Business is running at a loss and not making a profit

What does running at a loss mean?

If your business is operating at a loss, your costs outweigh your income. That is not an unusual situation. Some new businesses are loss-making for several years before they become profitable, particularly when developing a product or service with high upfront costs. Businesses can also run at a loss in slow periods, often due to seasonality, and even during periods of growth. 

Operating at a loss is fine over the short term as long as you have money in the bank to cover your costs. However, it becomes a problem if your business operates at a loss frequently or for a sustained period and you do not have the reserves to sustain it.

What are the warning signs that your business is operating at a loss?

These are just some of the warning signs that may indicate your business is losing money:

• Your overdraft is at it’s limit and you have no plan in place to pay it off
• Your cash flow is tight and paying creditors is a struggle
• You’re taking on debt to fund your operations
• You’re not selling as much as you had expected
• You don’t have an accurate picture of the business’s financial position
• You’re receiving penalties for late tax filing and payment
• You don’t produce regular management accounts
• You are refinancing company assets
• You’re not taking any money out of the business
• You are using personal funds to subsidise the business

If you are waiting for a big customer payment and see these signs in your business, you have a problem with cash flow. However, if these are recurring problems, you have a more serious financial issue.

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Shaun Barton
Business Debt Expert

Is my business insolvent?

There can be a fine line between a loss-making and an insolvent business. A business becomes insolvent when it cannot pay its debts when they are due or has more liabilities than assets on its balance sheet. 

If your business is insolvent, you must cease trading and seek professional advice from a licensed Insolvency Practitioner immediately. They will assess your company’s finances and advise you on your options. Continuing to trade when you know or should have known your business is insolvent can lead to serious financial and legal repercussions.

What can I do if my business is operating at a loss?

If your business is operating at a loss and there’s no obvious solution on the horizon, you must act quickly to prevent it from entering formal insolvency. Here are some steps you can take.

Seek alternative finance

Borrowing money may seem counterintuitive when your company is running at a loss, but new finance streams can free up the cash you need to make the necessary changes to your business.

Alternative finance such as invoice finance and asset-based lending is more flexible than traditional bank lending and, thanks to the way the debt is structured, you can be approved even if your business is going through a difficult period.  

Make an HMRC Time to Pay Arrangement

If you have outstanding tax bills you’re struggling to pay, you can make a Time to Pay Arrangement with HMRC that allows you to pay what you owe over a typical period of around six months.

You must present HMRC with a viable plan and show that you are committed to making the payments. HMRC will also want to see that you have a realistic prospect of turning the company around.  

Enter into a Company Voluntary Arrangement (CVA)

If the business is insolvent and cannot pay its debts when they are due, a Company Voluntary Arrangement (CVA) can buy you the time to trade your way out of difficulty. It is a formal repayment plan that your unsecured creditors must agree to. If they do, you will make a monthly payment towards your unsecured debts over a period of three to five years. 

A CVA is legally binding on all parties, so your creditors cannot take action against you as long as you continue to make the payments. As a director, you remain in control of the company throughout the CVA, but you will need a licensed Insolvency Practitioner to help you set it up. 

Sell the business

If the business is unprofitable but solvent, one option is to sell it. That will enable you to recoup the value left in the business. Its current financial performance may mean it commands a lower price, but you will relieve yourself of the stress and be free to take on a new challenge. 

If the company is insolvent, you cannot sell it on the open market. However, Pre-Pack Administration could be an option. As it is a formal insolvency procedure, you must appoint an Insolvency Practitioner to oversee the process. 

They will assess the company to determine whether its underlying assets can be sold. They will then negotiate the sale with a buyer who may be a third party but is often a director of the existing business. The ownership of assets will pass to a new company that can trade without the debts of the old business, and the proceeds from the sale will be used to repay its creditors.  

Enter Company Administration

If your company has been operating at a loss for a sustained period, is insolvent and is facing intense pressure from its creditors, Company Administration could provide the breathing space to turn the business around. 

When you enter Administration, an eight-week moratorium protects your business from legal action while an Insolvency Practitioner assesses it and formulates a plan. Their primary goal is to rescue the company as a going concern. If that’s not possible, they will aim to achieve a better outcome for the creditors than if the company were immediately liquidated.

Liquidate the company

If the company is insolvent and has no real prospect of becoming profitable, liquidating it voluntarily via a Creditors’ Voluntary Liquidation (CVL) is your best option. The company’s assets will be sold to repay its creditors as far as possible and any remaining debts will be written off. You will not face any negative legal or financial consequences as long as you have met your duties as a company director.

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Need advice?

If your business is running at a loss and you are worried about the future, we can help. At Real Business Rescue, we provide confidential advice to the directors of businesses in all industries that are facing financial distress. Get in touch for a free, same-day consultation or arrange a face-to-face meeting at one of our offices throughout the UK.