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Evaluating Opportunity Loss in Business

Posted in Finance Articles, Total Reads: 876 , Published on January 02, 2020

Every thriving business need to focus on increasing efficiency of its business through increased sales or reduced costs. A new business can set basic targets which they feel they might be able to achieve. But as and when real business data is accumulated based on past performances, a constant revision is required on the targets a company wants to achieve for a specific time period. Based on past trends, companies can have forecasts, which help them understand the business opportunities that lies in the coming time period. This in turn helps evaluate the business opportunity lost in underperforming business units.

First what is opportunity lost in business? Companies come up with realistic forecasts which benchmark the output or sales required by a company. Each and every unit must be able to ensure that these sales are driven with an objective to meet or beat sales targets. However, certain business units perform better compared to others. This can be attributed to more intensity by sales force, better communication, lesser drive by others etc. Comparing the average business per customer to the opportunity base not converted can help evaluate opportunity loss for a business unit. This tells that if the sale was as much as the target or average, it would help generate that much money for the business unit. Hence opportunity loss in business highlights the loss in sales due to inactivity by business units.


Image: pixabay

 

Let’s take an example to understand opportunity loss better. Consider a company having business units in 3 states A B C responsible for driving sales. Each product costs $10. A has 1000 customers, B has 500 customers and C has 2000 customers. As per past trends, 5% is the total product penetration i.e. percentage of people who buy the product.

 

Now, A has sold 80 products, i.e. has 8% product conversion, B has sold 25 products i.e. 5% conversion. This shows A is performing better than the average 5% of B. However, C has sold only 20 products i.e. 1%. So, comparing it to the average 5%, there is a gap of 4% or 80 product units. Hence this is an opportunity loss. In monetary terms, the opportunity loss stands at:

80 units x $10 = $800.

Hence the inefficiency of C has led to an opportunity loss in business for about $800. If C business unit had given an average effort towards doing sales, they would have earned about $800 more than their current business output.

 

Opportunity loss is always a calculated figure which is evaluated based on various parameters like average business of other units, time duration, sales force size, target market size etc. It never highlights a definite figure but an approximate value of the business opportunity which a business unit has. Management can use this kind of an approach for showing comparison between different teams or business units, and drive them to perform better which comparing the business opportunity present for them.

 

Companies always need to forecast the business sales and set higher benchmarks. While some teams will achieve the set targets, other teams might falter and do lesser business. This is where the concept of opportunity loss in business is critical. It not only shows the revenue opportunity missed but is also a way to push teams to perform better with higher efficiency in the next time period.


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