Cutting loss can be the best strategy (and knowing when to do so is a strategy)

Faced with tough and challenging economic condition, one of the most obvious step taken by companies is to cut losses. Whilst cutting losses sometimes may be viewed as being a negative signal, at times such a strategy is both necessary and the right step to take.

In exercising loss cutting as a strategy, timing plays a very important role in deciding its effectiveness. But to effectively use timing, it requires that businesses has an effective monitoring mechanism that leads to effective timing for loss cutting exercise.

Why sometimes it can be seen that loss cutting seems to produce a negative result is because there is no effective monitoring ahead of time and hence it leads to abrupt execution to cut losses. Cutting losses in this way can be costly and result in missed opportunities and bad reputation. But cutting loss can be a good strategy when knowing when to do it ahead of time.

This then leads to the question of what are the leading indicators that prompt the need for closer scrutiny and monitoring for any loss cutting measures to be taken?

The following are some of the more profound ones that your business should monitor to decide on any loss cutting measures.

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1.??When there is hardly any niche for your products or services – Today if your business is not a niche with some demonstratable differentiation, then it is a commodity product or service. Commodities are generally abundant in supply and it is almost always a race to the bottom in terms of price and market share. Such business calls for close monitoring as margins are very low and business sustainability is very challenging and early loss cutting measures may be warranted.

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2.? Unsustainable fixed commitments – Where there are high amount of fixed commitment due to overheads, contractual obligations, fixed assets and salary, companies need to truly understand its monthly coverage capability. Fixed commitment means a committed obligation to meet the financial needs as it falls due. A forward projection on coverage capability will provide a good sense about its sustainability and whether potential loss cutting should take place.

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3.??Loss of key talents – Although it is not a direct correlation to a business sustainability, loss of talent can spell many problems ahead. Without key talents many important business operations cannot be performed well. Weakness will creep in and in no time will be expressed in your products and services offerings. Businesses that suffers from loss of key talents often will spin into losses. Early measures either to bring in new replacement talents quickly or early loss cutting are necessary considerations.

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4.??Opaque visibility into the future – Some business operates in a more opaque future compare to others. A business with a good visibility provide a better guide to business planning compare to one that does not. For those that operates in a highly volatile future outlook, do to take note of potential bumps that may suddenly throw your business into a pit of significant loss. Such business need to consider if their venture could afford to sustain losses if it really happens.

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5.??When hit by very negative reviews – All business live by its reputation. A business reputation is even more important as its greatest asset in the Balance Sheet. When a business reputation is hit by negative news, it takes a lot of efforts and public relations to recover from it. And a good number do not even make it back to their former glory days. Hence businesses that falls into such situation must monitor the sentiments especially from social media feeds and its past and current customers. The longer the negative reviews persist, the more drained the financial of the business will be. As such cutting loss can be a better strategy.

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The above scenarios almost always lead to significance losses when no attention is paid to it. Whenever such scenarios started to arise, attention must be paid to monitor and consider cutting loss if present measures are beyond help. Some businesses go through the exercise of rebranding but whatever the measures is, knowing and doing it early will save your business time, cost and reputation. But if and when cutting loss becomes the path to take, always remember; it is not what you do but how you do it, that matters for example with clear communication, leadership by example and exercise with empathy if it involves fellow employees.