Paying Out of Pocket to Keep Your Business Afloat

Ultimately, the purpose of any business is to make a profit. The value of any business is largely determined as a multiple of its profit or cash flow. While many, if not most, businesses lose money during their start up period, the losses will eventually have to stop in order to achieve success. If you are constantly having to put money into your business and particularly if you are taking on personal debt to do so, it might be time to take a hard look at whether the business should continue.

When starting a business, it’s a good idea to have a guideline in place as to how long you will tolerate losses. Typically a good gauge to start with would be a year, although it really depends on the business. For instance, it is my understanding that even some well-established chain restaurants expect their franchisees to lose money for at least that long. If you have gone past a year and you are still putting money in or you find you need to inject funds several years down the road it’s an important time to re-think the following:

1. Will the losses continue? If yes, should you downsize or terminate the business? Note, the longer you put off the decision the more your personal funds are at risk and as a director, personally liable for such things as wages, source deduction and GST if they are not paid by the corporation.
2. If the issue is cash flow, not profitability, can you negotiate new or re-financing, figure out how to collect accounts receivable faster, dispose of surplus equipment etc.?
3. Do you need to consider a formal restructuring?

This is always a very hard problem for entrepreneurs who are, by nature, incredibly optimistic people that believe in their own success. If your business is operating at a consistent loss, it’s a good time to bring back to mind the old adage that says you should be working on your business, not in your business. If your business is a little too close to home reaching out to a financial advisor could give you the professional perspective you need to really assess where your business is at financially.

If your business is operating at a loss and you are starting to feel concerned, one of our corporate recovery and restructuring professionals for a free, no-obligation consultation. Together, we can assess your unique situation and explore all of the options available to you and your business so you can choose your best course of action moving forward.