Entrepreneurship 101: Opportunity cost vis-à-vis business returns

From Entrepreneur.com.ph

When opportunity cost rises, the expected return from the business rises too. Using the same example above, if you held on to your inventory despite incurring an opportunity cost of 20 percent, you should sell your inventory at a very good price, a price that would cover not only your book value, which is P500,000, but also the opportunity cost of P100,000. Otherwise, it would be wise to clear your inventory now rather than later to avoid further opportunity losses.

Opportunity cost exists in every business decision. If your business resources were to be used in a different way, you could always compute if the opportunity cost is worth it. Your resources may include not only working capital and fixed assets, but also quality of people and time. If you have employees who are not competent for the job, or lack proper training to handle certain tasks, then your opportunity cost is high. You could have hired more competent staff at higher salaries, or invested in training to improve productivity.

What about your personal time? If you have left your high-paying corporate job to start a business, your opportunity cost is your salary. Your goal is to make your business pay you many times over your opportunity cost—how much in salary you would have received if you held on to your job—in the long term. If you are already earning so much from your business, then you have to manage your time well because every minute entails cost. Have you computed your opportunity cost?

 

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