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Free-lance Writer, Devon Callahan
From
Mr. Callahan
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.
You
can find more information about Devon by visiting his
web site. www.Skylarwrites.com.
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