Your first loss is your best loss

As our business cycle is winding down, I like to look back over the year and review what we accomplished and what we could have done better. There often are memorable problems and events that popped up. It might be a customer complaint, a big special-order mistake, or, for this year, how we reacted to a very volatile wood commodity market. One thing I know for certain is, I have never looked back at a problem and said to myself, “Man, I wish I hadn’t resolved that so quickly and decisively. Maybe I should have waited a little longer, and a better solution would have come to me.” I know this for certain because one of a leader’s biggest challenges is taking care of problems quickly. It is human nature to save the biggest, most difficult items for “later.” The problem is that “later” is usually too late, if it happens at all.

Russ Kathrein
Kathrein

At our company, we try to address this head-on by emphasizing our Rule Number One, which states, “Your first loss is your best loss.” This concept started out with our tackling some of our slow-moving or obsolete inventory. We had managers who knew how much the inventory cost, but couldn’t bear to think of selling it below that cost. So instead they sat on it, sometimes for years, with the plan to get rid of it “later.” Then, a funny thing happened. A new guy came in to run the company, and he heard their complaints about how they could not do anything to manage or lower the “corporate charge” assessed for things like accounting and IT. He also saw there wasn’t a whole lot of giddyup in their steps when it came to tackling slow-to-no moving inventory. So, he combined the two problems and started charging the locations for the corporate expenses as a percentage of their overall working capital (which was inventory plus accounts receivable less accounts payables). Overnight, our emphasis was placed on moving the unproductive inventory. We were so successful that we reduced our overall inventory by 25% within the first four months, freeing up millions of dollars in unproductive inventory. Our battle cry became, “Your first loss is your best loss”—so much so, we simply shortened it to Rule Number One.

As we continued to stress, “Your first loss is your best loss,” we realized that it was applicable to a great many challenges we faced. When a customer called up, unhappy about something, we found that a complaint handled quickly often entailed far fewer expectations from the customer than one that methodically worked its way up the chain of command. A special-order mistake that was quickly written off and turned to cash was far cheaper than one that sat around and accumulated monthly working capital charges. Or, as I liked to point out, the manager was paying a monthly charge to have the right to procrastinate when he or she should address some problem inventory.

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Rule Number One also worked with our accounts receivables. If we engaged a slow-paying customer as soon as they became past due and found out why they weren’t paying, it often turned out to be something within our control that we could immediately fix. If it wasn’t something that we had done, by engaging the customer sooner rather than later, we were at the front of the line compared to other creditors, plus we could limit our exposure sooner rather than later—another version of “Your first loss is your best loss.”

Rule Number One even plays out with hiring employees. Often, we know if a new hire is not going to work out. Yet, out of a sense of being fair, or because we hate to admit we made a mistake, we let that employee stay in the position far longer than we should have. Admitting early that an employee is not right for a position is obviously best for the company, but it also is usually best for the employee; then they don’t get a false sense of success and are not surprised when you do make a change.

So, the next time you are hesitant to write off some inventory or take a quick settlement of an accounts receivable problem, ask yourself if you will achieve any better result by waiting. If you can’t think of what that better result could be, then make the decision, and move on. Too many unresolved problems will weigh you down and eventually come back and bite you. Liberate yourself by making the decision quickly and decisively. Once it is off your plate, you will be free to go out and do what you do best—run your business.