Question

What are two reasons for a firm to operate at a loss? Please provide an example.

Answer 1

Companies can sustain losses as long as it has the capital to continue and pay its bills. A firm has to assess when it cannot continue as a on-going business anymore. Its a case by case basis. If a company thinks it can turn things around and it has the resources then it should. Jobs are lost and most likely its creditors will suffer too if it closes down. A company has to decide when it isn’t feasible any longer and cut its losses. Then all the creditors line up to get what they can from what ever is left.

why would I shut it down? I have 50+employees of that business who are counting on me to employ them and I fully expect that business to make money this year.

Now if one of my businesses lost so much money that it could no longer meet its obligations that would be different. That isn’t going to happen.

Many startup companies spend much of their lifespans operating at a loss in hopes of finding enough business to survive on their own, or making their business model into something profitable. Actually a surprising number of tech giants, namely Twitter, Snapchat and Spotify, continue to struggle to be profitable because while their products are immensely popular and could be harnessed into a lot of money, they company hasn’t quite figured how to profit from its popularity yet.