Opportunity cost

//Opportunity cost

Opportunity cost

Opportunity cost is an important concept for small businesses to appreciate, particularly for those where time and money are limited resources (that’s most of us then!).  Simply defined, an opportunity cost is what you have to forgo when you choose one option above another.   The ‘cost’ is usually defined in monetary terms, but it may also be considered in non-financial terms such as people-hours, time, physical output or other such resources.

Times versus money

In the context of small business, a typical example would look like this:  As a small business owner, you have the choice of whether to outsource your accounting requirements or to do it yourself for free.  With only a finite number of hours available to you in the week, the time spent on this task (especially if it is not your area of expertise!) is taking you away from your core money-making business (whatever that may be).

If it costs £25 per week to outsource this task, or 5 hours per week of your business time, then you might be inclined to think that doing it yourself saves money.  However, if that time would otherwise be spent generating profit of £100, then the opportunity cost is £75 per week (£100 – £25).

Over the year this would equate to £3,900 (£75 x 52 weeks), plus there would be the non-financial benefits of peace of mind and comfort that comes with knowing a professional is keeping your books in order.

Conversely, if money was your scarce resource rather than time, and that £25 could be better spent on advertising that would generate £60 profit then the opportunity cost is £35 (£1,820 per year) and it would make sense to do the accounting yourself.

Outsourcing can be more profitable

It is always worth considering outsourcing non-core elements of your business to allow you to concentrate on the important (money-making) aspects.  Providing there is something better you could be doing with your time, and the numbers make financial sense, outsourcing can allow you to be a more profitable business.

Be confident in your business decisions

Opportunity cost can be applied to any business decision where resources are scarce (most commonly time, money or space).  Even if it does cost slightly more than the next best option, you may still feel the non-financial benefits of an outsourced provider’s expertise make it a wise investment.  Commonly outsourced business areas include marketing, IT, legal, web and graphic design.

You will be paying for hiring someone else, but as an expert in their field, they should be able to do it more quickly than you could, and at a higher level of quality.

2018-03-29T01:55:44+00:00 Tags: , , |