Opportunity Costs: The Dangers of ‘Invisible’ Loss
Being aware of expenses is pivotal to the success of a business. While most business owner’s work hard to keep costs low, opportunity costs are a type of expense that business owners often overlook because it isn’t always reflected immediately in the books.
What is Opportunity Cost?
Opportunity cost is the benefit that is lost, when choosing one option over another. A missed opportunity might not show itself on a business’ finances immediately, however opportunity does cause your business to lose money, which is why it is important to be aware of these seemingly ‘invisible costs’ that may be hurting your business in the long run.
The Opportunity Cost Formula and Examples
Opportunity Cost = Return on Opportunity Not Chosen - Return on Opportunity Chosen
Here are Some Examples:
Deciding to purchase a coffee for $5 everyday, or investing this money in a retirement account.
Deciding to turn down a client’s phone call while out to lunch with friends.
Deciding whether to do your own bookkeeping or outsource it to a professional.
How Much Is Lunch?
With every decision, it is important to focus not only on the immediate cost benefits, but also the long term benefits.
For example:
Though it may be a small investment, in 10 years a $5 investment can accumulate and be a big boost to your retirement or savings fund.
Turning down a potential client’s business while out to lunch with friends, is equivalent to turning down an opportunity to gain experience and income. That’s an expensive lunch!
A business could lose opportunities to meet and onboard new clients if employees have the added responsibility of managing the finances and bookkeeping of the business.
Do you really save money by doing your own bookkeeping?
In most cases, new business owners make the decision to manage their own finances. Especially when starting a new business, a business owner often has a lot of responsibilities.
Using the formula above, let’s calculate a potential opportunity cost to your business.
Calculate how many hours you currently spend on your bookkeeping per month
Note how much you currently make, or would like to make, per hour as a business owner.
Multiply these numbers, and this is how much you are currently spending on your bookkeeping!
How much are you spending on your bookkeeping per month?
If you find that you are spending more money on your bookkeeping than you would like, then you might consider working with a professional bookkeeping team to help manage your finances. Not only will a professional bookkeeping team save you money and time, but you will also get detailed insights into the health of your business, deadline reminders, and advice to save your business money.
Being aware of big opportunity costs, like outsourced vs. in-house bookkeeping, will help you make more educated decisions as a business owner. When making decisions, make sure you use the opportunity costs formula above to decide whether or not the decision will help your business or cost your business money in the ling run.
If you would like to see how bookkeeping can save you money on invisible costs, get in touch and we’ll answer any questions you have.
