.