Before earning my MBA at the University of Florida, my process for decision-making was very much like a 'shoot from the hip' strategy. I got lucky a few times, sure, but overall the amount of effort I put into most of my pursuits wound up being more than the outcome itself. In other words, I rarely hit the bullseye and would barely land within the 25-point ring.

As an aspiring entrepreneur, you too will face countless decisions—big and small—that shape your business journey. Every decision you make comes with trade-offs. Understanding these trade-offs is essential for making informed choices. 

But how do you make great business decisions that hit the target?

One of the most powerful tools I learned while attending the University of Florida - Warrington College of Business was the concept of calculating your opportunity cost. 

Knowing how to calculate opportunity cost is a crucial concept for you to apply as an entrepreneur.

What Is Opportunity Cost? 

Opportunity cost is the value of the next best alternative that you give up when making a decision. In other words, when you choose one path, you’re inevitably sacrificing another. Said in a more positive way, when you make any kind of choice (business or personal), you are gaining that one thing you choose to do while also intentionally choosing not to do something else.

Here are a few scenarios where we could measure opportunity cost that might hit home for you:

• Being outside on a beautiful Saturday in Spring instead of working inside, on tax returns (personally, the latter makes me want to barf 🤢).
• Tackling that home improvement project you’ve been wanting to complete versus day drinking on the weekend.
• Learning how to create a solid foundation for your new business as opposed to enduring another few months of frustration and overwhelm at your current job.

Recognizing opportunity costs can help you optimize your choices and make decisions that align with your long-term goals.

As an entrepreneur, whether you’re deciding between investing in a new marketing campaign or hiring an extra team member, measuring opportunity cost helps you evaluate your options. By considering what you’re giving up, you can make more strategic and informed business moves.

How to Calculate Opportunity Cost

To apply opportunity cost to your entrepreneurial journey, follow these six steps:

1. Identify your options
2. Write down all alternatives
3. Estimate each outcome
4. Give each alternative a value
5. Calculate the opportunity cost
6. Review the results and make a choice

Now, let's dive into these steps in detail so you can see it in action with an example.

Step 1: Identify Your Options 

Start by determining the decision you need to make.

For example, let’s say you’re deciding how to fund your startup. Well, your choices here are to either:

• Bootstrap (aka use your own hard-earned money), or
• Find external funds from an outside source.

Step 2: Write Down All Alternatives

Now you're going to list the alternatives available to you. In the example above, your alternatives could include:

• Funding your business with personal savings. 
• Seeking venture capital or an angel investment, like getting funding from a Shark on SharkTank 🦈.
• Taking out a small business loan with a traditional bank, the Small Business Administration, or a loan from a family/friend.

Step 3: Estimate Each Outcome 

In this step, you're going to assess the potential outcomes of each alternative. Consider both the benefits and drawbacks, the pros and cons, the advantages and disadvantages; whichever is your flavor of comparisons.

For instance, bootstrapping your startup with your own dollars means retaining full control of your business (an advantage) but may limit your growth potential due to financial constraints (a disadvantage). If you use your own money, you don't owe anyone anything. However, you also lose the opportunity to use that cash on other things like: 

1. Investing in the stock market and possibly making an 10% return on investment (ROI).
2. Going on a vacation which could give you rest and relaxation that you value as a 20% ROI.
3. Paying for unforeseen costs that arise throughout life which generates a saving of 28.7% (the average interest rate charged by credit card companies).

Ever had to pay for a new transmission or a new HVAC unit or a big medical bill "as scheduled"? No, of course not! Those things happen at random, so having cash on-hand to pay for those kinds of events is better than paying Amex or Visa interest at 28.7%! 

My point here is to be smart about your bootstrapping, strategic in your choice to commit personal funds, and estimate the value of the next best alternative. You likely don’t have a mile-high stack of cash like Scrooge McDuck does, just lying around, waiting for you to take a swim. I've worked with a few clients who took it upon themselves to funnel every savings dollar they had into their startup, liquidated their retirement accounts as a cash infusion, and still the business generated no revenue. This is not a smart use of personal funds, and I told them that from the get-go, but they were relentless. Don't be like that entrepreneur. Please take this opportunity cost concept and use your money wisely!

The next alternative is seeking out investors who could provide substantial capital for expansion (a pro – finding that person that is a Scrooge McDuck!) but this usually requires giving up equity and also decision-making control (a con – especially if you are a control freak or perfectionist).

Taking out a loan allows you to maintain ownership (a benefit), but you’ll have contractual financial obligations and interest to repay (a drawback). Interest rates are the highest they've been in the past 20 or 30 years, depending on the type of loan you're able to secure. Here's how you can estimate the outcome of using a loan:

1. Small Business Administration loans come with interest rates ranging between 10.5% to 15.5%
2. Average business bank loans range from 7.85% to 8.79%
3. Online bank loans go at a rate between 9.0% upwards to 75%

Step 4: Give Each Alternative a Value 

Assign a value—either monetary or non-monetary—to each alternative. This could include revenue potential, ownership retention, or even intangible factors like personal satisfaction.

Here’s what it looks like based on the example we’ve been using so far on funding your startup:

• Bootstrapping: You retain 100% ownership, but your growth may be slow due to the lack of cash infusion so your estimated revenue might be only $200K in the first year.
• Seeking investment: Let’s say you receive $500K in funding from your favorite Shark which might drive potential revenue of $800K in the first year but you have to give up 30% equity.
• Taking a loan: You secure $100K in the form of a business loan but must repay $120K over time, principal + interest expense; you’ve projected you can earn revenue of $300K in the first year from this cash infusion.

Step 5: Calculate the Opportunity Cost

The opportunity cost is the value of the next best alternative that you are giving up. The formula is:

Opportunity Cost = Value of Next Best Alternative - Value of Chosen Option

Let’s put that formula to work and say that you choose to use your own money to fund your business instead of working with a Shark 🦈. 

Your opportunity cost equation would look like this:

Opportunity Cost = $800K in revenue with the Shark - $200K in revenue from bootstrapping

Opportunity Cost = $600K

Going with the Shark might initially seem like the better, more fruitful choice. But wait -- the Shark takes 30% equity, remember? And your net income flows directly into equity. So, the Shark has a say in what you do with those funds. The revenue doesn’t just land right into your pocket. Your opportunity cost could actually be lower than the amount above. It just depends.

Step 6: Review the Results and Make a Choice 

Once you’ve calculated the opportunity cost, analyze the trade-offs involved. Keep in mind that opportunity cost isn’t always about financial figures—sometimes, personal fulfillment, control, and long-term vision outweigh immediate financial gains.

Working with a Shark could add an additional $600K in revenue by taking their investment funding. However, if retaining full ownership and complete control is more valuable to you than rapid growth, then bootstrapping (using your own money) may be the better choice for you.

Why Opportunity Cost Matters for Entrepreneurs

As an entrepreneur, your resources—time, money, and energy—are limited. Every decision you make affects your business trajectory. By understanding opportunity cost, you can:

• Make more strategic investments
• Allocate resources more effectively
• Reduce unnecessary risk
• Stay focused on long-term success rather than short-term gains

For example, if you spend months building a product without validating demand, the opportunity cost = the time and money you could have spent testing your MVP and generating revenue sooner. Recognizing this trade-off early can help you pivot faster and avoid costly mistakes.

Applying Opportunity Cost to Your Business Strategy

Here are some common areas where applying the opportunity cost model can help you make a decision:

• Hiring vs. Outsourcing: Should you hire an in-house employee or outsource certain tasks to a freelancer or agency at a reduced cost but also reduced control?
• Marketing Strategy: Is it better to invest in paid advertising or use your time to create organic marketing content?
• Product Development: Should you launch a minimum viable product (MVP) quickly or spend more time perfecting it before release? hint: if you read my last newsletter, you’d already know the answer!

By consistently evaluating opportunity costs, you’ll become more confident in your decision-making and set yourself up for long-term success.

The Recap

Every business decision involves trade-offs. You can make smarter choices by following these six steps:

1. Identify Your Options – Determine the key decision you need to make.
2. Write Down Alternatives – List all possible choices available to you.
3. Estimate Each Outcome – Consider the benefits and drawbacks of each alternative.
4. Give Each Alternative a Value – Assign a monetary or non-monetary value to each option.
5. Calculate the Opportunity Cost – Use the formula: Opportunity Cost = Value of Next Best Alternative - Value of Chosen Option
6. Review and Decide – Weigh the trade-offs and make an informed decision that aligns with your goals.

By consistently applying this process, you’ll uncover hidden opportunities and make better strategic decisions for your startup.

Every entrepreneurial decision presents a trade-off, but hidden opportunities exist in places you might not expect. By shifting your focus from what you’re sacrificing to what you’re gaining, you can make more strategic, forward-thinking choices. Whether it's bootstrapping vs. investment, hiring vs. outsourcing, or launching early vs. perfecting your product—each choice opens new doors. The key is recognizing the potential in every path.

Ready to Build a Savvy Startup? 🚀

Making smart business decisions starts with understanding opportunity costs and other key entrepreneurial principles. That’s why I’m writing Build a Savvy Startup, a book designed to help new entrepreneurs navigate the startup process with practical, actionable steps.

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