A lot of my clients don’t know that I actually received my Bachelor’s degree in Economics. While my passion, and my livelihood, has been in Accounting for years, my inner Economics geek peeks out every now and then! One of my favorite topics from Economics class was the idea of opportunity cost, which states that the cost of any activity is based upon the value of the next best alternative that you did not choose. Read on to learn how real this concept can be for your small business.
Is your revenue stagnating or decreasing every year? There are many factors that can cause your revenue to slide, and one of them I’d like to introduce is your opportunity number.
Your opportunity number is the smallest amount of business you’re willing to take on when you take on a new client. Here’s an example: if you have a ten-hour minimum per client engagement and your hourly rate is $300, then your opportunity number is $3,000.00.
Going after a business opportunity that is too small could actually cause your company to earn less. Since our limited resource is time, we can either spend our time going after small fish or big fish. If we want our business to grow, we need to let go of the small fish and spend our time bringing in the big fish instead. In our example above, it’s not worth it to you to sign up a new client for less than $3,000 because of the opportunity cost … taking time away from landing the big fish … is too high.
Define your own opportunity number
The first action item is to set your opportunity number if you don’t already have one. Take a look at your average annual revenue per client for last year or the last twelve months. Continuing our example, let’s say it’s $10,000. You always want to be striving to increase your average annual revenue per client year after year, in most cases.
Your opportunity number and your revenue per client are related in an important way. If your opportunity number is too low, it can drag down your revenue per client average. That means it’s going in the wrong direction.
Evaluate your opportunity number
If your opportunity number is too high, you may be walking away from business that could be profitable after a period of time. It’s possible once you build trust after doing a small engagement that the client will come back for more. So it’s important to factor in the potential.
If you have a sales team, you may have a different opportunity number for each sales person and yourself. They may have more time to pursue a larger number of smaller deals. If you have lots of leads and less time, then you want to find a way to work on the largest opportunities by qualifying those leads, estimating the potential revenue, and comparing that to your opportunity number.
Once you implement your opportunity number, you might free up quite a bit of time. You’ll have more time to go after the larger opportunities while giving yourself permission to “throw the small fish back in the pond.”
Seizing the opportunity
There’s nothing wrong with taking your opportunity number a step further and proactively seeking power clients and deals that will net far more than your opportunity number.
What’s your number? Let me know if we can help you calculate yours.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.