As business owners, we make financial decisions every single day. But when speaking with business owners in our office, it’s apparent that many of them fail to consider opportunity cost. What effect is this decision today going to have long term on your business cash flow and ability to grow?
When you’re first starting out in business, it’s all about survival. What can you do to get sales and maintain efficiency so your business doesn’t go under? But as your business matures, it’s important to make adjustments for longevity and efficiency within your business.
We always say it’s not what you buy, it’s how you pay for it. And the key is making the proper decisions with the information that you have to increase your efficiency and therefore stabilize the longevity of your business. One of the keys to efficiency is recognizing the difference between costs and opportunity costs.
Back in the 1800s, there was a French economist named Frederic Bastiat. Frederic Bastiat pointed out the difference between that which is seen and that which is unseen. And what does that mean?
Well, basically what we see when we’re making purchases are the costs. What we don’t see are the opportunity costs. The other things we could have done with that money had we not deployed that capital in the way that we did. And one of our tag lines or one of the things that we always tell people is that you’ll never see the interest you don’t earn by paying cash to make major purchases.
You see, as business owners, we make financial decisions every single day, and a lot of those decisions are based on cash flow. Can I afford this payment? Do I have enough capital to pay cash for this expense? But what’s not considered is, is there a more efficient way to use your money that will leave you in more control and leave you in a better position in the long run?
You see, we finance every single purchase that we make. What do we mean by that?
Well, whether you pay cash or finance, either way, you see the interest that you’re going to be charged. But when you pay cash, you never see the interest that you don’t earn on that money. And what we mean by that is basically, if you invested that money, what kind of rate of return are you giving up by giving up control of that pool of cash?
And once we understand the unseen or the opportunity cost, that helps us to make our decisions much, much more clear. Let me give you an example.
Let’s assume you’re going to invest $50,000 for a major capital purchase to your business. Now, if you finance, the bank tells you that you’re going to pay 8% to borrow their money, but you also have $50,000 of cash laying around in your corporate checking account and you say, hey, if I use this cash, it won’t cost me anything. Big mistake, because it will cost you money. You just don’t see the interest that you’re not earning on that money.
So, if your decision is to pay cash because you’re saving 8% on interest, that you’re not being charged. That, again, is a mistake because you’re not recognizing what the opportunity cost can be for that money that you have sitting in cash.
So you may be wondering how should you be making these purchases if everything all purchased is financed? What is the best way to use your money and make it as efficient as possible for your business and your family?
And that’s where we come in, because we can help you make the proper assessments that take into consideration not only the costs that which is seen, but also the opportunity cost that which is unseen. And again, once you understand the difference between the seen and the unseen or the cost and the opportunity cost, your decisions will become much, much more clear and much more focused.
Our solution uses a specially designed whole life insurance policy designed for cash accumulation. This allows you access to your cash value via the loan provision so you’re able to self-finance and earn uninterrupted compound interest within the policy.
If you’d like to get started with an analysis of your business cash flow and see if this is a solution that makes sense for you, check out our website at Tier1Capital.com. Feel free to schedule your free strategy session, or check out our webinar: The Four Steps to Financial Freedom. It’s free and right on our homepage.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.