Back in my days as an accounting and finance undergrad, I was taught that sunk costs are irrelevant. It took a long time for the concept to sink in. But it’s powerful, and I use it again and again and again.
Unfortunately, too many people in the business world don’t understand this fundamental concept. Basically: Anything you’ve paid for up to now and anything you’ve invested in your business – time, money and other resources – are considered sunk costs. The money is expended. What you’ve spent up until now doesn’t matter. You can’t recover those costs.
What matters is what it’s going to cost in the future and how you are going to move forward. You need to look at where you are and what the next stage of development is going to cost or take.
One possibility would be to sell some of the assets you’ve developed. Consider their liquidation value or the price you could sell them for. The amount you’ve expended on something doesn’t impact its value in the marketplace or what it’s going to cost you in the future. You need to look forward from this point, at projecting costs and projecting developments. Anything you’ve done in the past is irrelevant to your decision-making now.
For instance, let’s say you paid $600,000 for a piece of equipment. You have $600,000 in that equipment. It’s going to cost you an another $50,000 to get that equipment working. Or you could sell it for $300,000. That’s your future decision point. You cannot get back the $600,000 you’ve already spent. Are you better off taking $300,000 in the liquidation or spending $50,000 to bring the piece online?
Remove from consideration the fact you paid $600,000 for the equipment.
The market doesn’t care, and it doesn’t matter in your decision-making. You want to be looking forward. This is very helpful in many cases because people often get attached to the amount of time, energy, or money they’ve put into something getting to today. What matters is the future, not the past. Only look forward. Don’t think about what you’ve put into something in the past.
This will make your decision-making very clear and clean.
What’s your experience? Have you struggled with sunk costs? How have you worked through this process?
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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Krzysztof (Kriss) Szkurlatowski.
About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment, gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can email R. Shawn McBride or (214) 418-0258.
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