Some small business owners fall for the sunk cost fallacy trap. They have invested so much in a product, marketing strategy or project, they feel that there’s no turning back. These may have a negative effect on cash flow and profits, especially if they don’t meet the desired results. As an owner, you still have a choice on whether to stop or continue a project.
Here are ways to avoid sunk costs.
Release Personal Attachments
Some owners have strong attachments to pet projects, new products and marketing strategies. This often clouds their judgment, and may lead to losses and lost opportunities. Stubbornness in this regard often revolves around reputation and the feeling of wasted time and resources. One of the ways to avoid sunk costs is to let go of all personal attachments to projects that don’t deliver results and cost a lot of money. Start a project objectively; analyze its strengths and weaknesses, allocate sufficient resources, and find the right people in your company to work on it.
Let Go of Pride
One of the reasons owners fall for the sunk cost fallacy is pride. They think their idea is full-proof and that their reputation depends on its success or failure. Blind bravado can lead your small business to failure. If you see costs rising and profits plummeting, prepare to have a conversation with your team about a possible U-turn. This allows you to avoid further losses that may limit the growth or force your company to close. Once you’ve made the decision to take a step back, you can allocate resources to other projects that enable your business to grow.
Monitor Opportunity Costs and Investments
You need to find ways to improve your business’ working capital to pursue opportunities and investments. Monitoring opportunity costs and potential investments allow you to avoid sunk costs as well. Doing so allows you to determine the time and resources you’ve spent on projects. This enables you to get insights on whether to continue them or change course.
Foster Creative Competition
Internal competition even in small businesses is good. Foster creative competition in your organization so that your team can flesh out good ideas from bad ones. You’ll see different points-of-view about a project when you have this kind of environment. You can also weigh the possible sunk and opportunity costs of the decisions you make.
The sunk cost fallacy is a trap you’d want to avoid as a small business owner. If you need assistance with bookkeeping, feel free to reach out to us here at Robookkeeper via [email protected]. You can also review our affordable bookkeeping services to learn more about what we can do for you.