Opportunity Costs...

"Life is a gift, and it offers us the privilege, opportunity and responsibility to give something back by becoming more."

~ Tony Robbins
                      

I’m friends with the owner and president of a small company that manufactures  replacement windows near our office. His name is Steve.

 

Steve and I met each other at a local Chamber of Commerce mixer last spring and realized that we had a lot in common both personally and professional so naturally we became friends within a short while.

 

While enjoying a cup of coffee one morning at a local diner, Steve mentioned to me that his business has been doing exceptionally well over the last few years and he was thinking of expanding his operations.

 

He detailed several new initiatives that included expanding his sales staff, buying a new building, and purchasing a new piece of relatively expensive production equipment.

 

After careful consideration, Steve has decided to make the purchase of machinery his first priority.

 

Steve explained to me, "I’ve done the math and it appears that we’ll break even for the first two years, but then it’ll start giving us a good return after that".

 

I was elated for Steve and his growing business... he definitely must be doing something right.  

 

At the same time, Steve appeared to me to be more of an operations person than a numbers guy, so I wanted to ask him a few more questions about the new equipment purchase.

 

I asked him some basic questions, like how much was the purchase price?... , was he planning to pay cash or was he planning to finance his new acquisition?... how much more work could this new machine produce over and above what his current machinery could produce?...

 

Steve’s long-time business philosophy was that he would always pay cash for anything that depreciates and finance anything that would appreciate. So in the case of this new machine, he would be paying all cash.

 

I was curious as to why he thought that the new equipment would be just a break-even proposition the first two years.  He replied that he currently didn’t have enough business to actually keep his old equipment and new machine working all the time but that after a few years, he hoped to be able to grow his sales to a point where the equipment would be running more efficiently.

 

He also explained to me that by buying the device with cash, there wasn’t any great urgency to use the machine at full capacity as it wasn’t costing him anything while it sat idle.

 

I think that Steve is a good businessman and I somewhat like his idea of purchasing depreciating assets with cash, however, I think that perhaps he is forgetting one significant point.

 

An idle piece of machinery does indeed cost him money... in that he could have alternatively used the cash to create a better return to his company somewhere else.

 

His real cost comes from "lost opportunities" that they might have occurred by putting his cash into another area that could give him a higher yield on his investment; at least in the short run.

 

Since his factory was not currently running at full-capacity, I suggested to Steve that perhaps he reconsider the option of hiring additional sales staff.  In this way, he could build a larger client base (and demand) prior to actually purchasing the additional machinery.

 

Steve thanked me for my input, but his mind was already made up.

 

As I drove back to my office, I thought a bit more about the concept of lost opportunity cost.

 

Every person, household, and/or company has a finite amount of resources available to them. These resources could be money, time, space, credit, or manpower (womanpower).

 

Every day, we, as individuals and/or leaders, need to allocate those limited resources to maximize our returns.

 

It’s a simple concept...

 

If we spend our time or money doing one thing... it is at the expense of doing something else.

 

But here’s the rub... how do we know... ahead of time... which investment will pay off more than another investment?

 

I’ve heard countless people exclaim that their lives would be so much different if they had only bought Microsoft stock at $5 or Apple shares at $11.25 (did you know that exactly 10 years ago today you could have bought Apple shares at the bargain price of $11.25?... today it closed a few pennies short of $500 with a 2:1 split in 2005... so for every $11.25 invested in October 2003 would yield you $1,000 today...).

 

The great majority of people did not invest in Microsoft or Apple stock when it was at a rock bottom price but instead invested in something else altogether (perhaps like a vacation, new car, designer clothing, tickets to sporting events, or extravagant meals)... and received nothing tangible for their expense.

 

Even more to the point is our investment of time...

 

At least with a monetary investment... we can always have the opportunity to earn more money to invest...

 

When we invest time... that time is lost forever... we can never earn more time...

 

We can invest our time educating ourselves... earning additional capital (also called "work")... resting and/or nourishing our bodies and minds... or perhaps simply exercising our bodies and minds...

 

On the other hand... we could also waste our God-given time... filling our minds and bodies with "junk-food"...

 

For everything that we actually do... there are thousands of other alternatives that we could be doing... some of them good... some of them not-so-good...

 

The first key "take-away" point here is that everything and anything has a cost associated with it... sometimes the cost isn’t monetary but rather it is hidden as the loss of time or a lost opportunity cost...

 

The second bigger point is if you’ve actually made wise investments (both in time and money)... and have succeeded in creating wealth... what will you do with your financial returns?...

 

People like Warren Buffett and Bill Gates have decided to give away their vast wealth to try and create a better world... other wealthy people have the sole intent to use their wealth to gain power and influence for themselves and their families...

 

As with most things in life... there is little that is black and white... but rather simply a spectrum of grey...

 

Living in America, we all have been given the unique opportunity to succeed... and with that opportunity comes a certain responsibility to allow others the same opportunities to achieve similar success...

 

No one guarantees us success... just the pursuit of success...

 

Thank you very much for your support of OptiFuse as we try our best to ensure that you have the best opportunity for success when it comes to circuit protection.