Trade-offs. In the business world, we call them “opportunity costs,” but they mean the same thing. Basically, opportunity cost is what you give up when you’re faced with two (or more choices). Do I sleep in and start work an hour later, or do I hop out of bed before my alarm goes off and finish my day two hours earlier than usual? Considering a loan or other financing? Take a look at the cost of waiting to apply. Personally, I like to visualize the opportunity cost of a major business decision before I pull the trigger. I did this not too long ago with my office space. I’d been wanting to move for a while and had my eye on the perfect place in a building surrounded by companies that I really wanted to work with, but when I saw the rental price, my bank account said “absolutely no.” Then COVID whacked the commercial real estate market. My dream office went from “unattainable” to “expensive-but-manageable.” I visualized the opportunity costs both ways: Option 1: If I stayed where I was, I’d keep more money in the bank and have less stress every month to make my numbers, but… I’d pass on a “bucket list” office I’d never get for this price ever againI’d lose out on the networking opportunities in the new building since so many of my dream clients shared the same address Option 2: If I moved, I’d be in a great space but… My cash flow would take a hit short termI’d have to increase my revenue significantly to cover the cost of the new place long term In the end, I had to make the choice. Spend more for an amazing office near my clients or keep doing what I was doing, which I knew I could afford? Since my bank account was showing significant signs of COVID recovery, I was pretty sure that I could weather having a bit less money in the short term. Plus, I was willing to spend more so that I could be face-to-face with my ideal clients. I took the leap, spent the extra cash, and moved to my dream office. Every Business Decision Comes With Opportunity Cost You can apply opportunity cost to almost any decision. Do you go to bed early and miss out on an opportunity to meet your favorite aging rocker but gain some ZZZs and feel refreshed for work the next day? Do you take the scenic byway because it’s a relaxing and beautiful drive but miss the free hors d'oeuvres at the reception? Sometimes, it’s easy to identify and evaluate the opportunity costs. Hiring Nicci because she’s technically superior means losing out on the other applicant’s superior people skills.Marketing your custom spigots to a hyper-specific target audience means foregoing mass exposure. Buying Boardwalk during a game of Monopoly means you won’t be able to purchase the other two utilities you’re missing when you land on them. In the cases above, you would have to decide what’s more important, and circumstances will dictate the answer. For example, a technically superior chef would probably be more important than a friendly chef, but a friendly server will always be better than one who can do cartwheels with cocktails. Some Opportunity Cost Is Linked Directly to Money Sometimes, working out the most favorable decision can be a bit of a challenge due to the desirability of both outcomes. Pitching a New Business You’ve been invited to pitch your design services to two competing companies. We’ll call them Company A and Company B. You only have the resources, however, to pitch one. How do you decide? The Company A project has a high dollar value, but the work isn’t interesting. If you win their business, the project will give you the money to build your team, but it will immediately represent an unhealthy percentage of your business and you may have to scale back on some of your smaller, current clients. Because you know someone at Company A, it’s pretty much a guarantee that you’ll win their business. The Company B project is half the value of the first, but the work is way more exciting to you and your team. Still, you’ve been told that the client is very demanding. The work, however, would also give you experience and credibility with a whole new industry. One more thing: there’s a lot of competition to win Company B’s contract, so it’s anything but a slam dunk. 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. Borrowing Money to Buy Inventory 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, but you need to buy the supplies now. One problem: you don’t have the money. You have two choices: Borrow money to buy the supplies. This will result in you taking on more debt and a loan payment, but that money will allow you to immediately ramp up and sell exponentially more birdhouses while demand is high and possibly add more people to your team and a few other birdhouse designs, too. Still, it will take a few months before you realize any profit and a year to pay off the financing. Stay the course and build your business slowly. You can stay the course and build your business slowly and avoid taking on debt. It will take you 1 or 2 years to save up enough money to buy that same inventory, although inflation may jack the price of the supplies up further. You run the risk of your customers finding another source for custom birdhouses, too. But all of the money you earn during that time will be yours to keep: straight profit. 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. Two final (and very important) points about evaluating opportunity cost As a business owner, opportunity costs are very real and sometimes very scary. Still, you can mitigate some of the risk associated with choosing your path by doing the following: Research your options thoroughly but don’t take too long or you may stall your company’s growth while your competitors close the gap.Understand that you can’t change the past so once you’ve made your choice, don’t look back. Have a plan and keep moving forward—and be willing to modify your path if new opportunities come your way. 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. Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.