Opportunity cost is one of the most useful things I learned about when I was forced to take microeconomics as an undergrad course.
Here’s a very good definition from our dear friends at Investopedia:
“Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.”
Get it?
Like Neil Peart pointed out in an incredible song recorded by Rush (to paraphrase): even if you choose not to decide you still have made a choice.
The opportunity cost of doing your own books begs the question, “What benefit am I missing out on by doing my own books?”
Simple.
Making money doing what you actually specialize in.
What you are in service to others for.
This dovetails nicely into an idea that I talk about from time to time.
I like to call it the time-money continuum.
A little bit like the space-time continuum in physics.
In caveman terms, the two things really are one thing.
As one creates more intrinsic value with the time they spend on money-making, the time-money continuum responds positively.
Think of the billionaires, not just in this country, but all over the world.
It’s a matter of scale.
Do you think the wealthiest and most successful people do their own books?
Or prepare their own tax returns?
Or even do their own dishes, for that matter?
Not so much.
I think that’s because they manipulate the time-money continuum to fit their paradigm.
Their vision of the world, and their unique role in same.
I’m traipsing down this garden lane of logic this fine early spring day because it never ceases to amaze me when I come across someone that views our service as a cost to be borne, instead of what it really is.
An investment.
If you are offered an opportunity to save $10,000 in taxes plus $21,600 in lost time in an exchange for an investment of $10,800…
…PLUS, know that your specialized level of service is receiving your full attention for twelve or more additional hours per month…
…PLUS! The aforementioned investment provides you the top level of professional bookkeeping, accounting, and tax services you know you really don’t want to do yourself…
Is there really a question here?
Put $10,800 into a magic box, get $31,600 out of the other end, and have a dirty job most people hate done for you.
It’s the classic “There’s no reason not to do this” scenario.
And yet, I find myself failing not once but several times to explain clearly how this investment makes you wealthier in business and happier in life.
Let’s talk about that a little here…
As your business grows a couple of things happen.
One, you get better at what you do through experience.
Hand-in-hand with that, you are hopefully also evolving both your offer and your processes as you accumulate that experience.
The other thing? Stuff gets more expensive over time.
We are all painfully aware of the costs of a strained and oft-broken supply chain, for example.
Software goes up.
Professional services go up, too.
I know it has happened for us.
The companies that provide integrated client software, tax preparation, and cloud accounting services go up once or twice (or more!) every year, and at a much greater rate than the consumer price index cost of inflation.
Plus, hell, inflation is going up even faster since Uncle Sugar decided to give everybody below an arguably quite-livable household income free money the previous couple of years.
We didn’t need ours, so we just turned around and paid taxes with it!
The interest rates are going up, the Fed’s response to curb inflation, just as if they didn’t know this was going to happen.
Stuff gets more expensive all the time.
Fact.
There are certain givens in economics, assuming inflationary times.
I submit to you that we’ve been living through inflationary times since approximately the 18th century or so.
Things quite frankly get more expensive as the services offered not only carry more overhead, but out of necessity and competitive business survival the offer and the delivery both improve and evolve as well.
Those numbers I said earlier? That’s based on a $200 per hour gross revenue, which is really a low average for most of the businesses we currently support.
They’re real.
So…when I share with someone that’s been very happy all year that we have been foregoing an increase in their fees until their one-year engagement agreement has expired, and that the services they’re currently enjoying have increased in value in the last year from between 60% to 100%…
Which naturally follows that their fees for the following year need to increase by a proportionate level to continue services…
What do you suppose happens about half the time?
A hard focus on the new number, no matter what the profit & loss statement tells them is not only possible but necessary.
It’s a lot higher, therefore it’s too much, therefore I can’t afford it.
Four words a serious entrepreneur should never say again, out loud or in their head, by the way.
You’re just begging the universe to keep you poor when you say “I can’t afford it” out loud.
Knock that shit off, right now!
Opportunity cost. What is the trade-off here?
Extreme example:
I not only saved one business over $25,000 in unnecessary self-employment taxes in 2021, but an additional $60,000-plus in representation services during a double-audit, and when it came time to talk a new year of successful business relationship we got kicked to the curb because of the new proposal.
The accounting expense margin would have remained well under 2% for that business, but this entrepreneur focused solely on the number relative to the previous year’s number, and not on the opportunity cost of the investment.
Missing the forest by focusing on the tree.
This is going to happen to you, too, most likely.
People do not always know what’s best for them, even when it’s explained in crystal-clear laymen’s terms.
Here is our conclusion, and I’m so hopeful that this will both resonate with and encourage a fellow entrepreneur in a similar situation:
If you have to charge double what you did a year ago to meet your goals for providing monstrous value to the people in your clientele, and your current clients are no longer on board?
They are no longer meant for you.
God/Allah/Vishnu/Buddha/Zoroaster has something better in store for you.
Be sure to be grateful, both in prayer (if you do that) and to the nice departing client for the opportunity to be of service and to learn and grow with them.
Even if just a little.
Always know there are going to be people out there like you and me out there that, when handed a magic box that takes a buck fed into it and coughs up three out of the other end, know what they have when they see it.
Opportunity.