This blog was last updated on October 21, 2020.
There’s a particularly interesting and, indeed, insightful concept in economics that every business owner should know as clearly as basic concepts such as cash flow and balance sheets: opportunity cost.
What is Opportunity Cost?
Simply put, opportunity cost is the benefit that must be given up when one opportunity is chosen instead of another. Let’s look at farming as an example. A farmer has the opportunity to sow his fields so they’ll either grow 100 carrots, or 100 stalks of celery. If he chooses to grow carrots, then in addition to whatever financial cost he’ll incur (e.g. the price of seeds, equipment, fertilizer, labor, etc.), he’ll also incur an opportunity cost of 100 stalks of celery. Why? Because that’s what he could have grown instead of carrots.
Now, this brief look at opportunity cost isn’t meant to trigger scary “Economics 101” flashbacks. Rather, it’s meant to get you thinking about the opportunity costs that you’re paying right now because you had to choose one option instead of another; or perhaps several others.
Opportunity Cost Examples
For example, here are some very real opportunity costs that you may have incurred thus far:
- The profit you would have generated if you carried certain products or services that your current or coveted customers want to buy
- The profit you would have generated if, instead of being forced to take care of a particular task or activity, you delegated it to qualified staff
- The profit you would have generated if you had invested in marketing and advertising, and sold more of your products and services
Another Element of Opportunity Cost
At the same time, there is another element of opportunity cost that has a specific application in a business context vs. a personal context: competition!
That is, when you miss out on generating profit due to the examples listed above, it’s more than just an opportunity cost to you. It’s a win for your competition because the customers that you weren’t able to serve (whether because you didn’t have the products/services they wanted, because you were too busy doing the job of two (or more!) people, or because you weren’t reaching them with your marketing and advertising) won’t just shrug and put their wallets away.
They’ll more likely give their business to your competition, which will boost their market share and mind share. So in this sense, it’s a double loss: you lose potential profit, and your competition gains a customer.
Turning Opportunity Cost into Profit!
All of this begs the question: how can you mitigate or, even better, eliminate opportunity cost and turn it into profit? For thousands of small and mid-sized businesses across the country, the answer may be to seek out a business loan.
A business loan – specifically, a working capital loan or a merchant cash advance – can put cash in your bank account within a matter of days*. As long as you use the loan for your business, there are NO restrictions on how you can use the funds1. For example, you could add profitable products and services to your offerings, hire staff so you can delegate, spread the word through advertising and marketing, and so on.
We strive to offer flexibility with the loan products that we offer access to because the best person to make decisions about your business is YOU.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!
The information shared is intended to be used for informational purposes only and you should independently research and verify.
Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.
