Business — like life — is a series of choices. Whether you’re shopping at the mall, walking in the woods, or deciding whom to hire, with every step forward you make a choice. But what we’re not always aware of is: every time we make a choice, we’re giving up something else.
This is an essential concept for small-business owners to understand. In economic language, it’s called “opportunity cost” — “the value of the next best alternative use of a resource.” In daily operations, you can use this tool to analyze the benefits you could have received by using a resource for a different purpose.
For example, if you have $500, you can choose to spend it on a printer or on an advertisement. Which is most important to your business success at this time?
The opportunity cost of the printer is the forgone income that could have resulted from the advertisement. On the flipside, the opportunity cost of the advertisement is the additional printing cost incurred by using the next best alternative, which could be maintaining an old printer, the printing cost for using a copy center, or even the extra time involved.
Time is often your most valuable resource, so evaluating the opportunity cost of how you spend it is critical. For example, one afternoon you have the option of going to a networking event or analyzing your financial records. The networking event might be more appealing. But by not analyzing your financial records, you incur the cost of not identifying a cash flow need or some other issue that could improve performance.
Time is a finite resource; you can prioritize your activities by recognizing that what you DON’T spend time on represents a cost.
Once you start thinking within this framework — both in your business and personal life — you’ll be amazed at how many applications it has.
John Bonham is a business developer at Mountain BizWorks. He has a master's degree in applied economics from Virginia Tech and uses economic principles to help entrepreneurs with business models and financial analysis.
To receive one-on-one business coaching from John, contact Mountain BizWorks at 253-2834.
Learn more at www.mountainbizworks.org.