Which parts of your business are not profitable?

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August 14, 2021

by a searcher from Bard College in New York, NY, USA

Resources are limited. Should business only support the sales of things that actually make money? Considering P&L and COGS, under what circumstances would supporting something at a net loss be beneficial in the long term?

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Reply by a professional
from University of California, Santa Barbara in Seattle, WA, USA
There's a lot to unpack here and obviously more than one answer. I'll give one example, I took over a business that had income-generating assets (B2B ) and services supporting those assets which also generated revenue (B2C). What we quickly realized was that the services side was not only losing money but these were better performed by others in the industry. So we outsourced the services side and gave up that revenue. We also significantly reduced costs because using third party providers were less expensive than having those resource in-house. We then changed the direction of the organization to be B2B sales focused versus trying to do all things. We started to turn a profit but it was painful. Our focus was on cash generation and annual recurring revenue growth - for us those were the key indicators of success. Find out what your company does best, project your growth and cash flow, see what your industry does...and use all of that to help inform your decision. Good luck
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Reply by a searcher
from Tufts University in Los Angeles, CA, USA
It is entirely dependent on how much capital you have access to.

Under certain circumstances, especially with high multiple industries, it makes sense to operate businesses at a loss in order to grow as quickly as possible and rapidly increase enterprise value, but you've got to make sure your investors/capital providers are supportive of that plan and will continue to fund those losses. This is a common theme in tech/SAAS/media/cannabis, etc.

If you don't have access to sufficient capital to operate at a loss, then I would say you should wind down or divest the unprofitable product lines/segments. You can't count on raising capital when you're running out of liquidity - it is tremendously challenging to raise capital when you have limited runway and the overall business is unprofitable.
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