The beneficial news for small business owners during a downturn is that running a small business is difficult regardless of the economy. So, when things become tough, the strong resolve you’ve established as an entrepreneur will help you persevere and, ideally, expand. And your resolve will be crucial when calculating opportunity cost.
What Is Opportunity Cost?
When faced with two or more possibilities, opportunity cost is what you give up. They are the path you choose vs the road not taken, and small business entrepreneurs balance the opportunity cost of various options every day:
- A consultant may compare the earning potential of taking on new clients against the lifestyle given by their current clients.
- To improve the profile of a restaurant, the owner may have to choose between bringing in a big-name chef from New York and introducing a novel concept.
- Is a general contractor’s tool improvement budget spent on refurbishing current tools to make work more efficient or on purchasing new tools to provide more options to customers?
When money is scarce, assessing opportunity cost can be more stressful since the consequences of making the wrong option can be more severe. And this is where your determination will shine.
#1: Don’t Take Too Long
The stress of a downturn can (and almost certainly will) slow you down. You’ll spend more time analyzing your options since every decision you make is more important when the economy is working against you. And you may find yourself going back and forth more than usual. However, set a time limit for when you make a decision and stick to it, otherwise your company’s growth may suffer. Your determination will get you through the difficulty of making a decision, but you will do it with profound understanding and reflection because you took the extra time.
#2: Don’t Look Back
Your determination will be extremely useful in reminding you that you cannot change the past and in keeping you from dwelling on previously made decisions—especially if forces outside your control jeopardize your well-laid plans. Looking backward, on the other hand, has never helped anyone go forward. So, keep your eyes forward and be ready to adjust if new chances present themselves.
An Opportunity Cost Decision Most Business Owners Face in Down Markets
You need to generate additional business because your revenue has dropped, and you have two options:
- Borrow money to expand or broaden your product offering. This will require you to incur further debt and make a loan payment, but the funds will allow you to immediately improve your offering, expand your workforce, and pursue new markets. It will be a few months before you know whether it is successful or not. In any case, you’d have to start repaying the loan right away, which would be an immediate monthly hit to your finances.
- Reduce expenses and save the money to develop a growth fund for when the time comes, taking advantage of increased savings account earnings. You’ll be more financially comfortable for the time being, but saving enough to upgrade or diversify will take years, and you risk losing consumers to a competitor who does improve and diversify.
So, do you take a chance or stick to your guns? Do you choose the discomfort of debt and the possibility of exponential development, or stability and the status quo?
In any case, keep in mind both the short- and long-term costs and benefits. It can be easy to believe that an economic slowdown will persist forever and to remain cautious, but this has historically not been the case — and you may miss out on critical growth chances as a result.
Instead, take a step back and consider taking some of the risk (that is, short-term risk for a longer-term gain) connected with borrowing money, often known as financing, if it benefits your business’s aims.
And, while business owners will almost always be wary of borrowing money when the future of the economy is uncertain, the availability of financing choices available in areas can help minimize those risks. Lines of credit or business credit cards, for example, can function particularly effectively in recession-related circumstances since they allow you to take on only as much debt as your firm need at any given time, on an individual basis.
BONUS #3: Don’t Fear a Misstep
Despite all of your study, option-weighing, and late-night pacing trips up and down your driveway, you made the wrong decision. What do you think? You will not have been the first or the last person to step in it.
What will identify you as a business owner (and likely keep your business afloat) is how you repair a mistake. After making an opportunity cost mistake, the ideal way to think is that getting it wrong is an opportunity to get it right. This is especially true in difficult circumstances.