Have you ever wondered what really happens, when a company makes a loss? Who pays for it? How do loss making companies keep operating? To start, in simple terms – a loss occurs when expenses exceed Sales. You can calculate this on a monthly basis, as is done traditionally when you do the financials. A month or two of losses can be overcome, easily, if in the previous months you have profits. A sustained loss is ultimately unbearable and it starts with the inability to pay bills from your Sales and collections. This usually brings on a forced makeup of a priority list of what to pay – salaries is the first priority, then it is materials or goods for sale, then it could be utilities, rent and so on. The business is now experiencing a severe cash shortage.
At this stage, a business may decide to borrow more money and/or the owners will put in more money. This means you can pay bills that have come due; the company is getting an infusion of new capital. This is only viable if con-currently there is a plan to makes Sales exceed expenses and it can be implemented in a relatively short period of time – certainly before the new infusion of capital runs out. A business has to be self sustaining. !
Sustained losses, produces more liabilities than assets and is called “negative equity” – this means, the owners Capital has been wiped out due to the business losses and the Balance sheet will now show liabilities exceeding assets.
MSNCFO provides many opportunities to intermediate accounting students. Throughout my 3.5 years of working with the company, I was able to improve my existing skills,