Archive

Posts Tagged ‘opportunity cost’

The Biggest Expense to Your Company

November 25, 2011 Leave a comment

While reading the book, I’m Feeling Lucky: The Confessions of Google Employee Number 59, I stumbled on a question that Sergey Brin asked of his marketing folks. It really got me to think about how we look at corporate costs.

Think for a second, what is the biggest expense that a company can incur? Is it facilities cost, equipment leases, or big-ticket purchases? Is it health care, taxes, or employee salaries. It must be salaries and benefits, right? That is what has been preached to me from well-meaning CFOs.

Wrong! The single largest expense a company can incur is “opportunity cost” and it can literally make or break a company.

(Sorry, I set you up.)

Opportunity cost can be defined as the ‘profit foregone by selecting one alternative over another. It is the net return that could be realized if a resource were put to its next best use. It is “what we give up” from “the road not taken.”‘

It is like I try to teach my kids, every day you make decisions to do (or not do) something. When you decide to do one thing, you are consciously (or subconsciously) deciding NOT to do something else. It is the consequences of those decisions that directly impact opportunity cost. In the case of companies, every action taken (or not taken) has an affect on the bottom line.

It is the phone call that is not made.

It is the product that is not shipped.

It is the project that is not completed.

It is the process that is not managed.

It is the follow-up that is not performed.

It is the questions that were not asked.

All of these have a direct impact on business either immediately or down the road – but they definitely have an impact.

Thinking in terms of opportunity costs takes a different mindset; one that is not necessarily natural to most people. But considering it in our daily actions can make all the difference in the success or failure of a company.

OK, so as I wrote this, I was also preaching to myself, but I couldn’t miss the “opportunity” to put it out there.