Don’t quit your Day Job
We all make sacrifices every day, whether it’s taking the train to work to save gas, or taking a sack lunch to save money buying lunch at a costly fast food joint. As an entrepreneur you must make similar sacrifices, except these sacrifices are ones that benefit your business directly. The same way you took a sack lunch to keep from spending money during your lunch break, one may want to put off the purchase of a new automobile in order to finance the start up costs for a new business. Economists call these, opportunity costs. Opportunity costs are classified as anything forgone for the gain of something else. For example: You go to the catalog department of your favorite store to pick up an item you ordered, but you notice there is a long line. You planned to be finished and at home by a certain time. You feel that you can accomplish this even with the long line but you remember that you still have a gift to buy for your niece. After pondering for a minute you decide to take a ticket. You go to another department to shop while you wait for your catalog number to be called. This is yet another example of an opportunity cost because you are prioritizing and making decisions that allow maximum use of your time in order to get something that you want, which is getting home by a certain time.
As with opportunity cost; it is equally significant to understand and consider explicit and implicit cost when thinking about starting a business. There are a few things to consider before you leave your job: Will you have to pay for labor, if so, how much? Is transportation required? What materials will you need and how much will this cost you? These are all examples of explicit costs. Explicit costs are expenses that you incur from employing outside sources.
How will you pay these costs? Will you pay with a percentage of your savings? Will you have to pay with some of your earnings from investments? Will you use some of your normal income, or will you have to quit your job in order to effectively run your business? If you have to quit your job, what benefits would you lose? Maybe your job includes medical benefits. Guess what; if you leave your job you lose these benefits as well. These are all examples of implicit costs. Implicit costs are expenses that are covered by using self owned resources.
Let’s assume you had a job like the one mentioned with some of the perks. Could you afford to lose this job and start your business too? Well you could if your profit exceeds your implicit costs. Let’s use this example: You go into the lawn care business making $4,500 monthly but you spend $2000 for equipment, supplies, labor and advertising, (your explicit costs.) You quit a job that paid $3000 monthly with a medical benefits package worth $700. Your implicit costs are equal to $3700. Let’s say you used $2000 of your savings to help pay for the additional costs; your new implicit costs amount to $5700 because you used your own assets for payments. After your explicit costs of $2000 your accounting profit is $2500, ($4500 revenue minus $2000 explicit costs.)
To figure out your economic profit you would subtract your implicit cost of $3700 from your accounting profit of $2500 which will leave you with a negative profit of $1,200. If you planned ahead, this problem was foreseeable, and you would reconsider the lawn care business or devise a better plan to earn more revenue before quitting your day job. If you are seriously thinking about quitting your day job to run a business, I am all for that but make sure you do your homework. Know how much money you need to make. Make it your business to make more money than your implicit costs. If you think that you may not be able to achieve this, then it very well may not be a good idea. You may have to stick to your day job a little while longer.
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