Running a business is a balancing act, and it can be difficult to keep track of all the things that cost you money. But ultimately, the only way to succeed in business is by making a profit, and that means identifying the problems that are eating your income. Here are seven reasons your business might be losing money.
1. Inaccurate Accounting
Do you know exactly what’s happening with your money? It’s critical that business owners keep an accurate account of all the money coming in and going out of the business so that they can make informed decisions. This means that all transactions need to be logged accurately. Even small recording errors can lead to time-consuming and costly consequences. It’s also important to log all transactions right away. Not knowing how much money your business really has might mean that you consistently find yourself spending more than you’re earning. Constantly being in a state of negative cash flow isn’t healthy for your business.
Sometimes, it might seem impossible to record everything quickly and accurately, and some business owners feel like their time might be better spent on increasing revenue rather than recording transactions. If that’s the case, you might be suffering from a disorganized system, which is costing you time, money, and energy. Disorganized accounting also puts your business constantly at risk of misreporting funds, and makes handling taxes stressful, frustrating, and expensive.
No matter the size of your business, it’s worth investing in developing an organized accounting system, and in getting support from a financial professional.
2. Making Decisions without Financial Information
Financial reports aren’t just for the benefit of accountants, tax preparers, and bookkeepers. The Income Statement, Balance Sheet, and Cash Flow Statement are powerful tools for decision making.
Also known as a Profit and Loss statement, this report measures income and expenses over time. It answers some of the most important questions that a business owner might have. For example, are you paying too much to manufacture your product? The income statement will help you figure that out. Do you have excess revenue to invest in growing your business? Go to the income statement so that you can make that decision without guessing.
This statement is a snapshot of how strong your business did in a specific period of time, commonly a month or a year.. It’s akin to taking a picture or measurements on the same date every month to track how well your diet and exercise plan is going.
Cash Flow Statement
Less well-known, but in fact a very important statement, this document breaks down where you spend cash over a period of time. If transactions have been recorded accurately and on time, the cash flow statement will allow you to quickly determine your ability to pay bills and it will also help you quickly identify problems.
Sometimes it can feel like you don’t know where your business is losing money, but if you start by getting specific with your accounting and reporting, you can quickly identify and fix any problems that are standing in your way.
3. High Turnover
Think about how much money one of your employees makes. Now, multiply that by 213%. The Center for American Progress published a paper that estimated that that is the average cost to a company when they have to replace a highly skilled job. If your employee has a salary of $70,000, it could cost you $149,000 to have the position remain open, then replace and retrain to get the new employee to the same level. When you find that your company has a high rate of turnover, it’s important to quickly assess and address the reasons for that turnover in order to assure that your business isn’t losing money unnecessarily.
If your hiring process leads you to hire employees that aren’t a good fit for your business, consider re-thinking that process. Other reasons for turnover could be that your employees don’t feel like there is room for growth within the company, or they might feel like they’re not getting the feedback they need to grow. As a business owner, you can fix this problem by getting creative with the ways you’re inspiring your employees to invest in the business.
4. Ineffective Communication
Communication is a big topic that sometimes that often gets reduced to day-to-day desk conversations and emails, but communication is so much more than that. Communication also includes project management systems, procedure documentation, systems which allow for easy asking and answering of questions, revision, and review.
The cost of ineffective communication is shockingly high. Poor communication impacts employee productivity, creates strained relationships both internally and externally, instigates high turnover, and results in countless costly errors. An SIS International Research internal study estimated that poor communication could cost your business $26,000 per employee per year. Say you have five employees: inefficient or negative communication procedures could be costing you $130,000.
Currently, as many businesses focus on remote work and scattered teams, it’s more important than ever to evaluate the communication practices that are in place in your business. Is your process for collaboration strong? Does it have a platform for questions and problem solving? Is your employee management system efficient and effective?
Take the time to check-in and set-up systems to make it easy for your employees to check-in frequently with you and with each other. It’s worth it.
5. You’re Not Making Long Term Plans
Always, always plan for your business’s future. That way, nothing can catch you off guard. A really great example of a plan you should be making is a tax plan. If you’re not doing year-end tax planning, during which you can estimate tax owed and learn what tax credit and incentives you qualify for, it’s time to start.
Not only will taking early steps to plan for taxes provide you with an estimate of your possible tax liability, it will also allow the time and space for you to potentially reduce your tax burden. For example, a business that uses the accrual accounting method can analyze accounts receivable, identify worthless debts, and then see if those identified debts can potentially entitle you to a deduction. Or, in reviewing your planning, you may find that there is a significant benefit to deferring income – these considerations vary, so make sure to speak with a tax professional during planning.
6. Not Making Smart Tax Elections
If your business has a personal vehicle like a car or a truck that is used for the business, you have two choices when it comes to deducting the expenses related to it. Choice one: take the standard mileage rate. Choice two: claiming actual costs. Sometimes business owners get into the habit of making the same election each year, but if you are keeping meticulous records, you can choose the deduction that gives the greatest write-off.
7. Not Planning Around Tax Incentives
You might be noticing that these tips are starting to have a theme: taxes, taxes, taxes. That’s because taxes are a huge deal. Taxes can make a large impact in either helping or hurting your business. And yet, they often get overlooked by business owners. Tax law is constantly changing, and many businesses are only focused on taxes during tax season. But as governments work with businesses to stimulate the economy, they provide many incentives for decreasing overall tax burden, such as tax exemptions, tax reductions, and tax credits. Many credits have detailed applications and specific deadlines, so if you’re not planning ahead, your business could be missing out on savings.
Even if you already have an accountant/accounting team, you might want to consider consulting with professionals who specialize in Tax Credit applications to supplement the work your team is doing.
You can also consider cost segregation – one of the most rapidly growing areas of tax planning. It involves reclassifying certain assets so that they move into an accelerated depreciation class and deferring state and federal income taxes. If your business purchased, expanded, constructed, or remodeled any kind of real estate, you might be able to increase cash flow this way.
Reach out to us (https://hitollc.com/) and schedule a call with one of our in-house tax specialists to take your first step towards an active tax strategy for next season today!