As business owners, we’d like to think that we make rational, logical decisions regarding our business finances. However, scientists have discovered hardwired biases in our minds and thought processes, one of which is the sunk cost bias, also known as sunk cost fallacy.

A sunk cost is simply money, time, or resources you have already spent and can’t recuperate. Another word for them is retrospective costs. The bias comes into the picture when we consider those costs in future decisions.

The sunk cost fallacy, first hypothesized by Richard Thaler in 1980, is a cognitive bias where people overestimate the importance of sunk costs in their decision-making. He wrote, “Paying for the right to use a good or service will increase the rate at which the good will be utilized.”

In a 1985 paper by Hal Richard Arkes and Catherine Blumer titled “The Psychology of Sunk Cost,” the authors found evidence that this tendency is “predicated on the desire not to appear wasteful.” Furthermore, “those who had incurred a sunk cost inflated their estimate of how likely a project was to succeed compared to the estimates of the same project by those who had not incurred a sunk cost.”

Essentially, instead of making a decision that’s right for themselves and their future based on current circumstances, people will make a decision heavily informed by the action already taken, even when it isn’t relevant to current circumstances. It doesn’t sound very productive, does it?

Let’s discuss two examples of the bias in action. First, let’s say you have spent a lot on car repairs. You continue to repair the car, digging a deeper and deeper hole. Making a $3,000 downpayment toward purchasing another vehicle is likely a better decision than sinking the same amount of money into another round of repairs. However, you are still emotionally (and irrationally) attached to all the money you spent on the clunker.

Now say you have an employee that is a borderline performer. You keep investing in them, thinking you can “fix” them. However, they don’t improve. Regardless of whether the employee is insubordinate or simply not the right fit for the role, letting them go was likely the right move to make some time ago. 

So, now that you know about the sunk cost bias, how can you avoid falling into it in your business? Here are some ideas:

1. Increase your mindfulness when making decisions that involve costs already incurred. Ask yourself, “what decision would I be making if I hadn’t already invested the time/money/resources into this project?”
2. Since the bias can often come as the result of not wanting to experience negative emotions like feelings of failure, irresponsibility, or loss, try to remove your emotions from the equation altogether. Instead, examine the business project at hand from a facts-only perspective. Ask yourself, “What does the data show me?” Then do the math. 
3. Track key performance indicators (KPIs) regularly to see whether you’re on or off track and assess whether it’s worth continuing the project sooner.
4. Like setting a budget for holiday shopping, establish goals and milestones for future projects, and have a “walk away” plan if things spiral out of control.
5. Stay future-focused.

Ultimately, it will be up to you to ensure that sunk cost bias doesn’t affect your decision-making in the future. Hopefully, this information and the five tips we provided will help you orient yourself to make business decisions that benefit current and future you, rather than past you.

If you’d like to learn more about cognitive bias, including the sunk cost bias, check out the works of two additional scientists, Daniel Kahnerman and Amos Tversky (the former of whom won the Nobel prize for his work!).

Are you looking for new ideas to market your business? Knowledge panels might be an excellent tactic to consider. If you haven’t heard of them, don’t worry; many people haven’t, but they are a Google invention widely used in search results daily.

Knowledge panels are the information panels that appear on the bottom right corner of your search results when you look up specific people or brands. They differ from the business profiles you see when you query a company, which Google Business Profile provides.

Knowledge panels display information that Google has collected in its Knowledge Graph, which is one of Google’s information databases. For example, search for a favorite author or your current Congressperson, and you can see an example of a knowledge panel. Famous historical figures and extremely popular entertainers may have a more robust page displaying all of the information about them, but there will typically also be a column of text to the right (you may have to scroll a bit to see it), which is the knowledge panel.

So, how can you use knowledge panels in your business? A knowledge panel representing your leadership or brand brings instant credibility and visibility to your organization. It boosts reputation and helps to build trust with all stakeholders.

Who typically has a knowledge panel? If you happen to be an author of a book with a formal ISBN (International Standard Book Number), you would automatically get one. If you are a leader of certain organizations, like Bob Iger of the Walt Disney Company, you will also get one. If your brand is well-known, it will have a knowledge panel.

You can’t create a knowledge panel, but you can claim it once it appears. Google determines who receives a knowledge panel. But you can “lobby” for one, and there are marketers you can hire to help you execute the steps it takes to get one. The main thing is to be active and visible online.

If you already have a knowledge panel, there are procedures documented on Google Help that you can follow to claim it. You can also make edit suggestions and submit them to Google. You can’t directly edit your knowledge panel, however; Google has final control over what is displayed.

After reading this article, we hope you now have a good jumping-off point to understanding and obtaining a Knowledge Panel. With so many marketing tactics available online to help promote your business, it’s essential to stay in the know about them!

A balance sheet is a financial statement showing a company’s assets, liabilities, and equity at a specific point in time. It’s one of the foundational financial reports for your business. But did you know the equity section of the balance sheet looks different depending on a business’s legal structure? The most common entity types are corporations, partnerships, and sole proprietors. Recently, we discussed what equity looks like on a corporate balance sheet. This time, we’ll review what the equity section of the balance sheet looks like for sole proprietors.

The Equity Section
The equation Assets = Liabilities + Equity is true for all entities. For a sole proprietor, equity is called Owner’s Equity. There are typically two accounts listed: the Owner’s Capital Account and Owner’s Draw Account. We define both below.

Owner’s Capital Account. This balance represents how much money the owner has put into the business. Also included are cumulative business income or loss amounts from prior years.

Owner’s Draw Account. This balance represents how much money the owner has taken out of the business. Since a sole proprietor does not get a paycheck, taking money out of the business via a draw is how they receive their money.

A third account will show up if you run a balance sheet report in your accounting system on any date during the year: Current Year Earnings. This balance is the same as the net income on the year-to-date income statement. It represents the profit of the business.

On a formal balance sheet for external purposes, only one account will show: the Owner’s Capital Account. This is because the draw and the current year’s earnings will roll into that account.

Salary vs. Draw
It’s important to distinguish between the concepts of a salary and a draw. In corporations, owners receive salaries in the form of paychecks, where payroll taxes are deducted, and W-2s are issued at year-end. In the corporation’s income statement, the salary and taxes are deducted as expenses.

For a sole proprietor, this is not at all how it works. A sole proprietor has no salary. Therefore, there is no payroll expense or payroll taxes on the income statement for the owner. The owner could have employees, and those payroll expenses would be shown on the income statement, but there is nothing for the owner.

Instead, the owner takes draws, which are not an expense; they’re simply a reduction in equity. They do not affect profits or change taxes owed. An owner can take a great deal of money out of the business, and there is no impact on profits. There is undoubtedly an impact on cash flow, however!

A sole proprietor does pay payroll taxes in the form of self-employment taxes. They simply do it on their IRS Form 1040 as opposed to payroll tax forms that a corporation would use.

The equity section can be the most challenging to understand on the balance sheet. Hopefully, the explanation above will provide more clarity so you can better understand how to read your business’s financial statements.

Running a business can be incredibly rewarding, but it can also be incredibly exhausting. As a business owner or manager, it’s essential to take the time to slow down, recognize when you’re feeling overwhelmed, and take proactive steps to reduce fatigue and burnout. In this blog post, we’ll explore the importance of sustainable business practices and how slowing down can help protect your physical and mental health while supporting organizational success.

1. Eliminate wasted time.
Take a thoughtful look at your to-do list. Are there any tasks that take significant time and resources to complete that don’t offer you the return on investment to make them worthwhile? What would happen if you eliminated them from your to-do list entirely? Would you still meet your desired destination? If yes, it may be time to axe that task. Consider this quote from The Four Disciplines of Execution: “The only reason you fight a battle is to win the war.” Is this task going to help you win it? Or does it just feel productive?

2. Get off electronics and social media.
Vision Direct polled 2,000 adults in the U.S. and found that the average person spent over 6,259 hours per year staring at screens. If that statistic is making you sweat, or if you feel like you don’t have any time to live the life you want to, your work-life balance could be lurking behind the electric glow of your devices. Instead of setting an ambiguous goal to use your cell phone less, try tactics like:

• plugging your phone in overnight in a different room to prevent you from starting your day by doom scrolling
• Setting an alarm at night to set the phone down and enjoy some ‘analog’ activities
• Utilizing your phone’s screen time features to remind you when you’ve spent a certain amount of time on any one app.
• Turning your phone off and putting it away for–gasp–an entire weekend day.

3. Get enough sleep.
Sleep deprivation can negatively impact your executive functioning abilities. If you are sleep-deprived, everything takes longer. Mistakes happen more frequently. Emotions become hard to regulate. Slowing down and getting enough sleep each night can make you more productive, reducing work hours. Plus, you feel more refreshed.

If getting to bed an hour earlier isn’t feasible for you, could you find time to rest your eyes for 15 minutes a few days a week? According to the Sleep Foundation, “A nap can improve cognitive functions such as memory, logical reasoning, and the ability to complete complex tasks.”

4. Zoom out to gain a new perspective.
It’s called the hamster wheel for a reason: you’re moving so fast you can’t see that you aren’t actually going anywhere. Slowing down your usual routine can help you gain perspective. Now that you’ve cut out superfluous tasks, cut down on screen time, and are getting more rest, use that extra bandwidth to reconnect with your mission, vision, and purpose. You might have been fighting fires in the trenches for so long that you’ve forgotten why you’re in business. Make sure your employees understand their grander goals as well.

5. Avoid multitasking.
By this point, we’ve all heard the data that multitasking doesn’t actually save time. But are you executing the discipline to work on tasks one at a time, or are you task-switching in rapid succession? Almost everyone thinks they are good at multitasking, but a study by Jason M. Watson and David L. Strayer concluded that only 2.5% of people can multitask effectively. 

Becoming self-aware of your habits related to multitasking is the first step. Next, consider batching your work by client or task type. Note when you’re feeling more energized throughout the day and when your attention seems to lag. Then plan your work accordingly. This process is called capacity planning or time batching, and we have an entire article dedicated to it here. The key is to continue experimenting within the framework and see what works best for you. 

6. Get better at managing distractions.
If you get interrupted every five minutes, you will feel drained of energy at the end of your work day. Get smart about managing interruptions so you can be more productive. You can try strategies like:

• Setting your phone to “do not disturb.” 
• Carving out time on your calendar as “unavailable” so teammates don’t have total access to your time.
• Placing your phone somewhere you can’t mindlessly reach for it.
• Turning email and chat notifications off.
• Working during an off time. 
• If you’re in a physical office space, close your door.

7. Stop worrying about billable hours (for service businesses) – at least for a while.
If you’re feeling fixated on billable hours as of late, it may be time to take a step back, even if it feels counterintuitive. Otherwise, this preoccupation could affect the quality of service you’re able to offer your customers, which could lead to a decrease in customer satisfaction and hurt your reputation.

In addition, that constant attention on billable hours might even be causing you unnecessary stress. It’s not sustainable for every season of your business to be one of exponential growth. Sometimes, holding fast for a quarter can give you time to reevaluate your priorities in your business and personal life. This, in turn, can allow you to step forward confidently when the time is right.

8. Do nothing.
It’s actually okay to do nothing sometimes when you’re the business owner. Your mind needs space to develop new ideas, think about creative solutions to complex issues, and even daydream. Does the act of doing nothing leave you feeling incredibly uncomfortable? Then it’s probably exactly what you need.

By implementing these new strategies to free up time, you’ll find you’re better able to take back control of your day and slow down. Slowing down in your business is essential for your mental and physical well-being. Taking the time to rest, recharge, and evaluate your goals will allow you to refocus and realign with your purpose. When you are in a state of balance, it becomes easier to make decisions that benefit your business and your life.

And just as importantly, slowing down allows you to enjoy the fruits of your labor, appreciate the moments of success, and celebrate the milestones you have achieved.