The Opportunity Cost of Credit Control
Opportunity cost is defined by Oxford Languages as “the loss of other alternatives when one alternative is chosen.”
In a recent coaching session, I was reminded that everything we do is a choice. Even if that choice is to do nothing.
Which means that everything we do has an opportunity cost.
Here’s an example close to my heart! If I chose to eat that huge slab of chocolate, then the opportunity cost is not losing enough weight to fit back into my favourite clothes.
When it comes to money, the opportunity cost of going on a fantastic holiday instead of spending the money on a new car is not getting a new car.
The Opportunity Cost of Not Doing Credit Control Consistently
Chasing up unpaid invoices is not something most small businesses owners wake up in the morning enthusiastic about and raring to get stuck into.
For some, it’s a really scary prospect. The fear of confrontation is a powerful influencer of our choices (see this article for more on why).
You may believe that if you chase then you’re putting your chances of getting more business from that customer at risk.
Or you may simply have so many other demands on your time that it always gets pushed to the bottom of the to-do list.
Whatever the reason, if you’ve been putting off chasing up those unpaid invoices, you are making a choice not to have that money in your bank account.
What could you be doing with that money if you’d made a different choice and it was in your bank account?
Are you sacrificing business goals and opportunities because of a lack of capital?
Is your business growth being stalled because you can’t invest in new systems, people, equipment, or training?
The Opportunity Cost of Doing Your Own Credit Control
If you’re choosing to do your own credit control and you’re doing it consistently, well done.
Again, that’s a choice, and with all choices, there’s an opportunity cost to that choice.
In business, the opportunity cost is calculated as a ratio between two alternatives. A ratio of what you are gaining against what you are losing.
What you gain / (what you sacrifice – what you would pay)
Say you spend half a day per week doing your own credit control. In doing so you save yourself £200 in outsourcing fees (what you gain).
What else could you do with that half a day?
You could achieve something tangible that results in explicit profit, like finding and nurturing new prospects whose business you happily win, resulting in a £1,000 profit (what you are sacrificing).
So, the opportunity cost of not outsourcing your credit control is 200/800 or:
For every £1 you save you are sacrificing £4 of profit
Therefore, in this scenario, choosing not to spend money on outsourcing has a negative impact on your cash flow.
However, as demonstrated by the chocolate and my waistline, not all opportunity costs are financial, some, like the value of free time and personal wellbeing, cannot be monetised.
During that half a day there are lots of other things you could be doing, such as:
- Networking and meeting a new strategic partner or your next big client
- Having a planning session with your team, coming up with new ideas or problem-solving
- Working on that book you’ve always wanted to write (business or otherwise)
- Playing a round of golf
- Watching your child or grandchild in a school play
What you do with the time is your choice, and how those activities impact on you and your business is highly variable.
What are you going to Choose to Do?
The first step is to stop choosing to do nothing.
The next step is to chose whether to do your credit control yourself or to outsource it.
Can you give it the time and consistency it needs? Can you put on your big girl (or boy) pants and have those conversations?
We can help whatever you decide to do.
If you’re not sure how to get started doing it yourself, or if you’d like to consider outsourcing why not book a chat with us now to explore your options.