Let’s talk about opportunity cost…
What’s happening when people talk about is they’re weighing their options. You can’t make one decision without affecting another part of your business.
When you make decisions there are “trade-offs” that you need to consider. And that’s where the idea of opportunity costs come from.
In this article we’re going to talk about making decisions as a business owner and about the things you should be considering before making those decisions.
But first let’s define opportunity costs and the different kinds that currently exist.
What is Opportunity Cost?
In business and economics the term “opportunity cost” talks about the value of something you’re giving up so you can do something else.
Economics tries to put a number value on the things you don’t do so you can compare it against the things you do choose. For example, you can choose to train an employee or make a sales call. The new employee can make a bunch of mistakes that cost you and make you fire him or you can take the sales call.
For that specific day and specific decision you have to decide is the cost to train the employee is larger or smaller than the cost of missing the sales call.
That cost to you, is called opportunity cost.
2 Different Kinds of Opportunity Cost
Direct Opportunity Cost
Similar to the example above, let’s say you want to go out to eat. It’s not a special occasion, family isn’t in town and you have the ingredients to cook at home. The place you want to eat will cost you $50 plus $10 tip. You can choose to go out to eat or you can cook at home and save the money for a special occasion.
The direct opportunity cost here is all the things you could do if you didn’t spend that money in that moment. You could save the money and invite a friend to eat on a special night, you could also buy groceries for a week and eat at home.
There’s a clear amount of money that can either go to one thing or another and it’s up to you to weigh the best option for you.
Indirect Opportunity Cost
Here, there are more considerations than money. Indirect opportunity costs are more about the cost of a lost opportunity. For example, you have two options. Your mother is in town and wants to see you. She’s only in town for a few days but your also invited to a networking event in the city.
There isn’t any direct physical costs to either event but you need to ask yourself which decision would cost more to miss. Your mother can always visit another time and there will be more networking events. But in the moment, which relationship building activity will cost more if you missed it. The opportunity cost here is the missed time at either event.
Opportunity Cost is a Tool to Make Decisions Better
You don’t want to second guess everything you do. But every decision you make matters and can affect other areas of your life.
- Relationships
- Careers
- School Choice
- Social Opportunities
You want your decisions to align with your personal values. If going out to restaurants prevents you from saving money and you want to save money, then don’t go out.
The problem is when you make decisions based on opportunity costs and not your personal values and find yourself miserable and lost.
Figure out what’s important to you and make your decisions based on what you think is important and how you want to live your life. You can’t predict the future so you can’t think about all the possible scenarios that would have happened if you chose differently.
The purpose of opportunity cost is to make you re-frame the things you think are most important so you don’t feel guilty about making decisions.
Your Resources are Limited
As a business owner, there are only so many things you can do at one time.
And there are only so many places you can be at one time. So you need a system to determine what’s important and what’s not.
You have limited resources:
- Time
- Money
- Expertise
So think about the things you can do to maximize the resources you have. You’ll get farther along making your resources work for you rather than drowning in opportunities and decisions. The truth is when you choose one thing, you’re saying no to another, the value of those other things is the opportunity cost. But that’s not a bad thing, it’s the nature of running a business.
Wrapping This Up
Always keep opportunity costs in the back of your mind and make the best decision possible. That decision is usually the one that aligns with your character and values.
You don’t want to second guess yourself all the time, use this as a tool to become a better business owner and to create a better strategy.
Thinking of the bigger picture, opportunity cost is more about the choices we make more than money or resources. It’s about remembering that making one choice means something else is being let go.
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