Are Your Choices Costing Your Money?

Last week I shared some observations with you about valuing your time by delegating. Be honest, was your reaction, "That's great, but I can't afford to pay someone else right now?" Don't give in to that thinking. Keep reading and let me show you how to do the math that might prove your automatic response wrong. 
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I know that the dynamics of cash flow in a small business are real. I realize that debt creates anxiety and fear. I appreciate self-sufficiency and a willingness to engage in all areas of a business. That said, I often find myself coaching clients about the importance of factoring opportunity costs into their thinking.

Opportunity Cost 
the value of something given up to obtain something else.

​We begin with these basic premises:

1. Time is a scarce resource because it is finite - you can't create more of it.
2. To calculate the value of a task, you must know two things - the required time to complete and the market value of the work.

Then we do the math.

Example 1:
​As the owner, Sam's primary role is securing new business. On average, her customers spend $10,000 in services, requiring about 50 hours of Sam's time.

​Task - Sales
​$10,000 / 50 = $200/hr​

Sam's company has been steadily growing from 10 customers five years ago to five times that amount. ​Monthly bookkeeping tasks required an average of 2 hours per customer.

Task - Bookkeeping 
​2x10 = 20 hrs
​2x50 = 100 hrs

When the business was smaller, the choice to do the bookkeeping herself didn't take up much of Sam's time. ​Now, there is a big Opportunity Cost. LET'S DO THE MATH.

Opportunity Cost
100 hrs bookkeeping = 2 sales $20,000 income​

Bookkeeper  Cost​
$500/month
​($6000 annually)

Contracting Bookkeeper Yield
70% Return

Example 2:
​​Jen's administrative assistant works three days per week. Jen bills her clients by the hour, and because of her unique skills, she commands $150/hr. Jen pays her assistant $15/hr. Some recent positive press has increased potential customer inquiries, and Jen cannot keep up with the number of proposals that she needs to write and send. Jen thinks that she needs to increase her administrative support to 5 days per week, but she is not sure that she can afford to do so. LET'S DO THE MATH.

​Admin Cost
​$15 x 24 hrs = $360/wk

​Jen's
Target Revenue
$150 x 30 hrs = $4,500/wk

Opportunity Cost
Lost Revenue writing proposals
​$150 x 8 hrs = $1200/wk

5-day Admin Cost
​$20 x 35 hrs = $700/wk

Net Gain
$500/wk
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​There you have it. Jen can afford to have an administrative assistant in her office five days per week, and she can increase the skill level to handle the more complex task of proposal preparation. Not to mention, reducing Jen's stress and longer workdays will increase the quality of her work and her health. 

The math may be compelling, but there is one other essential ingredient, money. Even though business owners recognize the opportunity cost, the reality is that their time doesn't require them to spend money. Committing to the expense line takes courage, conviction, and sometimes a good business banker.
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​​Meet my favorite business banker, Amanda Vandervort. She is a VP of Business Banking at PNC, and she sets up short-term borrowing to help a business maintain the cash flow needed to invest in their business and themselves. She advocates the importance of establishing a financial relationship.

I want every business to have the opportunity to grow. Twice a year, I have an open dialogue with my clients about the cash flow of their business and what they want to achieve. My objective is to provide guidance and make their banking experience smooth. - Amanda Vandervort, ​Amanda.vandervort@pnc.com

​Opportunity costs may be old school, economics 101; but sometimes the oldies are the goodies. Doing the math can give you, and your banker, the confidence to invest in the growth of your business. And if you need to connect with a business banker, Amanda is ready to start a conversation.