This week we talk about opportunity cost. I answer what it is and why it matters.

We address the 3 types of costs related to it and 4 questions you can ask to bring awareness to these previously hidden costs.

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FOOTBALL, FOOD, & OPPORTUNITY COST

In the 2nd quarter of a recent Oklahoma State football game I found myself hungry. It was mid-afternoon and I hadn’t eaten anything for breakfast or lunch. This was the type of hunger that can’t wait, but must be handled right then and there.

So I started the search… what food would hit the right spot of goodness and fullness? As I walked through the concourse, the options seems endless.

There was traditional stadium food (hot dogs, pretzels, and popcorn) but also local fast food to choose from.

As I contemplated my options, I also considered the after game meal. With local hot spots like Hideaway Pizza and Eskimo Joes potentially on the horizon I had 2 choices:

1. Fulfill my full hunger now

2. Get just enough to tide me over and prepare for a feast later

I chose #1 and we drove straight home after the game.

Still, to this day, I’m not sure if I made the right choice, but it’s the choice I have to live with.

In buying that hot dog and pretzel, I was choosing those over both the local fast food and the local hot spot.

That money, and that hunger, was being allocated to a specific resource, which meant it couldn’t be allocated to another immediate resource, or to a resource in the future.

Every day we make these sort of trade-offs in life and business.

In business, these choices can have a huge impact:

Inventory or assets purchased or not purchased.

The asset deployed or not deployed.

Employees hired or not hired.

Types of costs

All of these are what you call explicit costs. Costs that are defined and the result of money actually going out the door.

But there are also implicit costs. This is the difference between the 2 options you chose. Yes, you bought the machinery (the explicit cost), but that money could have been earning interest in an account. That hidden cost (the loss of interest), is the implicit cost.

But implicit costs can also include time cost. Time devoted to training this employee is time that can’t be devote to solving your operations problem.

Measuring opportunity cost

So, how do we account for opportunity cost?

The best way I know? Awareness.

Awareness only comes from careful reflection before making decisions and careful reflection is often down through questions.

Ask yourself:

1. How much do I value this item (time)?

2. What am I choosing not to buy (do) right this second by choosing this?

3. What am I choosing not to buy (do) in the future by choosing this?

4. What regrets will I have by choosing this?

THINGS OF INTEREST

What is the goal of running a business? I’d argue that everyone’s goal is to create value. Ultimately for themselves, but also for their customers and employees. In last week’s podcast, I talk about a framework for value-creation in business.

Are you interested in growing your Twitter account? For the last year, I’ve been a part of a community who’s sole focus is helping you understand the “game” of Twitter. This week they’re offering a free 7-day trial for anyone who signs up. Check it out here (affiliate link).

In the last few weeks I hired a VA. Honestly, I’m just a little burned out and have more work than I can handle alone. While it hasn’t been a smooth transition (mainly because of me), I can already see how helpful it is going to be in time. In preparing to bring him on, I found an article by Khe Hy of Rad Reads that helped me prepare for this big change. If even thinking about bringing on a VA, I suggest you read this article.

Thank you for reading--see you again next week.

If you're interested in learning more, here are 3 ways I can help:

1. ​Purchase the Financial Statements Decoded eBook.

2. ​Join the waitlist for my cohort Financial Statements Decoded. Next one is in January!

3. ​Work with me 1-on-1 to optimize your financials and create a financial dashboard that will increase profit (booked through November 2022).