What's Your Opportunity Cost?

How much time do you spend on tasks that move you closer to your goal? How much time do we all spend on tasks that don't move us forward?


Asking the same question about our personal life goals, should also be asked for our work life goals, & how we operate in business every single day. If our business isn't moving toward some goal, target or milestone, toward some point in the future, it may as well be a ship sailing mid Atlantic, without a crew - It's going somewhere, but nobody quite knows exactly where.


From working in many businesses large & small, I've come to realize how valuable it is to know the most important step you need to take, that secret ingredient that fast tracks you to achieving your goal.


Before we go deeper, I want you to tally up how many hours you spend throughout a month, both on directly moving toward your goal, and those which just support your living, or your business but don't directly contribute to moving forward. In a business, the tasks which move us forward are normally those associated with generating sales, increasing profit margins, increasing the overall value of the business perhaps. Everything else would be a support function to that process.


The majority of people and businesses spend at least 40% of their days performing support tasks. If you're reading this, and currently work in a support role full time within a business, then that's 100% of your day that isn't driving the business forward.

But what if that resource & investment were to be focused 100% toward driving the business forward toward that goal? Wouldn't you get there much faster?

Let me ask you a question.

For every £1 you spend on sales & marketing, how much revenue would you expect to generate from that investment? £3? £5? £10 perhaps?


It probably depends on what activities you're doing, if your growth strategy is through business acquisitions, it could well be the case that you're achieving well in excess of a 10x multiple return. But let's just take a simple multiple of 3 for this example. For every £1 invested, you generate £3, which should be relatively easy to achieve in an established business.


Now let's assume 40% of our time is spent doing these non core tasks, those support tasks, the ones that don't move us forward. Putting a monetary value on that, lets just use the UK average salary of £26,500/yr. Add some national insurance costs, pension contributions, a few benefits, an allowance for desk space, or perhaps a vehicle, dependent on the type of business, and you're up to a figure approaching £35,000 per year.

 

What's the Opportunity cost?

So if we've determined that 40% of your time is spent performing support roles, that equates to £14,000 per year.  Many would assume that sum is your Opportunity cost, but it's not - It's a long way from being your opportunity cost in fact.


The opportunity cost can be summarized as what your lost revenue (or profit) will be by choosing one decision over another.

 

To give you another example. During my career, I've been involved quite heavily in bidding for government contracts. Now for the average contract, if i were doing the whole tender myself, it might take me say 200 hours to complete it, & that tender might be worth around £2m over the term of the contract. Now let's assume a 50% win rate. Based on the law of averages we can assume my time for completing that tender was worth £1m, divided by 200 hours, valuing my time at £5k per hour in revenue, or if considering a Net profit rate of 20%, £1k per hour.


If however I'd leveraged junior team members, thus freeing up my own time from the tender process, and say only spending 50 hours of my own time on it, that would then value my time much higher, at £20k/hr, & £4k / hr for revenue & profit respectively.

So for every hour I spent doing tasks, that didn't drive the business forward, it was costing the business £20k in lost revenue! This would be my opportunity cost. £20k per hour!


Coming back to my earlier example. Based on the average UK salary, & spending 40% of your time in supporting roles, it costs the business £14k per year for someone to do those support tasks. Remember that their job is actually doing something else in the business, perhaps they are a salesperson themselves, perhaps they even run the business. For every £1 spent, they expect to generate £3 in revenue. So in effect, their opportunity cost for doing that is actually £42,000 every year. So why don't they just outsource those services, and focus on their core business?


Now that we know the true opportunity cost, let's look at the average business. How many support staff do most businesses employ? Those are full time staff, just employed to provide non-core support services. Not only money invested in staff wages, but also in office space, company cars, business perks, coffee, the works!!

Why don't more people understand the concept of their opportunity cost? Businesses take on staff for varying reasons, some may not know about opportunity cost. That's fair enough, we aren't born knowing this stuff, we have to learn it. Hopefully this post goes some way to helping those people understand it better.


You might be mistaken by thinking this post is about trying to sell you an outsourced solution, but it’s not.  In fact the concept can be used in every decision that’s made in your business, every day.  For example, every time you make one choice over another, for most people this decision is based subconsciously on emotional choice, rather than logical reason.  Instead, if we choose the logical reason, we’ll be considering what the opportunity cost of either option is, & choosing that.


Some like to have control over each area in the business. Likewise, some don't employ anyone & try to do everything themselves because they don't want to lose control of their baby. Then for some, perhaps it's an ego massage. They like to count staff every morning, a measure of how successful they are in business. But I've got a much better measure of success - It's called 'return on your investment'. It's the money in your pocket!

Of course, many know the alternative to employing staff, and that is of course outsourcing everything. Everything that doesn't generate revenue or move you toward your goal. Look at how most of the celebrity entrepreneurs set up their life & run their businesses. Whether it's the Dragons or Sharks from the TV, or business leaders like Richard Branson & Elon Musk. They all understand the concept of opportunity cost in their life and business, & they all make their business decisions, based on those principles.  This is why they became so successful.  How much time do you think Richard Branson spends cutting the grass at home?


As companies start to get busier, I hope that rather than becoming busy fools, taking on increased roles and tasks, they’ll instead look at how best they can get exactly what they want, in a faster, & more cost effective way, using the opportunity cost principle, to help them achieve it.




We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.


If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen.  It’s a full time job. - The time investment alone is enough to put anyone off.  So imagine for just a minute, that you didn’t need to do all of this work.  What if this could be done over the next 3 - 5 years (by someone else).  Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.


Unlike other private equity firms, our focus is on growing businesses at the smaller end of the market.  We’ve worked in, and grown our own businesses in the exact same fields you work today.  We’ve spent years coaching and supporting small businesses just like yours, developing their teams, and helping them to grow, but now, we’d like to help you.  


We have a solution for business owners that need to sell their business immediately, or for those who want to stick around for a few years.

If you’re considering the options to grow or sell over the next five years, read more about how we're helping others just like you. Click here to read about our unique approach to helping you get what you want with the YokeFormula™ for your business.

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