Opportunity Cost Definition

Opportunity Cost Definition

See Also:
The Future of the Accounting Workforce
Future Value
Cost Driver
Certified Public Accountant (CPA)

Opportunity Cost Definition

Revenue that has been forfeited for an alternative use of time or facilities. Often times these types of decisions are made because a company or person forgoes an immediate cash stream for hopefully a larger one in the future.

Opportunity Cost Meaning

Opportunity costs decision making is often based on the potential for higher cash streams in the future. This can happen if a company is developing a new product, and in the meantime has available capacity it could rent out. However, the company keeps it idle in hopes that the new product will develop higher cash flows and use the idle capacity.

Opportunity Cost Examples

Here are some common opportunity costs examples:
– A person who just graduated high school has the chance to take a job at a factory or go to college and gain further knowledge. Often times, the student will go to college because he/she believes that they will be able to make more in the long run over the years by investing in an education.
– A company decides that it needs to invest in new software. It may costs a lot, but if the company becomes more efficient it would be worth it. If the costs to maintain the software is reduced and sales increased it could pay for itself and more in the long run.
– A bank has outstanding loans that have broken covenants. The bank could ask for the full amount right now, but often times they will work with the company so the bank can realize the interest payments along with the principal.
Learn how you can be the best wingman with our free How to be a Wingman guide!
Opportunity Cost Definition
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Opportunity Cost Definition

Related Blogs
Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »
Near Sourcing vs. Outsourcing: The Key to Cost-Effective Accounting Solutions

In this insightful interview, Dan sheds light on the critical role of accounting in business growth and success. Uncover the common pitfalls business owners face when overlooking accounting and how it can hinder access to loans and financial opportunities. Learn why good financial statements are vital for decision-making and attracting investors. With the NearSourcing model,

Read More »
Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »
WIKI CFO® - Browse hundreds of articles
Skip to content