Gaining an Understanding of Opportunity Cost. Finding The Hidden Cost in Your Business

Written by on April 19, 2017

 

What is Opportunity Cost?

You have a lot of different factors involved when evaluating just how profitable your company can be. One way is to insure that all the processes are streamlined. They define this as operational efficiency. There’s been a lot of buzz over the past decade touting it’s importance. I would agree that it is vital, but it is far from the only area a business leader needs to be concerned with.

Another is to look and insure that your pricing for goods and services gives the highest return possible. But, many business owners miss a huge factor in deciding and evaluating the cost of doing business, opportunity cost. All of the assets of your company hold an opportunity cost. Understanding how that cost effects your strategy is important in making the best decision regarding optimal outcome of your business.

Consider This Example

Your opportunity cost is just that, the cost you pay for choosing how you direct your assets. Consider, for example, a shipping company that makes roughly $1000 a trip profit through delivery of goods. Another choice for use of the asset would be to rent out the truck to a sub-contractor for $750. This makes the opportunity cost of using the trucks for delivery $750.

Now you may ask yourself why this matters and this is where most business owners are blind to their true cost of doing business the way they do. One reason this is important is to understand that using an asset in business isn’t “free,” even if you own the asset. At first glance, the above example looks like you are making the right decision. But what if you are paying taxes and other soft costs that average about $275? Without taking into consideration the opportunity cost, it would appear as though you are still making $725, but in fact you are losing $25 when you could have used that same asset to make $750 without the taxes and soft cost built into it. You would be better off exiting the delivery business and renting out the truck each day.

Your Most Under-valued Asset

Probably the most under-valued asset that most business owners don’t take into consideration is your time. As Tony Robbins says, it is the only asset you can’t get back. Everything else is replaceable. Your time is worth something, and you must place a value on it. Do you know what your time is worth? Do you understand the opportunity cost of your time in business? This is important for a couple reasons. One, it allows you to allocate your time more effectively. You are the best and brightest hire your company can make. The reason is that you are cheaper, work harder, and focus on the goals and objectives of your company better and more consistently than any other hire you could make. When you understand what it costs for you to engage, you can start to allocate your time more effectively.

Second, you are not hired for a specific role. You cover all roles that need covered. If there isn’t someone in the company to catch something, you are the one. That, by the way, is what business leaders call, “putting out fires”. By being clear on the opportunity cost of your time, you can start to see a deeper assessment of what those fires are costing you.

The moral of the story is that whether it is a physical asset or the use of your own time on a day-to-day basis (the one asset most owners don’t take into consideration), you make the ultimate decision on how to allocate those assets. When you make the decision, you need to look at as many factors as possible. One of those factors is the opportunity cost. Failing to notice this facet can lead to a bad investment decision and leave your company less profitable in the long run.


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