When I learned about economics in undergrad, it was always these graphs that talk about supply and demand, and we were just supposed to accept that over many centuries, these concepts were proven, so we didn't question, we just memorized. Which is a lot of how business is taught, especially in early stages.

Fast forward some odd years (let's not put hard numbers on that one :)) I was sitting through my grad-level microeconomics lectures and this amazing thing happened. The professor ACTUALLY SHOWED HOW THE GRAPHS ARE CONSTRUCTED.

It was like angels singing - the clouds parted and OMG I could finally understand what was going on. Which is sad because I really liked my economics professor in undergrad, but I may have been a little too preoccupied to actually pay attention, let's be brutally honest. 20 year old me is much different than thirty-something me. (Emphasis on -something).

The other difference is that now that I have been in business going on 10 years - I actually could apply the concepts and theory into real life terms. And the BIGGEST lightbulb moment for me was when the professor was talking about ECONOMIC PROFIT.

As a trained accountant, I get accounting costs. It makes my little ordered heart sing when books balance, I can track all my expenses and can pull numbers at a moment's notice. I love me some numbers.

But with economic profit - the opportunity costs associated with delivering that thing you do and not using your available resources for other pursuits - this concept hit me like a ton of bricks.

You see, there isn't a receipt for opportunity costs. There's no obvious number that you plug into your models. This number needs to be arrived at. And it's not always clear how to arrive at that number.

Here's an example of what opportunity costs look like = multi-passionate entrepreneurs.

A multi-passionate entrepreneur is someone who has many talents or interests - and of course everyone has a limited number of resources - whether time, person-power, or investment capital. They have to decide how to divide their resources to find the most profitable way to expend them. Whatever resources they have - they tend to be only able to direct those resources in one direction at a time. While they can divide their resources in any ways they like, they have to decide how to divide them up.

So let's pretend we have an entrepreneur - Jane - who has a couple different income streams that she is interested in. She loves to blog about her favorite beauty products, she has a product that is targeted to parents of toddlers, and she also likes to teach people how to create and market their own products.

She can look at how to divide the resources she has - her own time, two part time assistants, and a nest egg of $15,000. She can look at the pure numbers of what income she could bring in putting all her resources in one income stream - what she would make solely blogging, solely focusing on her product, or solely focusing on her educational model. For the purposes of this example, we won't go into hard numbers, just high level ideas.

She probably has the most income potential selling her product - but her expenses would be high if she tried to mainstream her product. She would also be working 40+ hour weeks and traveling to build out her empire on the product.

She probably has the least income potential with the blogging as it takes a few years to build up a following and while it's super easy for her - she can do it in her sleep, she wants to be able to make consistent income right away with any business.

The educational income stream is probably a good balance of her time and income, but if she invests some of her resources into the other two she can diversify her income and not completely depend on one income source for her income.

As you can see, there is more than just the income stream itself, but also the time and energy investment with her fully focusing on one stream over another, and the costs associated with putting all her (nest) eggs in one basket.

Because if there is anything you need to learn in business - it's how to be agile and be able to make adjustments as revenue streams dry up or consumer behavior changes.

Or 2020 happens..

But it doesn't mean that it probably means most of her resources will go into one income stream or another, so she has to weigh the opportunity costs of how she splits up her resources so that she maximizes her income and her lifestyle goals.

Because as business owners, we need to also take our lifestyle into account. Sometimes the most profitable businesses don't align with your time commitments, other commitments, or even just investment strategy.

So all of these hard opportunity costs as well as our tradeoffs need to be considered when looking at how we are invest our resources.

This was driven home in my micro class, and it's something I knew at some level over the years, but seeing this concept spelled out really hit me over the head last year. I realized how important it is in my own business, but also for my clients.

Opportunity costs are all around us, and we really need to consider them when streamlining our business - or just finding ways to improve our income and our lives while staying true to our goals. And we also need to honor that our values and needs may change over time.

Whether you are starting a family, or your family is no longer dependent on your 24/7 attention, or if your free time got sucked into a vacuum for whatever reason. Or perhaps you want to move or start an additional income stream. Or maybe you just need more space in your days.

Or maybe you just don't like HOW you are making money anymore.

It's all something you need to examine as you build your business and scale to the next level when you are streamlining. Because it's not just about your financial statements when it comes down to it.

We explore this in Week 2 of the Growth Accelerator, but this is something you should be doing whenever you are planning for change in your business, or even trying to just make one more thing a little more automated.


If you are interested in learning more about economic profit vs accounting profit, check out this cool video.