Operating a private practice, or any private business, means that you as the owner are frequently faced with choices about how best to spend your resources, money and time. Most of the time, you will not have a complete set of information about how to best decide. Analyzing the opportunity costs of any decision will help you prioritize and make a wise decision more likely.
What is opportunity cost?
This concept is rooted in the self-evident and simple idea that you are operating with finite resources. This may be time, money, access to capital, people, etc. But, none of it is infinite. So therefore, if you take pathway A you cannot, by definition, also take pathway B. Simple in concept, maybe not so simple in execution. We live in a multi-tasking, mobile world, so it can seem like you can take both pathways at once. With skilled and effective delegation, you may be able to partially do this. But again, resources are finite and this sort of arrangement is often temporary. So, you have to consider which opportunity to take, but also which not to take.
What are some criteria to help me decide?
Most opportunity costs come when you are starting a new enterprise, duplicating or significantly expanding an existing one. This generally does not apply to streamlining , simplifying or improving and existing, functional enterprise. Here are a few key points to consider:
- Do I have sufficient capital to undertake this? The preliminary exercise here is to create an operating budget, complete with start-up costs, and add a healthy contingency fund for unanticipated expenses and delays. This should be at least 25% of anticipated costs in cash, and another 25% in access to loaned money.
- Do I have sufficient time to operate both enterprises? This can be tricky, and it is usually a rough estimate at the beginning. However, tracking time commitments can give you a decent measuring stick in this arena.
- What skills, resources and people will I need to make this a success? In general, skills and resources are somewhat easier to obtain than the right people, since they can be obtained through independent contractors, temporary workers, consulting services, etc.
- What sort of return on investment am I anticipating? For entirely new enterprises, this is going to be a rough guess at best. For duplication of existing enterprises, you should be able to estimate this pretty closely. The natural follow-up question to this is, “Is it worth it?”
- How easy is it to retreat if things do not go as anticipated? Almost all projects can be cancelled with relatively little pain when they are in the planning stage. As soon as yur name goes on a lease or a line of credit, that back door closes. So, the time to be brutally honest is early on.
- How will this project get me closer to my desired end result? You may desire to create a sellable business in the future, for example. Will this enterprise make it more marketable, or less?
- How much of the new enterprise is strictly dependent on me, and how much on other personnel and built-in systems? The more it’s dependent on you, the more your existing enterprises may suffer as a result. Remember, resources are finite.
- What is the risk that this will disrupt personal things in my life, such as primary relationships, family, my health, etc.? This again may be hard to assess in the beginning, but it does deserve attention.
As usual, there are typically more questions than solid answers when you are considering a new pathway. Just considering the above items in detail can save you unnecessary grief when diligently followed up on. Sometimes, not taking an opportunity is the best decision.