Financial loss

Financial loss is the risk that money put into a business, or money needed to keep it running, is lost. Any business decision involving money can carry this risk.

Starting or running a business usually needs financial investment: money put into the business, for example for equipment, stock, premises, marketing or staff. If the business does not survive, the owner may not get that money back. Financial loss is not the same as business failure: failure is the business not surviving, while financial loss is money lost. Owners can lose money too, not only investors, because they may put their own savings into the business.

How financial loss can happen

Even a business that keeps trading can lose money. Three common causes are:

• Lower-than-expected sales: revenue is less than planned, so money spent on stock or promotion may not be recovered.
• Higher-than-expected costs: materials, energy or wages rise, leaving less money over.
• Unexpected expenses: a broken freezer, an urgent repair or a legal bill has to be paid.

For example, you open a small plant shop and spend £3,000 on stock and shelving. If only half the plants sell before they die, you may lose much of that £3,000. A repair bill for a leaking roof adds a cost you did not plan for.

Cash flow and financial risk

A business also needs cash available to pay day-to-day costs such as wages, rent and suppliers. Poor cash flow, where money comes in slowly while bills are still due, increases financial risk. A business can be owed money by customers and still be unable to pay its own bills on time. The risk is greater when the owner has little savings or backup finance to cover the gap.