Top 4 Ways That Business Owners Lose Money

All businesses strive to make a profit, but not all of them succeed. Your business can go from making money to losing it in the blink of an eye. But how does this happen?

There are several ways that the typical business can lose money. No matter what particular industry you are in, being aware of these common sinkholes of wasted capital will greatly improve your chances of staying out of the red.

1) Inefficiency

If you are losing money, the problem could simply be employee efficiency. Ask yourself if your business utilizes the most modern methods of production. Are your employees trained in the most effective techniques? If not, this alone could be the major source of your cash flow problems. Operating at a snail’s pace while your competition moves at the speed of a jaguar is a surefire recipe for bankruptcy.

2) Poor Profit Margins

If profit margins are too low to survive, it almost certainly will lead to a loss of money. The fundamental rule of profit-making is selling a good or service for more than production costs. However, not every situation allows for that. As a business owner, you must consider some basic questions. What am I paying for materials? What are my competitors paying for the same? What do you sell the finished product for—and what do your competitors sell theirs for? Taking some time for some honest reflection of the competitive landscape will almost always reveal where you are falling short.

3) Absence of a Standard Cost System

It is highly important to have a standard cost system in place. For every type of cost your business incurs (advertising, supplies, materials, etc.), you should have some type of benchmark. Without this information, you cannot look at an expense and rationally assess it. Lacking any objective frame of reference, you can only make an emotional decision about whether to pay it or not. A standard cost system also permits managers to plan and control costs, prepare budgets, and value their inventory.

4) Unmonitored Credit 

Company credit cards should be monitored extremely closely. It is very easy to get in the habit of simply paying whatever a statement says you owe and tossing the bill in the trash. However, taking a moment to examine your statement may surprise you. The so-called “free trial” you signed up for a year ago may have been billing you at $50 per month ever since. Unless you meticulously examine your credit card bills, all of these extra fees will continue to mount.