When you are starting your own business or practice, you have most probably assessed prices, overheads, profits, and reserves. This may not be the most sufficient if you want to grow without working your fingers to the bone. Economics is not only for big conglomerates - they have an important role to play in small businesses.
Small Business Economics
There are core principles of economic analysis that are vital for small businesses because they clarify your company’s prospects. The principles address areas like prices, marketing, product expansion, and strategic planning.
We have listed some principles you should incorporate into your decisions.
RAR - Risk And Return
We all know the phrase,”the higher the risk, the higher the return.” What is not often stated is that one of the highest commercial risks is a small business. More small businesses run out of money or shut down than any other size business because their cash flow and profits have huge variances compared to big companies.
A small-business business plan must, therefore, set up failure safeguards against their unique projected higher RAR.
Marginal Benefits Costs
Marginal Benefits (MB) is the benefit achieved when you supply extra services or products. On the flip side, the Marginal Cost (MC) is the cost of supplying those “extras.”
You will record profits if your MB is equal to or greater than MC. When the costs rise to equal the benefit, you achieve maximum benefit.
New product costs exceed benefits until the economy of scale is achieved, and market saturation causes costs to exceed benefits.
A salary raise is an MC, but it attracts and keeps better staff, reduces recruitment & onboarding costs, and increases customer service & referrals.
Opportunity Costs - OC
Opportunity costs are calculated by deducting the cost from the return of a product or service versus the same equation for a better alternative.
The cost of start-up capital & operations costs are OCs. Prior to starting a new product, you need to assess the returns of investing the money into it versus investing in other places. E.g. if sales executives use one day a month to produce, submit and file invoices, assess the loss of sales on that day against the cost of a sales support person.
Sunk Costs - SC
These are expected, unrecoverable expenses that should not influence future decisions, e.g. rents, wages, and R&D. These costs exist whether you sell 10 products or 8 products.
Business owners often include SC when assessing the cost of a new course of action, e.g. warehouse rent should not be in the cost of stocking a new product if rent payments are already being made on an existing warehouse.
There are additional strategic economic principles that need to be correctly understood in a small business, such as Supply And Demand, Elasticity Of Demand, and Differential Pricing.
We are ready to work with you to identify the economic principles that need attention in your business, as well as help you formulate a strong business growth blueprint.
Start growing your business today!