Situation: A company lost money last year, but turned the corner with a profitable final quarter. One of the company’s divisions continues to lose money, though the losses are small compared to the total picture. The CEO is considering cutting this business. What factors should the CEO consider in making this decision?
Advice from the CEOs:
- What expense factors contributed to the loss?
- The biggest factor was allocation of vehicle and space expense. This division has seasonal revenue but carries the allocated expenses for the full year.
- Make sure that your 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.
- Study your allocations by shifting the allocation made to this business to other businesses. What is the impact on their profitability?
- 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 reduction in profitability of other businesses from closing the division.
- How strategic is this division to the overall business mix?
- Is this business essential to your product/service mix or just a customer convenience? If you terminated the business will customers be upset?
- Do competitors offer this service, and would you be disadvantaged by discontinuing it?
- What are the alternatives?
- Can you raise prices to increase profitability and refuse business that does not meet this pricing?
- Can you restrict the offering to less price sensitive customers?
- Can you refer customers to other vendors or sub out this business?
- Can you reduce the scope of the offering while adjusting pricing to enhance profitability?
- Can you source other labor alternatives to reduce cost?
Category: Strategy, Service
Key Words: Profitable, Loss, Division, Business, Critical, Factors, Expense, Allocation, Seasonal, Overhead, Loss Limit, Customer, Price, Competition, Offering, Scope, Labor, Skilled, Contractor