Cutting your losses

One challenge for business is making a decision to cut your losses.

The theory is simple, if a deal/transaction/relationship is costing you money instead of making you money you should get out.

We all know the problem, though.
1. I have invested so much time/money/effort I do not want to throw it away ….
2. We are nearly at the critical point. As soon as we … things will turn around.
3. The fundamentals are good, this is just a short term problem.

We justify the situation based on instinct and then rationalise that instinct using whatever numbers we can find that support our instinct.

So how do we make that decision more intelligently?

It helps to have a few simple and strong criteria.
1. How much is this costing me? Not a gut feel, an actual number please.
2. How else can I obtain the strategic value this is supposed to bring? If we are brutal, a lot of our pet projects are really only pet projects by accident. Some one gave us a tip over dinner, we picked it up at a seminar, someone we respect did it in their business. There are probably much more logical ways to achieve the same objective. Stand back and have a good look at what you are setting out to achieve.
3. Are my core values being compromised? It’s a pretty simple yes or no. If you’re not sure, that’s a negative.
4. What is the trend? Use your statistical nouse. Check the long term rolling average against the short term. Something that has been consistently getting better for months but had a bad week last week is not the same problem as something that it dribbling along and last week was worse than usual. If the long term trend is okay but the short term trend is about to start pulling it down, it is time to act now, not after the rot has set in.
5. Am I having fun? Seriously! If you are not, then you are not going to put your heart and soul into it. If your business is a chore, get out of it. Now!

We are all prepared to compromise one or two of these simple criteria to get major benefits in one or more of the others. My recommendation is that as soon as two of these look shaky, though, it is time to get out – or at least stop putting any energy/time/money into it.
There is nothing worse than looking back at a month and saying these figures are bad because I was distracted. This is a tool for dealing with those distractions earlier than our emotional self will generally let us.

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