How long should you wait before you cut your business losses?

June 21, 2022

The recent news of Revlon filing for bankruptcy this week came as a surprise to many, given that it is a well-established brand that was able to withstand competition over past years.

To the uninitiated, the US-based cosmetics maker and marketer recently filed for Chapter 11 bankruptcy, citing disruptions in supply chains and rising costs.

This news triggered some sad memories from a few years back when a friend and I had to make the decision to shut down a small chicken farming operation we had successfully established. As I read the Revlon story, it took me down a memory lane on how we deliberated on the decision before calling it to quit. Although this was not at the same scale as Revlon’s liquidation, I think there is a common lesson to be learned.

We had just established a small farming operation on the land owned by my friend’s mother. The biggest cost to date at the time was money we had spent on the capital project of setting up the chicken house and acquiring the initial stock. With marketing, we were able to secure a market for the chicken and cash flow was relatively sufficient. During the first year of operation, we did not draw much money from the businesses, we continuously re-invested in the business gearing for growth.

Just as we thought the business was taking off, we were hit by a sudden increase in the cost of feed due to a drought that hit the suppliers of feeds in Namibia and neighbouring South Africa, beyond our control indeed! Despite the sudden increase in input costs, we had no room to increase the selling price at the same rate, which quickly eroded the profit margin that we were making.

As the business was relatively small, we had no savings, and the shortfall in the chicken feed prices had to be covered using our own resources. Trying to manage the limited resources, we reduced the stock of chicken we had which had negatively impacted our ability to service the demand we had at the time. With reduced demand, cash flow became further constraints, and we knew we needed to make the call.

After deliberation, we unanimously decided to split the flock of the chicken that was left to cut our losses further as we had no alternative realistic means of turning the situation around. This was a difficult decision to make as it felt like we were prematurely giving up.

Why am I telling the story if it has no better ending? I have noticed that there is often a bad connotation around business closure especially when it was perceived to have been performing well. As a business owner, you need to look realistically at your situation, the resources at hand, and obligations toward your creditors and make the necessary call. If after careful consideration and necessary consultations with various stakeholders there is no realistic way to turn the company around, it cannot continue business as usual. If it means liquidation, make peace with it because continuing may do more harm than good.

For more information on this and other money matters, visit our YouTube channel Money matters with Budget Bee- Namibian Youtuber to learn more on the subject.

*Klestina Kauhondamwa is a Chartered Accountant by profession.

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Last modified on Wednesday, 22 June 2022 18:48