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Home Industry Trends Opportunity Cost in a Recession: How Should Your Business Proceed?
When you run a small business during a recession or anytime there’s a looming economic downturn, opportunity costs can become higher-stakes. The age-old question of do I save cash reserves or invest money in growth changes in the context of a recession, as higher yields on savings accounts make a rainy-day fund that much more appealing—and effective. You might be tempted to raise prices during a recession to cover possible losses, but will that decision cost you customers?
No matter the economic situation, opportunity cost is built into nearly every decision, so it’s important to weigh your options carefully. Don’t consider just the cost of your business opportunity; be sure to consider their potential returns. This is especially important in times of economic downturn, as opportunities in these times may allow you to gain market share or a competitive advantage at a time when your competitors are cutting back—calculated growth, which can yield big rewards.
Trade-offs are inevitable. While we call them “opportunity costs” in the business world, their meaning is basically interchangeable. An opportunity cost represents what you give up when faced with 2 or more options. They’re the road you take weighed against the one not traveled.
For my small business, this can mean choosing between client gigs. Do I say yes to a new opportunity, even if it will be more work to onboard a new client, or do I keep working only with my existing clients, and trade theoretical growth for known stability?
For some opportunity-cost situations, even during a recession, the choices are straightforward—even if the decision between them isn’t.
In the cases above, you would have to decide what’s more important—and in times of economic uncertainty, this choice can get even more complicated.
You may find that working out the most favorable decision can be a bit of a challenge due to the desirability of both outcomes, and the economic climate doesn’t change that fact. Here are 2 examples to consider how opportunity cost plays out in real life for many small businesses.
You’ve been invited to pitch your design services to 2 competing companies. We’ll call them Company A and Company B. You only have the resources, however, to pitch one.
Opportunity cost: If you choose to pitch Company A, the opportunity cost (or trade-off) is creating a name for yourself in the industry, which you would gain if you earned Company B’s contract.
If you choose to pitch Company B, the opportunity cost (or trade-off) is the guaranteed financial freedom that you’ll immediately get with Company A’s contract. Which option would you take?
Here’s another example. People are clamoring for your custom birdhouses, and the only thing that’s holding you back is a lack of supplies. You’ve found a great source for those supplies and a pretty good price (for now), but you need to buy the supplies ASAP, especially because of increased supply-chain bottlenecks and quickly rising costs. The problem: you don’t have the money on hand.
You have 2 choices:
Opportunity cost: The trade-off of taking the loan is immediate profit, which you’d have if you stayed the course. The opportunity cost of staying the course, however, is three-fold: company growth, meeting customer demands, and scoring supplies at a cheaper rate than in the future. Which option would you take?
As the above examples show, a recessed economy can make decisions with a price tag a bigger challenge than they already are, as the stakes are higher and resources are tighter. Growth at this point can put you ahead of your competition, but it comes with greater risk of failure.
No matter what your choice would be above, when facing recession-affected opportunity costs for your small business, make sure to consider both short- and long-term costs and gains. It can be tempting to assume an economic downturn will last forever and remain cautious, but historically, that’s not the case—and you might miss out on key growth opportunities.
Instead, take a bigger-picture view of your finances and, if it benefits your business’s goals, consider accepting some of the risk (that is, short-term risk for a longer-term gain) associated with borrowing money. For those of you eyeing a growth goal, this could be especially vital. There’s unquestionably always risk in borrowing money when you don’t know what’s coming down the economic pike. But options like lines of credit or business credit cards can work especially well in recession-related contexts, as they give you the option to take on only as much debt as your business needs at a given time, on a case-by-case basis.
As a business owner, opportunity costs are very real and sometimes very scary—and never more so than during times of economic instability. Still, you can mitigate some of the risk associated with choosing your path by considering the following 2 points:
By the way, if the opportunity you’re looking at seems impossible because you don’t have the money to make it a reality, consider applying for a loan or other financing through Lendio. With a simple 15-minute, online application, you can be matched with funding from Lendio’s network of more than 75 lenders ready to help small businesses take advantage of the opportunities that come their way.
Rachel Mennies is the owner of The Little Book, LLC, a small business that provides writing and editing services to individuals, nonprofits, and businesses of all sizes. At last count, Rachel's writing and editing skills have helped shape nearly 500 articles and blog posts for Lendio.com.
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