Real options are financial decisions which are used to assess the investment options which one has. This is critical as it can help one to make a decision if they should make the move to invest in the business or wait whilst weighing the other options. The reason why l am writing this article is because last year l was faced with a dilemma if l should go into a business or wait because of the uncertainty of the pandemic.
Real option is a choice available to an individual in regards to opportunities you have. It gives flexibility in decision making especially during this time when many big companies are closing down. As a start-up you need to weigh options in pricing and how to develop the idea, to see if you are able to launch or wait. I will make this easier to understand using the three types of real options which l will explain below:
- Option to Delay
With option to delay you have to assess your business idea and see if this is the right time to launch your business. Some questions you can pose are:
- What is the cost required to launch your business idea, do you have the capital or you applying for funding?
- With an option to delay you have all your financial projections at hand but the timing is just not right. So, you just wait on launching and maybe give yourself a year or so to revisit the idea.
This is what l personally did with Tapiwa my business associate on that certain business idea which l mentioned earlier (it’s still early to disclose all the details, but you will know in due time) We had to use the option to delay because we did not have enough capital to fund the idea. Then we opted for a cheaper idea in line with the real business we have in mind. So, we just delayed the actual idea but taking another route which can help us to assess the market and be able to see if it is a viable business.
2. Option to Switch
The option to switch is different from the option to delay. As with the option to switch you are now considering taking a totally different route to the original business idea. This can be as a result of the research you have taken that the results are looking not so great at the moment to go ahead with the business then you can consider a cheaper way which does not require much capital.
Let me share an example that we did last year with my husband, we had an option to expand on our perfume business and we were considering renting a shop. Because of the lockdown we saw it was not a viable business idea to rent a shop and looking at how the pandemic has affected people and also at that time perfumes were considered as non-essentials. So, we decided to switch this option and started mushroom farming instead. Reason being that food is an essential and it gave us quicker returns.
3. Option to Abandon
The last real option l will tackle is the option to abandon. So, with this you are actually considering to stop everything to do with your business idea. This could be because of any of the two reasons, you do not have the financial capacity to start the business or the uncertainty is just unbearable to go ahead with your business idea.
This also depends with your risk attitude and risk appetite. Other people looking at the current situation they might just be too scared to venture into a business and they just wait to let go of everything.
These are the three real options you have to use before venturing into a business to weigh the pros and cons to see if it will be ideal to delay, switch, abandon or go ahead with your business idea. COVID-19 has really affected many businesses so doing due diligence will help you save money rather than going blindly into an untapped territory which you unsure of.
By Tarie Manyonga a Financial literacy expert. If you found this post helpful please like, comment and share with others.