<p>Large expenditures need to be planned because they have a substantial cash flow impact.&nbsp; Some of those expenditures related to fixed assets are purchase, maintenance and storage.&nbsp; These choices should be carefully considered because of the required cash commitment.&nbsp; What is sometimes difficult is to separate the emotional part of past decisions from what needs to happen in the future.&nbsp; Decisions become our children, and we really want them to succeed.&nbsp; This isn&rsquo;t always a bad thing, but sometimes, this commitment to past decisions is a drain on future cash flow.</p> <p>One area which often clouds decision making is Sunk Costs.&nbsp; A Sunk Cost is money that has already been spent.&nbsp; It isn&rsquo;t possible to undo the cash flow outflow. Only future costs are relevant because only future cash disbursements can be controlled.&nbsp; Therefore, any money already spent should be not part of the decision process.</p> <p>For instance, your business needs a row boat to go across the lake during windy conditions.&nbsp;&nbsp; The wooden rowboat is getting along in years and it is getting progressively more expensive to maintain.&nbsp; You are immensely fond of the row boat and have recently spent money having it repainted, holes plugged, and a new set of oars. &nbsp;However, dear Ol&rsquo; Betsy is wearing out and the boat yard has told you that there will have at least one new hole in the bottom each summer. &nbsp;&nbsp;Without expensive future maintenance, it would not able to row across the lake during windy conditions.</p> <p>While attending a boat show in your local community, you learn the cost of buying a new metal row boat is $3,000. &nbsp;&nbsp;According to the salesperson, the projected yearly maintenance is $100. &nbsp;&nbsp;The brand spanking new row boat tempts you, but the old wooden row boat has a special place in your business.</p> <p>The business has already spent $3,000 in the past year to fix Ol&rsquo; Betsy.&nbsp; The yearly projected cost to keep the current row boat swimming along is $1,000. &nbsp;&nbsp;Do you purchase the new shiny row boat?&nbsp; Or do you keep Ol&rsquo; Betsy?&nbsp;</p> <p>Most would pick the leaky row boat over the new one because they have already emotionally invested $3,000 in the old row boat and the immediate yearly cost is less to keep Ol&rsquo; Betsy.&nbsp; Also, she has had many years of loyal service.&nbsp; How could you put her in dry dock?&nbsp; However, that $3,000 is a sunk cost.&nbsp; It happened in the past, which is unchangeable, and cannot be added to the value of the wooden row boat.&nbsp;</p> <p>A five year budget would look like this for the two options.</p> <p>Ol'Betsy:&nbsp;</p> <p>Year One: $1000,&nbsp;Year Two: $1000,&nbsp;Year Three: $1000,&nbsp;Year Four: $1000, and Year Five: $1000.&nbsp; Total $5000</p> <p>Shiny&nbsp;Row Boat:</p> <p>Year One: $3100,&nbsp;Year Two: $100, Year Three: $100,&nbsp;Year&nbsp;Four: $100, and Year Five: $100.&nbsp; Total&nbsp;$3500.</p> <p>The short term costs are higher for the new row boat, but the total five year expenditures are $1,500 less than maintaining Ol&rsquo; Betsy.&nbsp; Do you have an Ol&rsquo; Betsy soaking up cash?&nbsp; Say an old copier, an old delivery truck, or maybe a trusty old laptop that you are especially fond of?&nbsp; Is the cost of maintenance exceeding the cost of a new asset?&nbsp;</p> 2009-07-30T21:29:24Z 2009-08-03T22:12:39Z -4.4997 215 5736 true 10 36154 dont-let-sunk-costs-drain-your-cash-flow 5 2009-08-03T15:12:12Z 2009-08-03T22:12:39Z

Sunk Costs are sometimes difficult to ignore when creating a Budget. Learn to ignore the past and concentrate on future cash flow.

1 2009-08-03T22:12:39Z