growth, ideas and opinions, podcasts, Small Business Finance

What is opportunity cost?

Listen to the podcast here:

“…the loss of potential gain from other alternatives when one alternative is chosen.”

Running a business comes with an never ending series of trade offs and there are times when critical decisions need to be made that seem to have greater trade offs than what you may be accustom to. This can be particularly agonizing when a decision involves needing expertise that you may not have access to – like financing. When given an opportunity to profit from a decision that involves needing to find capital, often times entrepreneurs and business owners will either lean in and commit or miss the opportunity as a result of their lack of knowledge. Opportunity cost is a real concept that impacts many businesses but here are some things that might help you if you find yourself in a position where a gain to your business will involve being creative with how you find the capital to take advantage of it.

The simplest example to think of is a business that receives a large order from a new customer. The order would not only mean access to more business but ultimately new money going to the bottom line. The problem? The business doesn’t have the capital available to pay for the labour and materials needed to complete the order. It’s current working capital is fully used to keep up with existing orders and the business can’t afford to wait the 60 or 90 days before getting paid from the new order being placed. So what should the business do? In these situations an entrepreneur or business owner may make the decision that the opportunity cost is not worth paying. That cost might involve borrowing money at a high interest rate which scares or frustrates many entrepreneurs and business owners but if the interest was paid the resulting revenue would be more than worth it. In fact if done properly the cost of the capital can be included in the price to the customer so that the net impact to the business is zero.

What many entrepreneurs and business owners fail to realize

Borrow money at high interest rates is generally not a good idea. This is because most people have a context of borrowing money for a long period of time (years) and can’t justify to themselves why they would even consider borrowing money. The problem with that context is that there are times when money can be used like any other resource to achieve a result. If you work out the daily cost of using money to take advantage of an order and expect to use the money for 90 days you might be surprised to discover your business could be doing much more if you were able to use capital properly.

“There is always money available for a good deal but there isn’t always a good deal available”.

Entrepreneurs and business owners tend to be very creative when they know what they have to work with. If you find yourself in a position where an opportunity is going to require capital that your business doesn’t have make sure that you are working with people who understand what you are trying to do and more importantly can help you understand the opportunity cost. Fear tends to come from the unknown but if you can face the unknowns and arm yourself with knowledge your business may be able to not only get through a tough moment but thrive and get to new levels.

For almost two decades I have been helping entrepreneurs and business owners take advantage of opportunity using capital. If you want to chat or discuss a decision your business is trying to make – let’s connect and chat.

I created mlenow.ca to help businesses looking for ideas, money and results. Our team gets up every day to help businesses that find themselves in this position. Let’s chat and connect if you (or someone you know) needs some help with their business.

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