How much are you paying for your free lunch?

“There’s no such thing as a free lunch.”  Anyone who has taken even the most basic economics course has heard it.  But what does it mean, exactly?

The “free lunch” idiom is frequently used to simplify the concept of opportunity cost, in that, even as you accept a free lunch, you miss out on other opportunities during that period of time.  Investopedia defines opportunity cost as, “The cost of an alternative that must be forgone in order to pursue a certain action.  Put another way, the benefits you could have received by taking an alternative action.”

It’s a fairly basic definition and it’s one that most business owners understand…in theory.  However, for many entrepreneurs, the desire to keep costs low can cycle into a “do-everything-yourself” mentality, which, in turn, lends to missed opportunities.

To better illustrate this issue, consider Janice, professional photographer (and fictional entrepreneur we created for this example).

After experiencing a great deal of amateur success, Janice has decided to become a professional photographer full-time, and open her own studio.  She determines that her new business needs the following things:

  • A photographer
  • Photo editing
  • Someone to answer the phone and schedule appointments
  • A website
  • Bookkeeping

None of this looks too hard to start with, and Janice figures she can handle most of it.  She’s got the photography and photo editing skills already and, until she can afford to hire a receptionist, she can just take business calls on her cell.  There are plenty of places online where anyone can build a free website, and she can keep track of her own business financials throughout the year and figure it all out with TurboTax in April.  For a great photographer and hard worker, this shouldn’t be any problem.

Of course, things don’t go as simply as Janice has predicted.  Her phone rings with appointment requests while she’s in the middle of sessions and, by the time she calls the prospective customer back, they have already booked with someone else.  Her shoots run long because she has to change backdrops, arrange props, etc. by herself.  Her days are so busy she has to stay up late working on photo editing.  The website she built is…okay, but comes across as generic and slightly amateurish.  She’s not entirely sure how her bookkeeping as going because, with everything else going on, it’s been the last thing on her mind.

On top of all that, she’s started to notice that her business needs some things she hadn’t planned for, including:

  • Photographer’s assistant
  • Studio cleaning
  • Basic legal documents

For the sake of comparison, let’s assume Janice continues to do all of this herself.  Let’s look at how much money she is saving.

Receptionist                             –     $9/hour

Website                                      –     $500

Bookkeeping                            –     $500/month

Photographer’s Assistant   –     $12/hour

Cleaning                                    –      $8/hour

Basic legal documents         –     $300

It looks like Janice has saved her business a lot of money through her strenuous efforts and “can-do” attitude.  However, we have to factor in the opportunity costs.

Let’s take a look at what each of these things Janice is doing herself, each “free lunch”, cost:

Receptionist                             –     Missed income from lost appointments; positive word-of-mouth; professional image

Website                                     –     Lack of professional image; loss of referrals; missed income

Bookkeeping                           –     Missed deductions; increased risk of audit

Photographer’s Assistant   –     Shoots take longer so fewer of them can be scheduled, leading to missed income

Cleaning                                    –      Time and energy diverted away from more profitable activities, such as photo editing and networking

Basic legal documents         –     Increased legal vulnerability; loss of time

So, when you weigh all the opportunities to genuinely build her business which Janice has lost while she was busy doing everything else, how much money did she really save?

Now, this isn’t to say that you should farm out every task you dislike (particularly early on, when small businesses are susceptible to cash flow woes).  However, it is key that, before committing yourself to something outside of your wheelhouse, you measure the benefits of DIY versus outsourcing.  In many cases, the opportunity costs will be greater than you think.

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