How do I assess an opportunity to see whether it is likely to generate results for me, before I commit a lot of time and resources to it? If you can assess the cost of the opportunity, and compare that with the cost of the other aspects of your business, you will be in a better place to assess its likely profitability.
How do I assess an opportunity to see whether it is likely to generate results for me, before I commit a lot of time and resources to it? If you can assess the cost of the opportunity, and compare that with the cost of the other aspects of your business, you will be in a better place to assess its likely profitability.
Here’s a simple example of Opportunity Cost assessment to get you started. This example is about assessing the opportunity cost of applying for funding (which is probably familiar territory for most people in the arts).
Imagine you are considering applying for a grant to help fund a planned project (in this instance it should be a project where it is primarily to support your own work, not a big group project or production)… Have you calculated the opportunity cost to you and your business of making the application? Here are some questions and short exercises to help you run a sample opportunity cost exercise that you could apply to anything you’re planning to do:
- What’s your track record with funding?
I.e., if you have applied for funding fairly often before from this organisation you are considering, how many time have you been successful? Is it 1 out of 10 times; 4 out of 10 times; 10 out of 10 times? Now turn those results into a percentage; i.e., my examples would translate into 10%, 40% and 100% success rates. Now your percentage figure becomes your probability guide, meaning that no matter how well you do your application, and no matter how amazing the project is, from a business point of view you have to rate your probability of success as the same percentage as your past track record: e.g., I would have a 10% chance, a 40% chance or a 100% chance of success. My guess is, that if you have anything close to a 100% track record you are already making very strategic choices about what you apply for and when, so you probably know everything else I’m going to say already.
- Now add up the costs the application; this includes anything you would have to pay for (materials, documentation, printing, postage, phone calls, etc) plus how much time and effort you would have to expend in generating the application. If the project will only go ahead if you get the funding, then add in everything you do and spend to plan the project and make the application. If you are going to do the project regardless, then just calculate the costs of compiling the application. Remember that means time and materials.
- How do you calculate the cost of your time? If you have a job that subsidises your practice; or if you have work that you can pick up at any time to fill the gaps in your other income (say you work in a cafe; or you do front-of-house for a theatre, etc) then you would use this hourly rate as it is the very least you could be earning if you weren’t doing the application! If you don’t have a back-up job like this, then you’ll have to use an hourly rate that is the equivalent of the very least you could be earning if you weren’t doing the application.
- Do you know how much time you have spent on applications in the past? This opportunity cost exercise is bound to reveal what you know and don’t know about how you use your time. If you haven’t kept records, then as a rule of thumb your memory will under-estimate the time you put into these things. Try and work it out as best you can, based on the last couple of applications you’ve made and then multiply the hours by your hourly rate.
- Now that you know how much the application will “cost” you to make and your probability of success, you have to factor in the waiting time as well, which is not a tangible cost, it is more a psychological cost. For some people this may not be an issue.
- Now we need to look at what the grant, if you were successful, is actually comprised of. My guess is that most of it is project costs that can’t be counted as your business revenue, let alone your own revenue. Therefore you need to just consider the portion of the grant that would come to you as a fee for professional services, because everything else is likely to be simply money in / money out.
- Finally, looking at what the application is costing you (time and materials), plus the probability of success, compare the amount of the grant that would come to you to use freely with what your time is costing you. (Remember, the cost to you is equivalent to the amount you could earn if you chose to use that time differently.) If the amount you would get in the grant is less than, the same as, or even a little more than what you could earn by doing something else in the same time, then why are you applying for funding? Why not self-fund through savings? The rule therefore is that if the cost of the opportunity is greater than or equal to the value of the opportunity, then don’t do it!
* * * The next step * * *
Use these same principles of comparing what it costs you to do something with what you could achieve with the same time, money and effort if you applied these to something else. Then pick the most beneficial option.