Implicit costs are costs incurred by companies that are not seen on any ledger. These costs do not involve a cash exchange but are still an important element of any business cell and should be taken into account when calculating profit and loss. The most common examples of implicit costs involve time and foregone revenue, or the opportunity cost incurred when a business chooses one course of action over another.

For instance, when a business has the option to use its limited time, money and resources to pursue two different options, the opportunity cost of investing its resources in one project instead of another is an example of an implicit cost. Specifically, the implicit cost of taking the one option is the potential revenue or gain that the business foregoes by not selecting the other option.

Another example of an implicit cost is a small business owner who may forgo a salary in the early stages of operation to increase their revenue. By choosing to forgo salary in order to expedite growth, the business incurs an implicit cost which is the salary amount the owner forgoes.

The importance of accounting for implicit costs is that it gives an accurate snapshot of how much a business is truly making by investing its limited resources into a project. For example, if a business is presented with two different investment options, the best decision would be to invest in the project that offers the greatest net gain — when the mentioned implicit cost is taken into account.

Implicit costs act as a kind of a shadow to any business operation, as they help to illustrate the cost of the time, resources and revenue that go unregistered. Accounting for these cost types ensures that decision makers are presented with a holistic picture and are able to make decisions based on the net present value of their investments. As these costs may not be obviously visible, they should be included in any businesses operations or projects budget.