Sunk costs could lead to bad business decisions

Do you think pulling the plug on a failed contract would be “wasting all the money” your business has spent to date?

If so, you may be making the choice based on emotion and “sunk costs.” Sunk costs are past expenses that are irrelevant to current decisions – such as those spent on non-performing contracts. Read more.

 

Do you think pulling the plug on a failed contract would be “wasting all the money” your business has spent to date?

If so, you may be making the choice based on emotion and “sunk costs.” Sunk costs are past expenses that are irrelevant to current decisions – such as those spent on non-performing contracts. Why are they irrelevant? Because that money is already spent and generally cannot be recovered.

While admitting mistakes may be difficult and ego-bruising, staunching the flow of cash and changing course by abandoning a failed contract can be a wise decision. That’s because the only relevant costs are those that influence your company’s current and future operations.

For example, say your firm hires a new sales representative. You spend thousands of dollars sending the rep to training seminars. You assign mentors who take time from their busy schedules to provide on-the-job coaching and oversight. But despite your best efforts, the new hire isn’t working out. The rep doesn’t fit your firm’s culture, doesn’t grasp the company’s goals and procedures and doesn’t generate adequate revenues for the business.

As a manager, what should you do? At some point, you may need to terminate the employee and start over with someone else. But what about all that time and money you spent on training and mentoring? Those are sunk costs. Acknowledge that you can’t get them back, cut your losses, and start anew. Throwing good money after bad won’t salvage a poor business investment – or a poor business decision.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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