Opportunity-Cost

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Opportunity-cost analysis for decision making efficiency

The question is not “what can we do?” it is; “what is the value of that which we must forego to apply time or resources to our choices?”

“Doing good” as a justification is limited reasoning for a choice that excludes the option of “doing better”.

The real question in decision-making logic is typically in identifying “lesser evils” and “greater goods” – to then choose the latter of course!

We are the sum of our decisions

Often those choices we have to make are the systems, partners we work with and simply what we do with our time and skills – and the decisions we will usually then have to work and live for a significantly longer time afterwards.

So making good decisions is therefore making the best and most enjoyable possible future for ourselves and each other, and usually worth that little extra research and thinking time to continually build on creating new opportunities with minimal repetitive overhead.

Being a successful and sustainable organisation, or person, comes from well-reasoned choices – and this is helped by an understanding of the principles of “opportunity-cost” in those decisions.

https://en.wikipedia.org/wiki/Opportunity_cost

It may seem great to stock a product that sells 20 times a day (Rate of Sale KPI) – but is it a better choice than to sell an item that sells 10 times a day with twice the net margin (Potential Net Margin KPI)?

To answer these decisions, first we much choose our Key Performance Indicator metrics – and then we will need to sort by each to organise our priorities by the optimum use of resources – putting resources to use where they will yield the highest return in the fastest time.

With the stocking of product, this requires a third KPI metric; Return on Investment in Days. This KPI uses other KPIs for its calculation ((Rate of Sale * Margin) / Cost of Goods)), giving us a number that can be used to measure and sort for optimum decision-making in the commitment of cash to stock or manufacture.

Is it better to; fly to a poorer country to lay bricks for 50 hours in building a new school, effectively donating about £1/h in labour on a £500 trip; spend time fundraising, earning £10/h for 10 hours; or work an extra two hour at your day-job earning £50/h and donate that income to support 100 hours of bricklaying?

Busy fools

Appearing to help, is not always as helpful as a more efficient use of existing resources – starting with your own time, costs and value.

In the above example, the “opportunity-cost” of brick-laying at that school, assuming overtime day-job work is available, is £1,950 in lost donation potential. Looking good, does not always mean a person is doing the best thing for the recipient.

Similar principles can be used with the allocation and commitment of time to a project or task.

What are you choosing not to do?

When you choose to apply your time, thoughts and energies to something, there is the cost of neglect to consider.

Often people find that what they thought was valuable or helpful, actually has a negative impact when the opportunities foregone are considered.

It is the old adage or providing fishing-rods instead of fish – and for many of us nowadays, Google searches offers a lot of fishing rods.

Perhaps, knowing this, and that your team also knows this, will sharpen your senses in decision making, and relax your mind on the fact that, when you make good decisions based-on the above, if you are minimising opportunity-costs, you need not worry about the things forgone, because they can often wait still, and be there, when the best task to do is complete, and they will then become the new best application for your energy and resources.

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