When Should You Cut Your Losses?

10 Apr When Should You Cut Your Losses?

I’m often asked by my clients about how they should manage their inventory to generate the best returns. And, my answer is often simpler than most would expect.

The key to boosting your profits is rooted in simplifying your product offering. Many businesses cast a wide net and offer a host of services or products. However, when you do this, you inevitably tie up your cash by holding too much inventory. I’ve been there too, I know the struggle of wanting to offer as many options to your customers as possible. I get it.

But, if you don’t get a handle on what makes your business the most money and what doesn’t, then you’re putting your business at risk.

Keep in mind that all of the inventory you have already paid for is tying up your cash. And, the number one reason why most businesses fail is that they run out of cash.

To prevent this from happening, I recommend you follow these three steps.

1. Review your sales. Go through everything you sell and figure out which ones are selling. You should know the margins of your entire inventory line up. This will be invaluable for you to be able to know where you are losing (or making) the most money.
2. Make cuts where needed. Chances are good that 80% of your profits are coming from 20% of your products or services. Once you figure out where your gross profits are coming from, cut all other areas. I know this can be an uncomfortable thing to do, but if you are sinking money into an area of your business that is barely turning a profit, it is not worth it.
3. Reinvest resources. When you eliminate a product or service line, find ways to reposition those resources to help bolster those areas that are making you the most money. For example, you may sell off inventory that you won’t produce anymore and use that cash to buy more equipment or to hire more people to support the product/service that is the most profitable for your business. The key is to shift your business from what is not working to help strengthen what is.

Chances are good that you are selling more than what you need to. Find those areas that are dragging your profits down and be open enough to find ways to pivot.