Know When to Cut Your Losses

April 13, 2006

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How much money are you willing to lose in your new business venture? You should set a maximum dollar amount that you're willing to commit.

If you don't decide the financial commitment to your new business in advance, you may regret it in the future. For example, suppose you have $50,000 in cash and investments that you have accumulated from past saving. You're going to open a new business that you're willing to limit to a $10,000 cash commitment of your own money. The business is losing money and needs additional funding. What will you do? Will you increase your cash commitment or will you consider it time to cut your losses? If your business has lost the $10,000 commitment, stop at that amount.

Save Money

Don't start throwing money into a sinking ship. Make sure you've made the appropriate changes to your new business to make it a successful operation. Don't just presume the business will get better.

How long are you willing to commit to an operation that will barely support itself? Would your time be better spent starting another new business that is related to your current idea or would you be better off becoming an employee for someone else? Before you start your new business, it would be a good idea if you also have time commitment goals as well. For example, if you're willing to develop your business for three years and then expect a livable profit, what will you do if you have not made your profit objectives? You need to answer that question before you start your new business.

If your new business does fail, your goal will be to get out of the business with the least amount of financial pain.

The following are different ways to cut your losses if your business is failing or has failed. Some options will work better than others, but just remember that there is no ideal way to get out of a failing business.

Sale of the business. A voluntary sale of your business may be the least painful way to get out of your business. A voluntary sale usually will allow you to sell your business for the most amount of money. Most potential buyers are willing to spend more on a business that is still in operation and has some ongoing business value.
Forced liquidation of the business. This occurs when the creditors force the sale of company assets. This can be an expensive option because the price received may be substantially less than you would get in a voluntary sale of the business. In some instances, it may make sense to sell parts of the business and to wait until you find the best buyer for each business part. For example, you may be able to sell your office equipment to one buyer and your manufacturing equipment to another.