How to improve business performance through understanding opportunity cost

There’s a TV show I enjoy called ‘once upon a time’. In this show there is a character, Mr Gold, who’s catchphrase is “all magic comes with a price, dearie”. He’s right, but price tags are on more than just magic; everything comes with a price. That price is the opportunity cost or the ‘cost’ of losing other alternatives when selecting one decision or course of action. This principle is the same for decision making and problem solving in all elements of our lives.

Every single choice we make means that we can’t make an alternate choice using the same time or other resources. Decision making isn’t easy most of the time, and thinking about it in this way can make it even harder, especially when you’re looking for business growth or to improve business performance but there is so much to do. However, having a strategic plan and clear set of goals can help you prioritise what’s most important, evaluate your options and make the choice that represents the best value for the ‘price’ you’re paying by not selecting other options. There are usually at least three elements to a choice; time, cost, and quality. Let’s look at a few examples.

Managing your books takes time and can be frustrating. You can hire a bookkeeper to do this for you; that will cost money, impacting your profit. However doing so will give you back time and it will likely be done faster, given that this work is a bookkeepers expertise. You can spend that time you save doing revenue generating activities, bringing in more revenue, also impacting your profit. The opportunity cost of doing your own books is being able to spend that time generating more revenue. The opportunity cost of hiring a bookkeeper is that you can’t use those funds for anything else.

You can consider any decision in this same way. Firstly, identify your goal and the elements to the decision’s outcome, such as time, cost, quality, and anything else. Then document your options as well as the opportunity cost and how each impacts your chosen components. Finally, review your options and select which will best progress you towards your goals.

So what:
• Everything comes with a price – so be clear on the price you are paying for your choices
• We don’t always have choices, but when we do, evaluate your options and their opportunity cost to make sure you choose wisely