First of all, please accept my apologies for the inability to share some information over last week, basically due to unavoidable circumstances. Today let’s briefly consider the concept of opportunity costs. This is a somewhat not very common concept but I believe we will appreciate the importance to an entrepreneur by the time we close this brief article.
In its very basic form, opportunity cost is what you lose by choosing an alternative. It is the cost of choosing one option to another. As an example, what do you lose by financing your business with your own money instead of using borrowed money? What do you forego by outright purchase of an asset rather than leasing it? What do you lose by producing your products in your small manufacturing outfit instead of outsourcing production?
I guess many of us entrepreneurs do not even give a thought to these costs many times we make decisions. Yes – and more so due to the fact that such costs are not easy to quantify, and belong to the future. We get so occupied with actuals and budgets and forget about such costs. Moreover, such costs are off balance sheet – in other words they are not accounted for and so it’s easy to forget or ignore them.
Do you know that total cost equals financial costs plus opportunity costs? Let’s be honest ladies and gentlemen. How many of us really go beyond financial costs when doing our numbers? Now, your costs that comprise only financial costs are not true or real costs, simply because there is more to it. However good you are at costing, if you don’t consider opportunity costs in your decision making, you might be missing some very good things. Period!
Every decision we make is a trade-off. As decision making is almost a daily part of an entrepreneur’s life, opportunity costs cannot be avoided. Don’t you think so? Therefore, what are some of the vital things we entrepreneurs need to understand about opportunity costs? Why must an entrepreneur understand the concept of opportunity costs? Let’s briefly mention some of the issues down here.
Well, I think we should stop here for today. Nevertheless, within and beyond entrepreneurship, this concept of opportunity cost is so vital. I leave it to you to decide. You can chose to utilize the principle – that is if you are not yet there – or simply ignore it. At the end of the day it’s your business. Isn’t it? Deep within me I know that every genuine entrepreneur desires good financial footing, strategic ability to take advantage of opportunities and comparative including competitive advantage. Great weekend!
The Wise Entrepreneur