Basic accounting is an unforgiving unyielding world of debits, credits, depreciation, payroll, and government forms. But as you get more experienced in running your business, you should factor in a more intangible phrase from Management Accounting; OPPORTUNITY COST.
Opportunity cost is easy to define, but a lot of business’s don’t consider it often enough. Pretend you own a 20,000 square foot farm and milk 50 cows, ending up making a profit of $2000 a month.
Another farmer has the same size farm filled with alpacas, and makes a profit of $10,000 a month, giving tours and harvesting alpaca fur. The first farmer had the OPPORTUNITY to make $8000 more in the same amount of space.
Probably not many of you are going to start an alpaca farm next week, so how does opportunity cost fit into any business, and small business accounting in Denver?
1) Dave owns a small tree cutting business. He can earn up to $750 for cutting down a tree and cleaning it up. On one day of each work week, he stays in the office to catch up on his overdue bookkeeping. If he would have outsourced his bookkeeping, he could have taken that time to do an extra tree job. When Dave gets away from the office, and on the way to a job site, his sharp eyes notice other sick trees in the neighboring yards. Now his opportunity cost is in the thousands of dollars for the eight hours a week he was stuck in the office doing paperwork.
2) Jill’s passion was cooking. She became such a good cook that she turned her culinary hobby into a cupcake business. She always hated accounting courses in high school, but didn’t feel her business was big enough to hire a full-time accountant, so she muddled through the bookkeeping herself. In her mailbox is a notice that her government forms are wrong, and the IRS office 45 minutes away, needs to see her. Now she has to hire an accountant to get her books in order, and has to cancel numerous cupcake orders to prepare and meet with the IRS. How much money would she have saved, if she originally outsourced her bookkeeping?
Any small business can identify with the owners in the latter examples. Owners frustrated with costly accounting errors, and trying to find a few more available hours in the week to make profits.
If you’re missing opportunities because your business is getting too big to handle the paperwork by yourself, but too small to hire a full-time accountant, do consider working with an outsource bookkeeping provider like LUXA.
