Or – don’t throw good money after bad!

This is something I come across in business on a regular basis, and it is one of those things that can stop business owners and Directors moving forward as quickly as they should.

Human nature compels us to cling on to things we have invested in, and ignore things that are new and unknown.  This has worked for us well over our hundreds of thousands of years of evolution.  You invest time and effort in your relationships, your children, your job, your home, etc.  By doing this you are more likely to survive than somebody who flits from one thing to another.

Sunk costs in business

However, these natural survival instincts can hold us back in the business world, hence the fallacy that holding on to what we’ve already invested in is always the best option.

Think of a time where you have kept supplying a client that doesn’t pay you.  Or you’ve kept on an employee who has never achieved the performance they promised.  Perhaps you’ve held on to the stock that you paid over the odds for and nobody now wants.  Or maybe you’ve kept on investing time and money into the business you are running, which has never been successful, nor is ever likely to enable you to achieve the financial freedom that you desire.

In all of these cases, you can feel yourself fighting the belief that it is better to stick with what you know than go with something new and unknown.  It’s hard to accept that the investment you made did not work, and you now have to realise the loss.  But being in business means being business-like sometimes.  You have to let logic overcome emotion, and move on.

Make the right decision

Let me give you an example:

Let’s say that last year, you invested £1,000,000 in a new piece of equipment that you believed would revolutionise your business.  You’ve spent a whole year trying to make it work, but it never has.  You now have a choice to invest a further £500,000 to improve it and make it work, or buy a brand-new model for £500,000 and scrap the old machine.  Which would you go for?

Most people would stick with what they have got, basing their decision on the fact that they’ve already invested so much time and money in making the equipment work – i.e. the sunk costs.  However, which is the correct decision has nothing to do with the £1 million and whole year already invested.  It depends solely on which £500k future investment has the best chance of success.

The same goes for that under performing employee – do you invest more time and effort in trying to get them up to scratch, or invest the same amount of time and effort in bringing a new person into the team?  And that old stock – do you sell it at a loss or scrap it, and use the extra time and space you have made to try and recoup the loss?

Alternatively, you could do nothing, and hope that a miracle happens – your bad employee suddenly sees the error of their ways and comes good, or there is a sudden demand for those old widgets sitting at the back of the stockroom, gathering dust!

Let go of the anchors

Well, my advice is to put emotion to one side.  Let go of the anchors that are holding you back.  The past is the past, it is done, there’s nothing you can do to change it.  The cost is a sunk cost, it’s gone, you can’t get it back.  The only thing you have control over is what you do now, and that will influence your future success.

So, take stock of the things in your business and your life that are not working as they should, ignore the previous investment, be brave, and make a decision to stick or twist, based solely on what is the best way forward for you.  Good luck!