Opportunity Cost

The concept of opportunity cost was foreign to me, and is probably foreign to most small business owners outside of the accounting world. Yet the concept is very relevant to profitability. Here's a simple definition I like to use. The opportunity cost is the value of what you have to "give up", the true cost to you.

Here's a simple example. A baker drives 20 miles to buy dough that is $2.00/pound less than the cost of locally sourced dough. At 50 pounds of dough, he/she saved $100. However the cost of gas and wear/tear on the company vehicle is $20/trip. In addition, the travel time means one hour of loss production, at a rate is $150/hour. So the true cost of buying dough 20 miles away, even at a $2.00/pound savings, is more costly than buying locally sourced dough.

What does that means for me. If you spend 5 hours a month doing your own bookkeeping, what is the opportunity cost of that decision? Well, that is 5 hours of time not available to "make more money". Maybe it's 5 hours on the weekend not spent with family.

With GerMel Financial Services bookkeeping, the $150 spent monthly for us to do the bookkeeping, creates a lower opportunity cost than doing it yourself. So let us do the books, and take the 5 hours saved to make more money. Or, let us do the books and take the 5 hours saved to spend with the wife/husband and kids.

Have questions, email is at admin@gernelfinancial.com, we're glad to chat.