A sunk cost is an irretrievable expense that could continue to cost you in the future and will certainly never make you a profit, now or later. The sunk cost fallacy is a cognitive trap that many people, especially businesspeople, fall into. When we spend money on something, we want to get our money’s worth out of it and profit from it as much as we can. When it comes to sunk costs, this type of thinking often leads to poor decision making. Learn about some ways that the sunk cost fallacy affects your business and discover ways to overcome this thinking and reduce the impact of sunk costs the smart way.
Train the Right People
Employees are one of the biggest costs for any company, but what happens when you are using resources on ineffective employees? Not only are an employee’s salary and benefits expensive, but it takes much money, time, and effort to onboard and train new employees. These items can be considered sunk costs. Even if an employee quits or is terminated, and a business is no longer responsible for the ongoing expenditures related to that employee, the resources used in training and onboarding can never be recovered, and the company will never reap returns from that investment.
Businesses can avoid sunk costs by taking extra time and effort to get the right people on the team the first time around and provide comprehensive training to well-suited individuals.
Stay Up-to-Date on Equipment and Property Maintenance
Staying ahead of the expenses related to sunk costs is a good way to keep them behind you while preventing them from causing further frustration or financial damage. In the case of HVAC systems, regular maintenance is invaluable. An annual inspection from an HVAC services company such as Gideon Heating and Air Conditioning serves as great preventive care.
Get anything unusual checked out and repaired to keep any issues from worsening. The same goes for plumbing and any other company machines, computer systems, or vehicles. Putting money into regular service and maintenance actually extends the life of these tools, which maximizes your initial investment.
Fire Deadweight Clients
Businesses have a pattern of spending far too much of their time and too many resources on clients who create problems and cause disruptions. Many companies end up profiting little on these clients. Realizing that despite profits you may be earning, the extra hassle of a problematic customer is often not worth the money gained. Mutually beneficial partnerships should be the goal of any company-client relationship, and when these relationships tilt their weight on you, it’s time to examine the benefits and costs of retaining that client, although it may seem counterintuitive to drop any client.
When we feel we haven’t gotten our money’s worth, we are susceptible to making poor decisions because of our sunk cost mental bias. Becoming aware of this way of thinking can save your business money in the long run and lead to prudent financial decision making.