What Every Entrepreneur Should Know About Comparative Advantage

As a small business owner, you wear many hats. In addition to being an entrepreneur, you may be your company bookkeeper, web designer, administrator, sales person and more. Having so many rolls is challenging, but at least it saves you the money you would have spent hiring staff or outsourcing these tasks. This is the mindset of many entrepreneurs who are struggling to take their business to the next level. They believe that if they do it all, they save money. The truth is that this is usually not the case. The error being made by the entrepreneurs, who believe this, is that they are ignoring the opportunity cost of their time (i.e. what they forego when they work on these secondary, but necessary tasks).

Comparative advantage is a term used by economists to explain the gains from international trade. It suggests that even if a country has an absolute advantage in the fabrication of all goods, it will maximize its wealth by specializing in those products in which it has the greatest advantage and trading for the others. How does this concept apply to business? Well, a business owner may be a better worker than anyone he hires to work for him, but he may still stand to increase his revenue by performing the tasks that bring him the greatest profits and delegating the remaining tasks.

Consider how much your time would be worth if you could spend more of it doing the tasks that make you the most money. For example, if you make $60 per hour when making sales, but you have to spend 2-3 hours of your day on administrative functions, that is a potential loss of $120-$180 that could have been generated during that time. This is the opportunity cost of these administrative duties. If you consider that outsourcing them would likely cost you no more than $30 per hour, you can see that you could stand to increase your profitability substantially by outsourcing.

Spending more time doing what you do best could be the key to taking your business to the next level of success. Don’t hinder your business’ growth by attempting to avoid the monetary costs of hiring an administrative assistant or by outsourcing the work. Do the calculations and you may discover that comparative advantage suggests that you should delegate certain tasks to others, so that you can concentrate on performing the tasks at which you have the greatest advantage.