Opportunity Cost

Every business decision involves trade-offs. When you choose to pursue one path, you're simultaneously choosing not to pursue another. The value of that foregone alternative is the opportunity cost. It never appears in your books, but it's real — and ignoring it leads to systematically bad decisions.

Concrete examples

You have $50,000 in cash and decide to pay down a 6% business loan. The opportunity cost is whatever else that $50,000 could have earned — if you could have invested it in equipment that generates 15% returns, you've given up 9 points of return. You decide to spend your Saturday working a $500 job. The opportunity cost is whatever else you could have done with that Saturday — including rest, which has a real value even if it doesn't show up anywhere on a spreadsheet.

Opportunity cost and owner's pay

Greg Crabtree's insistence on market-rate owner's pay is fundamentally an opportunity cost argument. If you could earn $85,000 working for someone else in your field, but your business only pays you $40,000, the business is costing you $45,000 per year in foregone salary. That's a real cost — it just doesn't show up in the books unless you record it explicitly. Simple Numbers makes it explicit.

Where it matters most in small business

Opportunity cost shows up in hiring decisions (should I hire someone or keep doing this myself?), pricing decisions (am I pricing work that consumes my best capacity at a rate that reflects its true value?), and capital allocation (where does the next dollar invested generate the most return?). None of these questions can be answered well without thinking through the alternatives being sacrificed.