In Challenging Times Do You Cut Losses?

A company lost money last year, but turned the corner with a profitable final quarter. However, one of the company's divisions continues to lose money, though the losses are a small fraction of the total picture. The CEO is considering cutting this business because it is not critical to the Company's overall business mix. What factors should the CEO consider in making this decision?

Advice from a group of CEOs:

Consider the factors that contributed to the loss. In this case the biggest factor was allocated vehicle and space expense. This division has seasonal revenue but carries the allocated expenses for the full year.

Make sure that the allocated expenses are fair to the business. Do overhead allocations reflect utilization? Unless closing the business eliminates vehicles or space, if you terminate this business these expenses will be borne by the rest of the company.

Evaluate the impact of current and adjusted allocations. Shift the allocation made to this business to other businesses. What happens to their profitability and what is the overall impact of the shift?

If you find that the current allocation does not reflect utilization and adjust accordingly, does the business still lose money? If this division covers its direct expenses along with most of its allocated expenses, a small loss in this division may be preferable to a significant reduction in profitability of other businesses if you have to shift the allocation.

How strategic is this division to your overall business mix? Is this business essential to your product/service mix, or just offered as a customer convenience? If you terminated the business, will customers be upset? How much so? Do your competitors offer this service, and would you be at a competitive disadvantage if you discontinue it?

If there is a competitive reason to continue the business what are the alternatives? Can you raise prices to make the business profitable and refuse business that does not meet your pricing needs? How price sensitive is this business to different customer segments? Can you restrict the offering to less price sensitive customer segments? If you can't make money and a customer demands this service can you refer the customer to other vendors or sub out this business? Can you make the business more profitable by reducing the scope of the offering to increase efficiency while adjusting pricing to enhance profitability? Can you source other labor alternatives to reduce cost - for example using less skilled labor or part time contractors or instead of full-time employees who carry full benefits?

All of these factors need to be taken into consideration before you decide to cut the business. While it may seem on first analysis that cutting this business is an easy way to increase profitability and overall health of the company, until you fully understand the impact of cutting this business you may not be helping yourself.

About the Author:
Sandy McMahon is publisher of Ceo2Ceos (http://Ceo2Ceos.com), a non-commercial site for executives to share best practices. He is also President of Executive Forums of Silicon Valley. With over 20 years of executive experience, Sandy has a BA from Brown, an EdM from Harvard, and an MBA from Duke.

Article Originally Published On: http://www.articlesnatch.com

Tags: Strategy

, Service

, Profit

, Loss

, Division

, Business

, Critical

, Factors

, Expense

, Allocation

, Seasonal

, Overhead

, Loss Limit

, Customer

, Price

, Competit

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