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Do it Now, Do it Later, Don't Do it at All

 How Do I Consider The Costs

As business owners and managers we are constantly faced with the agonizing dilemma of trying to determine the need and appropriate time to make capital investments.  As consultants we are challenged by our clients to help resolve this dilemma.

It has been said that the more you have to agonize over a decision the less it matters which option you choose.  The point being that if there is no clear distinction between options, either will do.  If there is an obvious first choice, then stop the analysis and begin execution.

Typically the decision to move forward with an initiative is made in one of two ways.  In smaller family owned business conclusions are reached by instinctive feel and consideration of anecdotal evidence.  In larger organizations a more formal process exists, but ultimately a decision is reached through an analysis of empirical evidence, risk & benefit consideration, and ROI analysis.

Green Dollars, Orange Dollars, and Hidden Costs

Through standard practices the obvious costs “green dollars” of an initiative can be identified.  These are the numbers that impact the trial balance or balance sheet, and are the costs that are presented for ROI (return on investment) analysis.  An example might be the license fee for a new piece of software.  It is easy to identify and very specific. 

”Orange dollars” are also actual costs, but they often are not identified during the analysis phase of an initiative.  While the cost of the software license is obvious and easy to identify the labor cost for the additional data entry required by the new software is not so obvious.  Other orange costs might be the additional electricity required by the new computer to support the software.  These “not so obvious” costs are real and will have an impact on the company’s bottom line and could influence ROI analysis.  However, in many initiatives they are not identified and therefore not considered.

“Hidden costs” differ from “orange costs” in that they are known, but intentionally omitted from the ROI analysis.  Typically this omission is the result of the seller not fully disclosing the actual cost that will be associated with an initiative.  For example, when a new product locator system is being considered the vendor will put forth the costs associated with the software, hardware, and consulting.  In order to complete the implementation it will be necessary to design, develop, and apply barcode labels to all of the storage locations.  In a large facility with varying types of storage locations this cost could be considerable.    Page 2