Operating at loss: What to do for your business

When a business is spending more money than it’s earning, it’s said to be operating at a loss. This can happen during a business’s initial stages or during times of expansion. It’s acceptable if there are sufficient funds in reserve to support the business until revenue increases.

However, if a company is consistently running at a loss due to poor sales, modifications to the business’s operations are necessary. Seeking advice from an expert could be beneficial in turning the situation around.

• Insufficient funds to pay bills
• Negative bank balance with no clear solution to improve it
• Sales are below the forecasted amount, such as selling only three cups of coffee daily when the business model relies on selling ten.

If you anticipate receiving money in the future, such as a payment for a significant invoice, to compensate for your current loss, then you may be facing a cash flow problem.

In such a scenario, it might be necessary for you to obtain a loan or raise funds to cover your expenses until the payment arrives.

Here are some steps to consider:

1. Cut down on your expenses.

• Evaluate your spending and identify any unnecessary expenditures that can be eliminated.
• Consider reducing the amount of money you’re withdrawing from the business.
• Negotiate with your suppliers for better deals.
• Sell any assets that are no longer in use.

2. Increase your sales

• Can you increase the price of your product or service?
• How can you boost sales volume for your product or service?
• Is it possible to expand your customer base?

3. Consult an advisor to turn things around

Consulting with an accountant or business advisor can help steer your business back on track and prevent future problems.

Consider investing more in marketing to attract new customers. However, it’s advisable to start with a small budget and test the waters by spending $100 instead of committing to $1,000 right away.

By reporting a loss in your tax return, you can carry it over to the following year and decrease your income, thereby reducing your tax liability.

Report the loss in your Individual tax return (IR3). Once reported, Inland Revenue will inform you of the carry-over amount for the next tax year. If the loss exceeds your income, you can utilise the remainder to reduce your taxable income in the subsequent years.

How to claim a loss — Inland Revenue

Usually, companies that are experiencing losses are not required to pay income tax. Such companies may have the option to transfer their losses to another entity or carry them forward to future years.

To carry forward a tax loss, certain requirements must be met:

• report it in your company’s Income tax return (IR4)
• passing the shareholder continuity test, which mandates that a group of shareholders must hold a combined voting interest of 49% or more from the start of the year in which the loss occurred until the year in which it is offset.

Companies must use a specific method to calculate their voting interest, and in some cases, a group of companies may be unable to carry forward their losses due to being in a “market value circumstance.” Additional details can be found in Inland Revenue’s When companies make losses

If you are contemplating carrying forward losses for tax purposes, it is advisable to seek guidance from a tax advisor. Asking for recommendations from acquaintances can be a good place to start your search.

Here are some pitfalls that you should avoid:

• Neglecting the warning signs that indicate you may be in a loss position.
• Failing to establish a strategy to recover from a loss.
• Buying items that you are unable to afford. If you approach a supplier with the knowledge that you cannot pay the invoice, you are operating in an insolvent position, which can lead to bankruptcy.