With entrepreneurship being one of the most daunting fields ever with one of the fastest failure rates for any profession, people tend to seek jobs that give them employment security. However, the most basic reasons that businesses fail revolve around the fact that they cannot rightly assess what costs are important from a decision-making perspective. As a result, they do not consider those costs and they slowly stem up and take the business to a failure.
Here are some of the most important costs that are to be considered when making a decision for your business:
Marginal costs has several implications in the business terminology. Where economists might describe marginal cost as the cost to the next consumer or the next stakeholder, from an accounting/decision-making perspective, the cost has an entirely different meaning. In this context, marginal costs refer to all the variable costs. So for instance, a business that uses short & long-term forklift lift hire in Melbourne will consider the direct costs of hire in proportion to increased output.
Another cost that poses significant bearing on decision-making is the cost that is directly incurred and paid. To understand these costs you must consider costs that do not really constitute cash payment. For instance, take depreciation. Although it is represented as an expense in your income statement, it does not really result in any loss in the cash in your business. Now since a business never fails because it runs out of profit, but because it runs out of cash, the cash costs are essential when making any decisions.
Change in Costs
The costs as a result of a decision can largely be predicted before the decision is even undertaken. These costs are usually called differential costs. It may be further bifurcated in incremental or decremental costs to make more sense. Every business must make sure that they consider in direct comparison the results on a business before and after a decision and the costs incurred in bringing about that decision. This is by far the most important cost in any decision and also the most crude analysis for any decision.
Opportunity cost, in all these costs, is by far the most interesting one and the most important one for an economist. In fact, it may tell you the difference between an accountant’s valuation and an economist’s valuation of a project’s cost.
Opportunity cost refers to the cost of the alternative foregone. So, for instance, if you plan on investing in a stock of nestle, your opportunity cost could be to invest in a stock of Unilever. The main purpose of identifying this cost is to undertake an analysis of the sacrifice that was made. The analysis then helps to pave a pattern for organizations to follow in the future so that they can achieve better results. Moreover, opportunity cost is in fact the real cost of your decision. Had you taken a different decision, would you have made a better return or not? Then is your decision correct and hence justified?
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