We all remember the one that got away. That high school crush for whom we spent months or even years silently nurturing our feelings for then choked back the tears as they walked out of our lives forever. The winter coat that we saw in the Black Friday sale that had disappeared from the rack the moment we convinced ourselves that we could afford it (then spent the whole winter missing its absence as we shivered). The job interview when we were in our early twenties that we didn’t turn up for because we were so cripplingly scared of being rejected that it seemed a much better idea to skip it altogether. Often missing out on these opportunities is an important learning experience. We resign ourselves to the knowledge that in some parallel universe there’s a version of us enjoying the benefits of said opportunity, it simply was not meant to be. When we come to run our own businesses, however, opportunity loss becomes a far more serious proposition. Opportunity loss can inhibit the growth of your business, it can impede your business’ ability to adapt to industry changes, it can cause your business to go from an industry leader to an also-ran limping along half a step behind your competitors.
While few businesses can afford (nor even deem it prudent) to take advantage of every opportunity that comes their way, it’s important to identify and capitalize upon opportunities that will enable your business to evolve. This can be a difficult balancing act. After all, all entrepreneurs are (and should be) averse to needless spending. Indeed, when starting a business one is encouraged to cut costs as much as possible wherever they arise in order to keep their cash flow as healthy as possible and insulate themselves against the sheer quantity of unknown variables that come with the first few years of running a business. In an environment where one is expected to be shrewd, any investment seems sizeable. But there’s a universe of difference between wasteful or vanity spending and making informed business decisions that will enable your business to grow. Whether it’s investing in a larger or better located premises, with better foot fall, used cranes for sale for your construction business, or marketing costs for a rebrand to re-energize your business, a small opportunity can make a big difference… And they can be gone in the blink of an eye.
But how does one recognize an opportunity when it comes their way? How does one ensure that they’re able to act upon it when the time comes? How does one calculate whether their gamble will pay dividends? In order to answer any of these questions we first need to clarify what we mean when we talk about opportunity loss..
What is opportunity loss?
Opportunity loss generally represents a worsening of a business’ financial position. It is applied when a business is locked onto a course whereby spending is inhibited because liquidity is low (more on liquidity later). Usually, it’s because a business’ cash reserves are low. Businesses can experience cash flow problems for all sorts of reasons. It can be because they’ve tied up all of their capital in stock, because they’re still in their early stages and are struggling to get credit in the wake of significant startup costs, or simply because business isn’t great at the moment.
Every opportunity presented to a business has an opportunity cost if it is not taken. This means that the business loses out on the operational or economic benefits that the opportunity could have held for the business. For example, a manufacturing business might not have sufficient cash flow to invest in a new piece of equipment. This piece of equipment may have increased both productivity and output, meaning that more product was created at a cost of fewer man hours. This is both an economic benefit as the business is able to sell more product, and an operational benefit as the human resource cost is reduced, meaning that either the business has less outgoing in terms of paid hours or that employee workload is reduced, meaning that they are able to put more effort into the quality of their work now that quantity is less of an issue.
The opportunity cost equation
Of course not every opportunity should be taken up. Businesses can easily run themselves into the ground even if they were financially and logistically able to say yes to every opportunity that came their way. Obviously, any kind of investment for your business presents a degree of risk. There’s the risk that your investment won’t pay the kinds of dividends you expect, or that the investment will have a highly adverse effect on your liquidity. A formula needs to be applied to measure the potential cost of taking the opportunity as opposed to the benefit missed out on if the opportunity is missed out on.
The cost of missing out on any given opportunity is surprisingly easy to quantify. For both options (accepting or passing on the opportunity), a projection needs to be made to ascertain which will, in the long run, be more lucrative. Then it’s simply a matter of reducing the return on taking the opportunity (Option A), by the projected return on keeping things as they are). Thus, simply put…
Opportunity Cost = Option A-Option B.
The resultant figure will tell you whether it’s worth the temporary hit caused by the cost of the investment is worth taking.
But seriously, how bad can missing out be?
Your business won’t necessarily crash and burn if an opportunity passes you by. It may even be successful. But missing out on opportunities for advancement and growth can lead to stagnation. Stagnation is rarely a profitable venture for businesses. Many success stories, particularly in the tech world, are those of people who were in the right place at the right time, while others missed out on millions by not investing in the right project at the right moment. Hard work and diligence are certainly part of the equation, but there’s no denying that snapping up the right opportunity can take your business to the next level.
So, what’s a good opportunity?
We’ve talked about measuring benefits against risk in a business opportunity, so what’s a good opportunity? Well, obviously a good opportunity in this context is one that offers a greater return for a reasonable outlay. We’ve already mentioned investment in a better premises or piece of equipment to facilitate operations but other profitable investments include…
Marketing- Being the best in the world at what you do counts for little, if nobody knows who you are. Conversely, Starbucks don’t make the best coffee, nor do McDonalds make the best burgers, but their ubiquity represents the power of marketing. Liaising with a digital marketing agency can be a great investment as they will carry out research into your business, your brand and your target market and come up with a unique strategy to help your business grow. Since marketing costs tend to yield an average return:investment ratio of 5:1 spending on the creation of content, PPC advertizing or outside marketing fees is a good opportunity.
Personnel and development- There’s no greater opportunity in business than investing in the right people. The right employees can contribute enormously to the growth and prosperity of your business. However, they can only do this if they’re well looked after, nurtured and well compensated for their trouble.
This means that you should not only capitalize on opportunities to hire talented personnel, but on opportunities to train and develop them. If they feel like they’re stagnating in your business, they’ll happily cross the road to lend their talents to one of your competitors.
Diversification- When starting out in business, it’s important to know your niche. It’s what enables you to find your target market and carve out a name for yourself in a competitive marketplace. However, once your brand is established, it can be difficult to find opportunities for growth. Thus, expansion and diversification can open up new opportunities for you and your business. If you find an opportunity to diversify, it will likely require a significant capital investment but it can also be a huge step forward.
How can I make sure my business is ready to move on a good opportunity?
How do you insulate your business from opportunity loss and ensure that you’re always ready to move on an investment that could lead to significant growth. Well, it all comes down to liquidity. In the business world cash is king, and tying up your cash in the running of your business can lead to missed opportunities. You can, however, take steps to prevent this.
Identifying and eliminating unnecessary costs is a clear pathway to healthy cash flow. Finding ways to add value to your products or services can also be useful. For example, bundling products will not only generate additional revenue but reduce the risk of capital staying tied up in shelf stock.
If you’re in a temporary state of poor cash flow (perhaps you have a debtor that’s late in payment), you can still find ways to grow your business despite this poor liquidity. Bridging loans, business credit cards and even (in extreme circumstances) home equity can help a business to progress despite cash flow issues.
