What is “Sunk Costs?”

Sunk costs are past expenses that can’t be recovered for non-performing projects that are no longer relevant to current or future cost decisions.

Are you reluctant to pull the plug on certain projects because you’ve invested a lot of time and cash in them? When you continue spending on a project that’s going nowhere, you’ve not only wasted a lot of your valuable time, but it will also cut into your cash flow.

For example: You hired a company to install new computer software but it keeps having errors or freezes up all the time making it hard to get any work done. Will you continue to lose precious time and money because you have to call the company to come out and fix your computer system numerous times? Or, will you just bite the bullet and have a more compatible software installed?

Yes, if you have to move on to something different, you may feel like all of your initial investment of time and money was wasted. However, this is not true. This is “sunk cost”. It’s time to move past sunk costs with the confidence of knowing it's the smartest business decision you can make. But the longer you hesitate the more time and money that you won’t be able recover.

Other examples of sunk costs are sometimes found in advertising, inventory, equipment, or even time spent on the research of a product. These are all areas a business spends money that they can’t recover. When these areas of spending become irrelevant for current decision making, it’s time to ditch it and go with something else.

No amount of money will salvage a poor business or investment decision. But it can be a difficult to admit something isn’t working. That's why it's important to know when it's time to move on to something more relevant to your current and future business.

Are you ready to get an edge on your competitors? At Summit CPA we offer multiple resources and techniques to help you get on the right track to attain your goals. For more information on how we can be of assistance to your company, contact our office at (866) 497-9761 to schedule an appointment with our advisors.