Evaluating Invisible Costs: 5 Project Management Practices You Should Know
These common project management methods can help you evaluate opportunity costs.
As a small business owner with limited resources, the ability to carefully analyze options, assess associated trade-offs and make choices that maximize overall benefits is vital to your success.
You’re used to making choices. You routinely make decisions on the spot based on your knowledge and experience. It’s great for getting things done efficiently and ensuring smooth operations. But in the daily busy-ness of business, do some of your choices pose a risk of opportunity cost?
Opportunity cost is the value or benefits you sacrifice when you choose one option instead of another. It’s the potential benefits or profits you could have obtained from those alternatives.
Opportunity cost is not always about money. It could involve non-financial factors such as time, effort, or a holistic life consideration. For example, you choose a business conference to attend. The opportunity costs are the time and potential networking opportunities you could have gained by attending other events or spending time on other business activities. But there could have been a work-life aspect to your choice. Perhaps the conference you chose to participate in was at a resort where your family could accompany you, and there were amenities like nature hikes and a spa.
Here are five project management tools that can help you evaluate opportunity costs when you need to make a decision:
1. Selection Criteria
In project management, criteria are used for selecting projects. If you decide on a new product to develop or another project to begin, having guidelines for what criteria to base that decision on is very important. These criteria include factors like aligning with your business goals, financial viability, resource availability, and market demand. Evaluating choices based on these criteria helps determine your decision's expected benefits and costs, including opportunity costs.
2. Cost-Benefit Analysis
Project managers use cost-benefit analysis to identify and determine each proposed option's estimated costs and predicted benefits. When considering opportunity costs, consider the gains a given choice could achieve. These could be more than increased revenue and could include improved processes, additional business assets, more knowledge resources, reputation enhancement, increased influence, improved customer satisfaction, better support processes, streamlined supply chain, etc.
3. Trade-Off Analysis
Project management involves assessing trade-offs between objectives, resources, and the business’s limiting factors. Business owners can use trade-off analysis to carefully consider each option's benefits and drawbacks, including the opportunity cost of not making a particular choice.
4. Risk Assessment
Risk assessment and risk management are part of project management. Identifying and analyzing these, including opportunity cost risk, helps businesses make more informed decisions. Project managers can consider the potential losses or missed opportunities from making a particular choice and weigh them against potential rewards.
5. Project Prioritization: Project management prioritizes projects based on their strategic value, available resources, and potential benefits. When multiple projects compete for resources, project managers can consider the opportunity costs of not choosing a particular course of action. They can prioritize choices that offer the highest value or potential returns, considering the opportunity cost associated with the alternatives.
Here’s a real-world example of how I recently used these five methods to determine whether to purchase an expensive app for my small business. It’s a choice likely to be familiar to a digital business owner.
There’s no shortage of influencers encouraging those who produce digital media like videos, print-on-demand, and downloadable products, etc., to purchase software or online applications. These can require a substantial financial commitment either up front or over the long term via incremental monthly payments, which may not seem like a great deal but can add up considerably. Some digital businesses need multiple such app subscriptions to run their operations effectively and create products or services. Recently I attended a free webinar by a small business person I follow who was introducing a new video production software that allegedly presented an opportunity to make an additional great deal of income for my business. The influencer was someone I had purchased products from before and who often had good advice and reviews. The product presentation was visually appealing, interesting and very compelling.
I used the five analytical tools described above to evaluate the opportunity costs. Just thinking carefully about each item on the list was enough to help me make a choice I could be comfortable with. Could I make money using the software? It seemed likely and the presenter was very persuasive. Was there a risk? Yes, I felt that the vendor was making the software available for too brief a period for me to have time to research others’ experiences with it. Would the benefit be sufficient for the cost of the application? Probably not for me - besides the dollar cost, I would have spent time learning the app, which required much time. The software was untried by me to make money, although alleged to work well for others. Had I spent the purchase price, which was significant, I could not subscribe to the AI art generation app I wanted and knew was the better fit for my business and highly likely to generate revenue based on my research. The opportunity cost of missing out on the AI art software was significant, I thought. Do I edit video and could I use the promoted software? Yes, but AI art is a higher priority for my business. I am more proficient with it and have the necessary graphics software for upscaling and editing so that no additional costs would be incurred for training or more software. My expected return on investment, as calculated, was expected to be good. It had not taken long to run through my analysis. As appealing as the webinar presentation and video editing software appeared, it was easy to decide not to purchase it. Using the analysis had the added benefit of countering any emotional response to the webinar call to action.
These five methods: selection criteria, cost-benefit analysis, trade-off analysis, risk assessment, and prioritization, can help savvy business owners evaluate the opportunity costs as part of their decision-making processes.
These five methods: selection criteria, cost-benefit analysis, trade-off analysis, risk assessment, and prioritization, can help savvy business owners evaluate the opportunity costs as part of their decision-making processes.
This will work for selecting products to invest in, developing products to spend time and resources on, and pursuing other projects. Missed chances from selecting a specific project or product can be balanced with the potential benefits.
Credit: AI art generated in Blue Willow with graphic editing by Christina A. Steele, all rights reserved.