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Various reasons may be attributed to such a condition as mentioned above however2 primary reasons for operating losses whilst revenue being at the highest levels may be,
1. A disproportionate increase in overall costs
Now this increase may be attributed to various other reasons. Overheads may have increased due to inefficiency in handling controllable circumstances such as over consumption of power or other utilities, unfavourable negotiations with labours or suppliers, production wastage etc. It may also be uncontrollable circumstances such as increase in labour rate due to legislation etc.
2. Decline in margin on sales due to competition or other factors
Another reason could be that margin on sales has dropped due to excess competition. Previously the price charged inclusive of margin was higher due to either decreased competition or customer loyalty and brand recognition. Now margin on sales have dropped due to the above mentioned reasons.
It may also be noted that for an organization that basis price on "cost-plus" formula, a wrong estimaton/ analysis of cost can also be the reason for declined margin and hence loss on the bottomline.
1. Either there are Carried Forward Losses
OR
2. Current years expenses are getting out of control.
Make break even analysis that at what units need to produce then if sale company meet its all expenses & Costs.
While increased revenue is always coexisted by increased variable cost, the fixed cost remains the constant though. In this case, even after increase in revenue is not giving higher margin then following could be the reasons behind the same.
a) Not enough margin (profit) on the increased sales.
b) selling price not being identified while taking care of all forms of cost
c) Fixed Overheads have increased leaving a lesser scope for the profit to emerge from Incremental sales.
d) The company is just offering the product/service at cost or below cost in order to tap the market.
e) Significant % increase in the variable cost as well viz., product manufacturing cost component or the selling & distribution cost.
While complete analysis can be given only after having a thorough study on detailed financials, costing etc. which if shared can be provided.
For sure it is the result of imporper financial planning or its improper implementation, backed by improper ERP ( complete enterprise resource planning ) and improper analysis.
Corresponding increase in expenses could be the reason for loss
Many reasons of this problem but on top the following things
1) Wrong estimation of costs which ultimatly leads to lower sales price.
2) Ignores the step up cost impact on cost of the product.
3) Unrealistic assumptions while calculating the estimated price.
If we conclude all the debate it is the result of planning and judgment failure.
I would start to look for inefficiencies: excessive expenditures for products and services - line by line from your accounts, and starting with debt service charges. Then go from there.
fixed cost like salaries and bonus are increasing in greater proporation.may be, you have rasied loans and paying interest on it.cost of sales are increased also.
next year sales contract are added in this year sales.
There are many reason that can lead to this.
1.Selling price per unit can lead to that
2.cost buying materials per unit - e,g you high quality material at a higher price and you sale it at a lower price
3.Fixed overhead also gives such effect
4.Having uncontrollable expenditutures
5. Spending funds on personnal projects e.g upgrading his farm - very common to Directors/shareholders
Operating expenses need to be controlled.
