#11 You Should be Growing Faster

High-growth companies are opportunity-rich, time-poor and cash-constrained.

Choosing where to allocate resources is essential.

But decision-making processes often ignore a key component.

5 min read

The Crucial Role of Opportunity Costs in High-Growth Companies

In fast-paced, high-growth businesses, time and resources are always at a premium.

There are many things you could be doing — but are the ones you choose generating the highest return?

And what about all the time spent putting out fires... how much value could have been created if you didn't have so many problems to fix?

This is the realm of opportunity costs.

Understanding them is crucial for decision-making. Otherwise, these unseen costs can become a significant drag on growth and the long-term valuation potential of your business.

In this edition, we’ll dive deeper into opportunity costs and provide examples of how they can be calculated. The following case study, based on a real situation from a company I’ve worked with, highlights the substantial financial impact of not addressing these hidden costs.

Case Study – Quantifying Opportunity Costs

ABC Co was recently notified by its biggest customer, XYZ Co, of a significant quality issue with a batch of 31,500 products.

XYZ Co required a quick replacement, as per the terms of the supply agreement.

ABC Co couldn’t afford to lose this crucial account, but remaking the products meant pushing back other client orders, absorbing significant management time, and risking further financial losses.

The full extent of the financial impact was not just the obvious expense of remaking the product but also the opportunity cost — the lost revenue and management time that could have been better spent on strategic initiatives and growing the business.

I) Cost of Remaking the Faulty Products

It costs ABC Co £28 to make each unit, which are sold to customers for £50.

To remake and replace the faulty product therefore had a direct cost of £882k

However, this is not the full opportunity cost.

Had this error not happened, ABD Co would have produced and sold 31,500 units to another customer, generating £693k gross profit

ABC Co incurred a loss of £882k when it should have generated £693k.

The difference between where the company should have been and where it ended up is therefore £1.575m

II) Cost of Management Time

While the product costs are easy to identify, the less obvious — yet equally important — opportunity cost stems from management time required to resolve the problem.

Whilst you'll be aware of this when it happens, the opportunity cost usually isn't quantified. But it will still have a negative impact on your P&L.

So how can it be measured?

You first need to assign a financial value to a unit of each person's time.

In a people business, an agency for example, you can just use each person's billable rate: every hour of their time that is spent fixing a problem or wasted due to inefficiency could have been generating income on a client project.

For companies making products — including digital products and SaaS — or any business where the majority of staff costs is in overheads rather than cost of sales, it is not as easy.

However, I've developed a simple 5-step method that can provide a good starting point for calculating the opportunity cost of staff time.

In this example, we’ll consider the C-suite as a whole, but the same method can be applied to individual employees. We use gross profit as a proxy for the value created per unit of staff time.

Step 1. Calculate Each Employee's Proportion of Total Staff Costs

• to do this, you'll need to take annual salaries and add in all employment expenses, such as taxes and pension contributions paid by the company

• for this example, we are looking at the combined C-Suite: let's say they have a cost of £800k vs total employment cost of £8m = 10%

Step 2. Apply this Percentage Against Gross Profit for the Year

• forecast for the current year is best but you can also use the previous full year, or last 12 months

• ABC Co makes £20m gross profit, so 10% = £2m

Step 3. Approximation of Annual Value Creation

• The resulting figures provide an approximation for the value created by each person on an annual basis

Step 4. Determine Number of Working Hours in a Year 

• We'll assume 45 hours per week for 46 weeks each year (allowing for vacation and holidays).

• This results in 2,070 working hours per person per year.

Step 5. Opportunity Cost per Hour

• Divide the annual value creation figure in Step 3 by the number of working hours in Step 4

• This gives the opportunity cost per hour, in this case (£2m / 2,070) £966 for the combined C-Suite

The C-suite spent 60% of their time (27 hours per week) addressing the issue and its aftermath across a six-week period, resulting in an opportunity cost of management time of £156,492.

The full opportunity cost is therefore £1.73m — nearly twice as much as the direct cost of remaking the products, highlighting the extent of hidden costs that are often overlooked.

What are the Hidden Costs in Your Business?

As newsletter #9 explored, most problems are the result of poor decision-making at some point(s) in the chain.

This can be mitigated by embedding a clear sense of purpose and set of values, which serve as a cultural operating system — guiding the behaviours and actions of your team.

Consider: what recent problems could have been averted by having a strong operating system in place?

As for the 97% of companies that fail to implement ESG effectively, they face a whole range of opportunity costs:

Direct: wasted time due to ineffective implementation, forcing staff to repeatedly revisit the same problems

Indirect: through suppressed employee engagement. As previous editions have explained, a strong sense of purpose is the most effective way to increase employee engagement, which is a significant driver of performance

Potential: continuing to deprioritise or defer ESG increases the long-term risk of a significant financial loss — be that from future legislation/regulations, or a PR crisis due to poor environmental practices or supply chain governance

Next Steps

1. Identify and Reflect: Review a recent issue that consumed significant management time. Could clearer alignment with your company’s purpose or more effective ESG initiatives have prevented it? Estimate the opportunity cost of this problem using the methods outlined above.

2. Assess Your ESG Initiatives: Evaluate your current ESG strategies in light of your company’s purpose. Are they truly aligned? What are the potential hidden costs of inaction?

3. Optimise for the Future: Use the opportunity cost calculation method to make more informed decisions, ensuring that every hour spent is driving both purpose and profit.

Conclusion: Maximising Impact

Every decision you make comes with an opportunity cost.

While direct costs are easy to measure, the hidden opportunity costs can be far more damaging in the long run — especially when they stem from a lack of purpose or ineffective ESG practices.

By aligning your company’s operating system around a clear sense of purpose and a robust ESG strategy, you can minimise these hidden costs and ensure that every pound and every hour spent drives long-term growth and value.

The journey towards a better way of doing business

We are on the cusp of a new paradigm of responsible business, and helping impactful companies pair purpose with profit will accelerate the shift.

I believe this holds the key to solving many of our greatest challenges and inspiring positive change throughout society.

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