It’s Important to Know When to Cut Your Business’ Losses

“Quit.” The q-word is (at least, in the business setting) one of the worst four-letter words someone can use… usually. In the context you probably first thought of, yes, but there are plenty of times that quitting can directly benefit your operations.

For instance, let’s say you have a project that is eating all of your resources, with no real returns in sight. What do you do then?

It’s simple: you quit, as in, you abandon that specific effort in the interest of utilizing your resources more effectively.

Let’s talk about what basic economics can teach us about quitting, and how to determine if changing course is the most effective option for your business’ capabilities.

Different Business Initiatives Each Have Their Own Costs

With a bit of simple arithmetic, you can calculate and use the various costs of each of your options to help you determine your best course of action, particularly when you combine variables and considerations.

Let’s say your business has two potential routes to take, with $1950 available to you. You could either invest in more efficient technologies (Option A), or focus more on marketing efforts and direct additional funds there (Option B).

Both options offer distinct advantages… so which is the wiser approach?

You could begin by comparing the relative opportunity cost of either course of action. Basically, your opportunity cost is the estimated benefits that are sacrificed by selecting one option over another, giving you some extra data to consider as you make your decision.

For instance, Option A—the IT upgrade—will help increase productivity by 5%, which translates to approximately $1000 more revenue each month, but it will take a month for your team to adjust to the new technology before this revenue will come in and will initially cost $1500 to implement.

Option B—marketing more aggressively—will confidently bring in $7 for every dollar invested, with enough flexibility to invest $325 each month into these efforts… but you can only do so for six months.

Crunching the numbers, Option A will deliver $500 extra in month two before delivering the full benefit of $1000 by month three. If we presume that this continues, you’ll have about $4,500 more in revenue at the six-month mark, plus the $450 left untouched in the upgrade, for a total of $4,950 when all is said and done. 

Comparatively, Option B will presumably generate $13,650 in the same timeframe. That is quite the difference, $8,700 to be exact, meaning that Option A would have an opportunity cost of $8,700 dollars.

However, it is also important to consider that Option A feasibly won’t stop delivering this value, but the time-constrained nature of Option B means it will. 

So, if we look a little more into the future, Option A would generate $10,500 after a year (the saved $450 bringing it up to $10,950), while Option B would have stopped at 6 months and the calculated $13,650 when the marketing funds were depleted. This change in perspective does make a difference, but Option A still has an opportunity cost of $2,700… suggesting that Option B is, indeed, still better at this timeframe.

This is a very simplified look at it all, of course, as it does not account for potential compromises between the options. Perhaps the $1500 upgrade is selected and you commence with more effective marketing with the $450 in funds you have left. That gives you an added value of $7,650 after six months, and $14,100 after a year has passed.

This is a pretty good outcome… but what if your projections aren’t represented in reality?

Why It Could Be Best to Quit These Efforts

The fact of the matter is that projections and actual outcomes are two different animals, simply because the real world is messy… far messier than we can ever accurately reflect and predict through our projections.

Let’s say that, in the example we just went over, we elected to implement the upgrade and continue with marketing with the rest of the available funds. What happens if, instead of taking only three months to recoup the costs of your upgrade, you don’t see any profit from it until month five—or the upgrade doesn’t really deliver any added value? What if your marketing only brings in $4 per dollar spent, despite your confidence in a $7 return? What if it misses the mark, and doesn’t move the needle at all?

Either of these circumstances and countless other possibilities could throw the entire project into a tailspin and effectively wind up costing you more than it benefits you. Hence, abandoning (or “quitting”) the project once it is clearly unsuccessful could be advantageous to you… or at least minimize any damage done.

The Dangers of the Sunk Cost Fallacy

Speaking of damage done, we need to discuss why so many are so hesitant to give up on a project in the first place: the sunk cost fallacy.

In no uncertain terms, the sunk cost fallacy is more or less what it sounds like, that being the idea that once a certain investment has been made toward something, it is automatically better to see it through… whether it is successful or not.

On a certain level, it makes some sense. You’ve gone this far, so why not see your plans to the end and avoid wasting the money you’ve already invested?

This argument completely falls apart, however, when you realize that continuing on will almost certainly only result in more money, time, and effort being wasted… even if it seems that finishing the plan will prevent someone’s ego from being bruised, it simply isn’t worth it.

The much smarter, more responsible strategy is to monitor such efforts for success and efficacy without fear of pulling the plug if acceptable benchmarks are not met. Plus, the security that comes from the knowledge that floundering efforts can be abandoned helps encourage people to take bigger swings and try new methods that could potentially lead to greater success. 

In other words, sometimes quitting is the smart move.

We Can Help You Balance Your IT Initiatives So You Don’t Have to Give Up on Them

It’s no secret that information technology can be amongst the most expensive elements a business has to manage, and many of today’s businesses—speaking frankly—don’t have the resources to do so properly. However, this does not mean that quitting your IT is the way to go.

You should reach out to Techworks Consulting, Inc. and our managed services. Instead of giving up on your IT, you can give up on struggling to manage it. Give us a call at (631) 285-1527 to get started.