“Well, I’ve already got so much into this crop, might as well see it through...”
“I spent a whole lot of money to start this project, so I need to spend more money to get it done.”
If you hear yourself saying this, do not make any sudden movements. You are about to sink a decision by considering your sunk costs. “Sunk costs” refers to money that is already spent. No matter your next decision, that money is G-O-N-E with no recovery, so if you try to base your decision on those costs, you could end up throwing good money after bad.
Let’s talk about some common sunk cost situations in farming and how to make the best decision going forward.
If you are farming, often there are forces that cause damage (hail, rain, wind) that you have no control over. Other times, there are pressures that you could have managed (weeds, pests, irrigation), but it didn’t happen for one reason or another. Now the crop is mediocre. Should you spend the time to harvest and pack it? You might -- out of guilt (it’s food!), pride (I grew it!), or necessity (I need some income!). However, that might not be the best management decision. The harvest, pack, and marketing of some crops is the most expensive part. There’s a chance your year-end net profit will look better if you till it in and reseed or take a small loss on the crop.
Or say you start a building project, you are in the middle of it, and realize this is going to cost more than expected, more financing is going to be required, and the return that you are expecting is suddenly not looking like it will allow you to operate and make that loan payment. Do you finish the building? Most of us would want to see it through if for no other reason that the sight of a half-finished building would drive us crazy. Is that the right economic decision? No. The sunk costs – your investment to that point – is influencing your decision.
Maybe you realize that making hay is a money-losing endeavor for your farm each year, but you are doing it anyway because you have a loan on the equipment. KCARD would suggest making the endeavor profitable or minimizing your losses by selling the equipment. Otherwise, you are spending a quarter to make a dime.
Confronting sunk costs is hard for all of us. It means admitting that at one point in the past we did not make the right decision. But making another wrong decision doesn’t make the first one right, and it puts the business in deeper. If you find yourself in a situation with a lot of sunk costs and a bleak market outlook, reach out for assistance to someone who is not emotionally invested in the enterprise.
KCARD can work with you on developing a financial plan for better financial health in your business or help you assess a situation to see what “sunk costs” are damaging your business. If you have questions or would like a third-party look at your situation, call KCARD at (859) 550-3972 or email us at kcard@kcard.info.