What a Business Loss Means for Your Small Business


It’s nearing the end of the year and your profits are falling short. It’s a realization no business owner wants to have, but it doesn’t mean you’ve failed.

If it looks like you’re heading toward a business loss this year, think of it as an opportunity to turn a lemon into lemonade. Often there’s a silver lining to closing the year in the red, both for tax purposes and for the opportunity to shift your business toward a brighter future. Here’s how to make the best of this situation.

Ending the Year

Before you start using a loss as a tax-saving and learning opportunity, consider potential short-term needs and actions. Ask yourself:

  • Will I end the year or begin next year with enough money to meet any necessary expenses? If not, now’s the time to review financing options to tide you over.
  • Should I immediately reduce my own earnings to narrow (or avert) a business loss this year, and make up the shortfall from other resources?
  • Can I defer any other expenses until next year?
  • Am I devoting enough attention to collecting overdue receivables?
  • Do any of my credit arrangements have loan covenants that I must meet, such as letting my creditor know how the year is shaping up?
  • Can I negotiate more favorable payment terms from any of my suppliers?

Addressing these questions and taking any necessary action can help mitigate the loss.

Claiming a Business Loss on Taxes

A tax professional can help you with claiming a business loss on taxes. Losses in the current year can offset profits in future years, known as a loss carryforward.

How that tax angle plays out will depend, among other factors, on whether your business is a proprietorship, a pass-through S corporation, LLC or a C corporation. You might even be able to lower your taxes beyond next year, depending on the loss you experience this year.

Two farmers in a field discuss offering a new service after a business loss

Looking to the Future

Once you’ve taken the steps above, it’s time to make some lemonade and think about the future. This can be part of your budgeting and strategic planning process. Assuming you’ve been operating from a budget this year, take a close look at the variances. How much is on the revenue side? What about the expense column? Which specific revenue and expense categories are the biggest culprits of the revenue shortfall and why?

Sometimes this review yields relatively easy answers on how to avoid a loss next year. A retailer might decide to close stores that show little prospect for revenue growth. A manufacturer might decide to pull the plug on a product whose market has been shrinking dramatically.

And what about your employees? Are they performing up to realistic standards? Do you have good people who are in the wrong positions? Do you need to reinvent your workforce to meet your needs? Every expense category should be on the table.

Sustaining a business loss can also be a wake-up call to take a fresh look at your products and services. Do you offer competitive prices? Are you keeping up with shifting customer needs and tastes? Has your market share declined, or has the total market for your product or service shrunk? Are the challenges you encountered this year likely to go away next year or become more acute?

Finding answers to these questions may take some digging, and don’t overlook talking to your customers and employees. If they know you’re looking for ways to improve what you’re doing and not just looking for people to blame, you may get some valuable insights.

Finally, a loss for your business creates an opportunity to think creatively, whether by finding ways to do more with less or by developing new products and services. Venturing into new territory can be invigorating and can put you back on track for a profitable year ahead.

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