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Cut your losses, not your profit

05 Apr

Cut your losses, not your profit

  • Posted by tonyw

It’s very easy to let things ride. You probably need to increase business profits. Better to follow the example of savvy business owners. The ones that know intuitively when the dead wood should be cut. If you feel something’s not making profit – investigate why. Can you fix it? If not, then it’s time to cut your losses.

This isn’t limited to supply of products or services. It concerns the profitability of doing business with clients, too. Many SME owners and managers have that knack – of spotting unprofitable trading. We should learn from them; find time to investigate the facts and act accordingly. Don’t prevaricate; It’s one of the biggest causes of lost profit in business, especially small ones. Lose loss-making products or services and cease trading with clients whose demands outreach the margin available. A difficult decision – but better for a business in the short and long term.

Assessing product profitability should be straightforward. And it’s good practice to review each product’s profitability regularly as costs change often in a fluid supply chain. Create the discipline to adopt this essential practice, and to act on the lessons revealed.

Now we come to the unprofitable client. You know the sales value of the business you do with a client, and the direct supply costs (including delivery and all off-invoice discounts). Hopefully they pass this first hurdle! But often it’s the indirect costs that get out of control, leading to an overall loss of profit you transact with them.

These costs may include the bank interest you effectively pay on funding persistently late sales invoice receipts, or the opportunity costs of the time you and your team spend dealing with that client. The sums can add up so much it costs you to trade with that company. So, if this tends to be status-quo with certain clients, ask yourself how far you are prepared to go to negotiate a profitable solution. Then do it, and if that doesn’t achieve the desired result – then stop trading.

The baby and the bathwater

Important! Before you decide to withdraw a product, think about how you could replace it with one that meets your needs for profit and the client’s needs for his business. ‘One in for one out’ is a better solution than not having a ready replacement. Benefits all round!

It’s an obvious statement to say that profit is essential. We all need profit ­to retain the freedom to make our own decisions. Allowing unprofitability to creep into your business not only undermines confidence – it erodes the ability to control your business in the future.

So cut those losses now!


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