There’s a concept in business known as the “opportunity cost”. For those unfamiliar let me explain quickly. The opportunity cost of something is what you are giving up in its place, the next most valuable alternative. For instance, the cost of my college education was the $100,000 I spent on tuition, but the “opportunity cost” of that education was the 4 years of income I gave up to go to school. If I could have earned $35,000 a year for 4 years, the opportunity cost was the $140,000 I could have earned over those 4 years. I can think of my college education of costing me $240,000 (the cost of tuition and the lost income for my time). Had I not gone to college I would have the $140,000 I earned working those 4 years plus the $100,000 I spent on my education during those 4 years. That means I need to earn $240,000 more because of my college education over my life to make this a wise investment.
Now let’s consider the cost of starting a business. Most of the time the only cost I see considered is the capital invested (the money we come up with out of our pockets). Just look at how many books claim to teach us how to start a business without any money? How about the number of times people use the cliché “sweat equity”. These can be misleading ideas because all the time we invest in starting a business is time we could be using elsewhere. Think of the opportunity cost of all that time!
If our business (or a new product line) earns us zero money until its up and running, and it takes us 12 months to start a business, that’s 12 months we are not earning any income from it. What happens if we can get our business going in just 6 months? The opportunity cost of taking 12 months to start a business is the income we could have earned in the last 6 months if it was up and running. If our business could earn $3000 a month, we would earn $18,000 in the last 6 months our business was operational. The opportunity cost of taking a full 12 months is $18,000!
In the example above, what happens if our entrepreneur spends 12 months learning all they need to know to start a business? They miss out on $18,000 in lost income! If they were able to take a class in business, or hire a consultant, or find a mentor already in business or some other creative way to cut that time down by 6 months, they would be financially better off and we could say their business was less expensive to start. As long as they spend less than $18,000 they would theoretically be better off.
The cheapest way to start a business is the way finds a balance between the amount of cash investment and time investment or opportunity cost.
If we are teaching the cheapest way to start a business is to take lots of your time and massive amounts of your sweat equity than we are assuming your time and the income from your future business are not worth very much at the end of the day. When calculating the investment of your time and money we need to also consider the opportunity cost.
It took me three years to research and develop a business plan for our garage. It took a further two years of being in business to figure out some big lessons. What if I had found some independent garage owners that were in a different market (so they weren’t in direct competition with me) and I offered to work at their shop on my days off for free? How much could I have learned in just 1 month from someone who was already doing what I wanted to do? It would have saved me 8 months of research and probably a year of trial and error. That month of free work would have probably been worth $10,000 or more to me in the end. What if I went and found a mentor who could teach me to write a good business plan. I could have saved 8 months of trial and error and research. Could I have purchased an existing business that would have got me up and running faster than it would taken me to start my own from scratch?
I sold cars at a dealership before opening my automotive garage, and I was pretty good at it. A year before I started my business, I transferred into the service department so that I could get some practical experience in our industry. For 6 months I learned how the dealership service department worked and made about ½ what I did selling cars. For me, the experience was far more valuable than the lost income and helped me get a head start in my own business. Once our business was up and running we made a $50,000 investment in coaching. We looked at the opportunity cost and realized that it would have cost us a lot more to find the answers ourselves than it would have cost to buy them from a coach that already knew them. Our goal was always to free ourselves from the day to day running of our business and we estimated it would have taken us 8 years to build up the company to that point. With our coaching investment, that process took just 4 years and freed us up to pursue other sources of income.
If you’re still in the early stages of starting a business, look for creative ways to shorten your learning curve. Find people already in business and borrow ideas from them. Take a class or find a mentor. Hire a coach with a proven track record or find a way to start right away with less risk. Instead of quitting your day job and going in to consulting, start with a client or two on the side and get some experience before diving all the way in. If you’re getting into an unknown industry, go work for someone else first to get some experience. The key is to find ways to lower the opportunity cost without jumping in unprepared. The cheapest way to start a business is to consider BOTH the upfront and the opportunity costs when making decisions.