In today’s competitive climate, you can choose to grow your business or to sell your business. All of the other choices have a high probability of failure. In this article we’ll discuss the growth option.

The decision to grow your business is not without risk. The inability to manage growth is a major contributor to business failure. To successfully manage that growth will require a detailed, written Business Plan that provides a roadmap to achieve your objectives. To increase the probability of success of the plan; strategies, goals and objectives and the actions to achieve these objectives must take into account the Opportunity Cost of each contemplated action. Opportunity Cost is defined as “the cost of something in terms of an opportunity forgone and the benefits received from that opportunity”. Any decision that involves a choice between two or more options has an opportunity cost.

All businesses that operate for profit have real limits on the amount of assets that are available for any planed action. No company has the ability to do everything they want to do at the same time. This necessitates trade-offs, and trade-offs result in an Opportunity Cost. This is not limited to monetary terms, but also to human capital or any other thing that has value to the person or persons making the decision. Opportunity cost contrasts to accounting cost in that accounting costs do not consider forgone opportunities. Opportunity Cost is expressed in relative price, the price of one choice relative to the price of another.

When planning for growth, multiple opportunities are usually considered. The expected payout of choices sometimes masks the Opportunity Cost of pursuing those choices. If a small company decides that they will pursue a new market with their existing product, they also need to compute the Opportunity Cost of the action. Will the cost of marketing and advertising be incremental or will they be redirected from the current markets? If there is a limited sales force, will the new initiative result in less attention to current customers?. Will this result in forgone new business with current customers or even a loss of some current business? If the new market is outside the current geographical location of the current markets, how will this affect the ability to supply, the ability of management to oversee that geographic area? How will added travel costs affect our bottom line? I examination shows that 30% of management’s time and $20,000 of additional travel expenses per year are required; these costs need to be added to the equation. Putting a projected cost on each of these potential outcomes will develop the relative price of each action and focus management’s attention to make a better informed decision.

If a new product or product line is planned, how will it affect the current product line? The opportunity cost is not just the cost of developing and launching the new line, but any negative affect it has on the current line. These include substitution sales, concentration of manpower and management time on the new line and any potential non-investment on current product that affects its competitiveness. What are not considered in the calculation are sunk costs. Once a cost is incurred, it cannot be put to an alternative use. If the new product or product line requires new equipment, the cost of existing equipment cannot be part of the Opportunity Cost calculation.

In conclusion, any additional tool that allows business owners and managers to make better decisions is well worth having. The major value for any business of calculating the Opportunity Cost of proposed actions is to provide the maximum of useful information to decide on which of the actions provide the highest probability of success for the lowest relative price. Plans and projections are made in the absence of perfect information, but analysis of all the available information increases the probability of success.