1.5.5 Business Choices

Business Choices

Key Definitions

Business Choices: A choice that directly impacts a business that the managers must make whilst bearing in mind the opportunity cost of the decision.

Opportunity Cost: The cost of missing out on the next best alternative when making a decision or when committing resources. 

Trade-Off: The process of accepting the less of one thing to achieve more of another, such as to accept slightly less quality in exchange of cheaper production costs. 

A Brief Introduction

For a new business the 2 most important resources are money and time. Both of these have an opportunity cost, which impact the business. The time spent by an entrepreneur in creating an attractive website could mean that not enough time is left for recruiting and training new staff, or to reflect on priorities within the business. 

Every business decision has an opportunity cost measured in time or money, but often both. For a new business, the most important opportunity costs are:

• To not tie too much of their cash into stock as the cash could be used more productively elsewhere in the business.
  
• To not overstretch yourself:  good decisions take time, so it is essential that the business manager does not do too much.
  
• To take care with every business decision that involves the use of cash, as at the start of the business's life it is hard to get more cash in but more will always be needed. 

Opportunity Costs in Developing a Business Idea

Personal Opportunity Costs

Starting your first business is very likely to be tough, with long hours, highly pressured business decisions and stress being normal. A difficult cash flow is also normal, and this is a major strain on the business and the business owner. The owner is normally from a wage-earning background, and possibly a very well-paid background. The first opportunity cost here is the opportunity to earn a regular income, as it could potentially take months to get a business going and the profits up, which is a long time to undergo financial hardships. 

The investment expenditure brings another opportunity cost, as it involves using money that could be used on improving the life of the investor, such as improving their house, holidays and so on. Instead this money is used on a lease, construction work, fixtures, machinery, and human resources. The personal opportunity costs tend to add up massively here. 

The wear and tear on the family is also important to consider. Starting a business is time consuming, and also wholly absorbing for an individual. The owner of a business could easily spend, for example, 80 hours a week on the site of their business in the early days of set up, and then they could take further paperwork home. Owning a business has been known to cause some marriage difficulties, but it can also bring a family closer together. 

The Opportunity Costs of Developing One Idea Instead of Another

A new business needs to have a focus. so an opportunity cost will arise when an entrepreneur has 2 good ideas. One business idea will be chosen whilst one will be rejected, but this is only possible when the entrepreneur is ruthless. After careful evaluation of the options the weaker of the 2 ideas should not be considered by the entrepreneur, and not pursued, 

Deciding Between Opportunities

A successful business owner is a business owner who can make good, successful decisions. When deciding between business start-up opportunities certain factors affecting the decision are especially crucial:

1. Estimating the Potential Sales for Each Idea

This is hugely difficult in both the short term and the long term. Estimates must be made, either through the use of market research or the expertise of the entrepreneur - an inside of the knowledge of the industry is always useful. 

2. Considering the Cash Requirements of Each Idea

Some new businesses require a lot of cash for start-up, but other new ideas can be started using a lower cash injection as the initial costs are very low. 

3. Deciding if the Time is Right

The time a new business starts is crucial as trends and the economic climate conditions are always changing. For example, the launch of Innocent Smoothies was at a time in which luxury spending increased along with worries of diet, and their sales grew 300 times  from £0.4 million over a period of 8 years. 

4. Deciding if the Skills Needed Suit Your Skills

Running certain businesses require certain skills, and not all businesses require the same set of skills from the owner. 

Choices and Trade-Offs

In businesses there are situations where one factor needs to be traded off against another, such as choosing the business over friendships. In these situations the needs of the business must be considered over the needs of the individual. Examples of other business trade-offs include:

• When doing the initial business start-up the owner must choose between the business start-up or travelling the world with friends. The trade off here is the choice to start the business up instead of travelling with friends.
  
• Trading off the parts of the business that the owner most enjoys doing for the sake of profitability - for example, the owner of a restaurant may love to cook but has to put that aside as the business is more profitable when they are interacting with the customers outside of the kitchen or motivating the waiting staff.
  
• Trading off time today and tomorrow, as even though the entrepreneur may want to retire when they are 40, which sounds great in the long term but in the short term this means they would be seeing very little of their family and friends. 

Overall, the key to success will be to be clear about what you and your family want from the business in the end. It could be to become excessively rich no matter what, or it could be to find a balance between the freedom and independence of running your own business and to find time for your family.