If you’re a typical firm in a perfectly competitive industry, then you are incurring losses. The only way you can prevent these losses is to take steps to increase the profit margin. If you’re not doing this, you are incurring losses.
The classic example of a company with a high profit margin is the company that manufactures and sells all its goods at the same price. Companies that are competing in a market where they can have much lower margins (a market where they can’t sell at all) are more likely to incur losses. If you are the typical company in a competitive industry, there’s a good chance you’re incurring losses.
Losing a lot of money is bad, but when a company is losing a lot of money, it is also very likely to incur losses. If the company can’t raise prices, it will suffer losses. When a company is getting crushed by a recession it is likely to incur losses. If the company is getting crushed by an upswing in sales and profits, it is likely to incur losses. A company that is losing money is also likely to incur losses when its revenues are down.
If your company is in the black, you should not be looking toward the future to find out that your business is in the red. If you are not making money, you are not making your shareholders money. If your revenues are down, you are not making your employees money. And if your expenses are up, you are probably suffering losses. You should be looking for red flags that point to problems in the business and trying to fix them.
Sure, they’re nice-sounding words, but if you don’t understand them, they can be pretty misleading. Businesses can be in trouble when they are either making money or losing money. They lose money when they don’t get paid, or they spend more money than they make. However, they also make money when they are profitable or they make a profit. The key is to not confuse the two.