Sunk Costs Could Lead to Bad Business Decisions1 min read
Are you afraid that pulling the plug on a failed contract would be “wasting all the money” your business has spent so far?
That could mean sunk costs are causing you to make your decision based on emotion. Expenses spent on non-performing contracts, for example, are sunk costs. They are past expenses that are irrelevant to current business decisions. They are irrelevant because that money has already been spent and generally cannot be reclaimed.
Admitting mistakes may be difficult but it could be a wise decision to interrupt the flow of cash and change course by abandoning a failed contract. Costs that influence your company’s current and future operations are those that are relevant.
Say your firm hires a new sales representative, for instance. Training the new rep costs you thousands of dollars. Mentors who provide on-the-job coaching take time from their busy schedules. You’ve put forth your best efforts but things are not working out with the new hire. They don’t generate adequate revenues for the business, don’t fit your firm’s culture and don’t grasp the company’s goals and procedures.
What should you do next? You may need to terminate the employee and hire someone new. What about all the time and money put into mentoring and training? Accept they are sunk costs and that you can’t get them back, cut your losses, and start fresh. Putting good money toward something bad won’t redeem a poor business investment.
By Kathy Hopkins
Kathy has been a practicing accountant since 1985 and provides a vast repertoire of services that include budget comparison, reporting and analysis, QuickBooks® training, cash flow projections, financial analysis, compilations, reviews, audit preparation and management, as well as strategic planning.
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