I’m surprised how many business owners and managers don’t know the real meaning of the term “Opportunity Cost.” And many of those who DO know what it means rarely factor it into their decision-making process.
No one likes to lose money. And we all want to be as efficient and effective as we can with our resources—especially time.
But what we often don’t see is the income and value we leave on the table when we take one action over another.
Let’s say a business has extra land that could be sold or leased. If the land is leased, the opportunity cost is some other thing that could be done with it. Instead of leasing the land, one could sell it and invest the capital into a new product line. In this case, the Opportunity Cost (OC) is the forgone opportunity to create the new product line.
All too often, we take on projects and commit resources without considering the actual and eventual costs involved. We have to look at the big picture, make good decisions and not just react to things that come our way.
The word “decide” is from the Old French word decidere. It literally means to cut off. When we choose, we’re not only choosing FOR something, we’re also choosing NOT to do something else.
We live in a world of amazing opportunity. We can do anything we want, but we can’t do EVERYTHING we want. We must choose carefully because whatever we pursue takes over some of our resources. And these resources may not be available for other opportunities.
The ninth pillar of a World Class Business is stewardship. And it’s incumbent upon us to be good stewards of all our resources. Assessing the OC will help us do that.
Action Point
When considering a new venture, client or project, be sure to invest the time to look at what your decision will exclude. What is the opportunity cost—the OTHER ventures, clients or projects you’re cutting off when you decide.
It’s not always easy to determine, but if we don’t even look at it, we will always leave money on the table.
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