I’m sure you’ve heard at some point in time someone say “but we’ve invested all this money so we have to keep going”. For the folks that say this, the need to continue on a path is directly correlated to how much money has already been spent. For them I have two words — sunk costs.
It is essential for everyone in business to understand the concept of sunk costs. Sunk costs are costs that have already been incurred and cannot be recovered regards of what happens in the future. In other words, what’s spent is spent. Now I’m well aware of the fact that sometimes this spend is quite large and someone may have expended a lot of time and energy on a project. But if continuing to put more money in a project is not going to result in positive returns, by all means stop! What’s spent is spent and spending more is not the road to redemption.
I remember when I worked for a food manufacturer; they decided to start manufacturing a new candy. A formula was created and a few test runs were made which seemed to go well. The concept was presented to the sales group to see if there would be an interest in the market for it. There was instant enthusiasm and work on a
Most businesses are guilty of doing exactly this at some point in time. A project that creates a sense of enthusiasm and rallies people to it can produce this blindness because everyone wants it to succeed at all costs. However, businesses need to be disciplined and have ways of preventing the groundswell of enthusiasm from drowning good decision making. And they need to ensure they have communicated to their employees that if something fails, it’s OK to let go.
You can visit my blog, The Finance Compass, at:
http://financecompass.wordpress.com.