To Spend or Not to Spend – Evaluating Opportunity Cost during the present business crisis

Moments of crisis are always likely to occur in the long journey of any businessman. Successful business leaders are not those who don’t face any crisis. They are the ones who make the right choices in response to the crisis. So that the business emerges stronger after the challenges faced. Today, most small and medium businesses are faced with one such challenge – How to steer their business out of the Covid impact?

An important Economics concept that comes to the aid of smart decision making for entrepreneurs is that of Opportunity Cost. In the most basic terms, opportunity cost is the cost of a missed opportunity. The idea is to calculate the benefits of the next best alternative, had that been chosen. So that the benefits accrued from the present decision can be evaluated against the next nest alternative decision.

When applied to a business situation, opportunity cost refers to the profits a company could have made from its capital, human resource, equipment and real estate if these assets had been used in some other way. For example, “Should I infuse the capital I have to expand into new business areas? Or should I keep the capital in hand as emergency fund for a rainy day?”

There are a couple of critical decisions that many entrepreneurs would need to take in the present situation. Let’s figure out how the opportunity cost can be evaluated in both these situations and what course of action businesses can take.

#1 “To remain open or temporarily shut down”

The first decision that an entrepreneur needs to take is “Whether to remain open with reduced business or shut down for a few weeks until things stabilise?”

In the tough situation businesses are facing today, there is high uncertainty on the volume of business that can be conducted. With customer spending at very low levels and restrictions on people movement during lockdowns, it is very difficult to anticipate how much revenue one might be able to generate. For instance, businesses dealing with perishables such as restaurants, fast food joints have to make this tough choice.

Before deciding to shut down operations for a short duration, we can calculate opportunity cost for the “Remain open” option. We evaluate if the low revenues are sufficient to cover at least the fixed costs – like salaries, rent, electricity etc. That means the losses are not piling up with every day the business remains open. If the business is spread over multiple locations/cities, then the prospects of surviving with low demand are much higher. There is no common correct answer for this. The decision depends on the nature of the business and the entrepreneur’s financial position.

#2 “To spend more capital or save for future use”

Capital in hand is a powerful instrument for business growth. When kept idle, it does not generate any new value. Infusing new capital for the purpose of expanding into new products/markets or increased marketing spends are good ways to scale up a successful business.

However, the important consideration before choosing the path of extra spending is calculation of Opportunity Cost for the “Simply hold and save” option. Let’s say just by holding the money in deposits or equities, we can expect returns of around 7-8% per annum. Now compare this with the returns from the investment into business expansion. The medium to long term prospects must be considered here. Based on this comparison, the best route for investing the surplus funds can be decided upon. There are numerous ways where a growing small business can get significantly more value out of putting its cash toward a strategic investment than by letting excess funds just sit unused on the balance sheet.

The basic maxim of business is to keep the concern ‘going’. So the natural choice should be to invest and grow. However in extreme situations such as the present crisis, this decision requires serious thought.

One viable option is to park the surplus money in Chit funds. Instead of simply holding the funds in anticipation of need in future, it might be a good idea to invest the money in a chit fund scheme. This way, the money keeps earning healthy returns. And at the same time, the funds can be withdrawn as soon as a business need arises.

In the last couple of months, we have extended timely support to a number of our customers by providing them with funds for their emergency needs. The convenience of quick liquidity is one of the major advantages of choosing Chit funds as a financial investment option. Keep your surplus money in the fixed tenure schemes of 2-3 years. Evaluate the various investment options open before you by calculating Opportunity cost. Pull out your funds from the chit scheme and plough them into the business at the right time!

About Us – Shantala Chits is in the business of chit funds for over 2 decades now. We are a Government approved chit fund company with a 24 year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments. Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.

Anuradha C

Anuradha is a freelance writer cum corporate trainer in the IT/telecom domain with over 18 years experience. She served in senior technical and management positions in Huawei and TCS for 10+ years. Then gave up the traditional corporate ladder to go solo - in order to escape horrendous city traffic and to be at her own boss!
Anuradha C

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