Robert Tweed is a real estate investor and economics expert. His background in mechanical engineering gives him technical insight into the business world. As an experienced home flipper, Robert Tweed took advantage of the boom market in Los Angeles in the late 1980s and early 90s. He began his investment career soon afterward, becoming a partner in several successful real estate enterprises. He has continued to invest in deserving businesses.
Tweed believes that young entrepreneurs need to understand the basics of economics before they can become successful. In this interview, he shares his economic expertise with readers, focusing on the needs of the new entrepreneur.
What are some of the economic terms that our readers need to understand?
The most important economic term to understand is supply and demand. The market can only absorb so much on the supply side. If you are marketing a product or service that is already saturated in the market, you will not be successful. For example, if you choose to open a convenience store across the street from another busy convenience store, it’s likely that you will not be able to compete.
Another important term is the risk and return. When you take financial risks, you need to be sure that your potential profit is high enough to make it worth your while. Small businesses are financially quite risky. When a small business owner sets up a business plan, he or she must be prepared for the possibility of failure. Over time, small businesses turn a higher percentage of profit than large companies, but you will need to be patient until the returns start coming in. Marginal benefits are another area you must consider.
Tell me about marginal benefits.
Marginal benefits and costs are other crucial concepts to understand. Marginal benefits are the way you make a profit from sales. Ideally, you will need your marginal benefits to be higher than your marginal costs. Marginal costs may include things like upgrades to your production line, cosmetic improvements to your store, and packaging changes. You will need to know what kind of benefit these changes will make.
What is the “opportunity cost”?
You will also need to understand how opportunity costs work for your business to be successful. These can make a big change in the profitability of your business. When you calculate your opportunity costs, you will want to consider the difference between the cost of a particular business move and the potential growth your company could see as a result. When you decide to make an investment in your company, you should seriously think about whether you could spend the money somewhere else.
A good example of an opportunity cost is hiring an additional employee to clean your store versus having your sales staff do the cleaning. It may seem like a cost-saving move to have your sales staff clean the store, but if it takes away from the time they can spend on actual sales, you may be missing out on profits. It is also likely that your cleaning person will cost you less than your sales staff in terms of hourly wages.
What else would you emphasize for our readers?
One more concept that business owners need to understand is the sunk cost. These include expenses that should not be factored into decisions made down the road. Rent, taxes, salaries, and overhead fall into this category. When you are deciding whether an opportunity will be profitable, you need to exclude past sunk costs from your calculations. Of course, you can consider changes that will make future costs lower, such as moving to a shop with lower rent.
Why do business owners need to understand the basics of economics?
Too many people go into business not knowing what they are doing. These are the businesses that fail because their owners are not good at pre-planning their expenses. Be sure that you have a solid business plan that lists all of your costs, margins, and potential profits. If you don’t understand supply and demand, you won’t be able to adjust your business model as needed based on conditions in the market.
Not everyone needs to take an economics class to understand business, but it helps to be conversant with the basic terms. I hope that this interview helps your readers navigate the business world with more confidence.