8.6.17 – Time Value of Money: Are you sure you are doing it right?
We all have ideas on how to make our business bigger, better or more efficient, and if they’ve not already been implemented it’s usually because money is an issue. Whether that’s because you don’t have it, or you’re not sure if the investment is worthwhile, considering the Time Value of Money should help you make the best decision.
Time Value of Money (TVM) is the idea that cash in your pocket now is worth more than the same amount in the future, due to its potential earning capacity. Not to be confused with the mantra ‘time is money’ – which is only true if you’re being genuinely productive – this core principle of finance holds that, provided money can earn interest, it is worth more the sooner it is received.
Of course, that is a key principle by which The Invoice Market operates, but you might be wondering how such arcane financial theory relates to your business. Sure, you’d rather have money to spend, but you believe in your business and you’re happy to make whatever sacrifices are necessary to make it succeed. Arguably, that means the TVM effect is multiplied in the case of a dedicated entrepreneur or a budding small or medium sized enterprise (SME).
Invest in yourself
You don’t have to be an accountant to see that $10,000 in your bank account, even in these low-interest times, will be worth a bit more in 12 months’ time. Say $10,250, and naturally the growth is compounded as further years pass.
But what if you invested that $1,000 in your company? Coupled with your hard work and inspired entrepreneurship, that $10,000 investment could be worth $20,000 or $30,000 next year because it helped your business fill an important order, reach a new market, or upgrade to a more efficient way of working. Therefore, we would argue that the time value of money is multiplied in the hands of a capable entrepreneur.
Using TVM to evaluate investments
When large corporations are considering an investment, for example in a new production line, they use the theory of TVM to work out if it’s worthwhile: if a $1m investment will yield $1.1m in savings in five year’s time, it sounds worthwhile on paper. But when that $1.1m is converted back to present day values (or alternatively, when you consider what that $1m could do in a safe investment elsewhere) the production line upgrade may not look like such a good idea.
This is the standard use of TVM and one that SMEs would be well advised to consider too. However, most smaller business owners believe in themselves and their enterprise, and know that their growth potential far outstrips that of money sat in the bank. Most could think of half a dozen investments that would yield a better return that 5% a year, or even 10%.
Get money sooner, invest earlier
If you have ideas that would help your business, but think you lack the money to make them happen, tim can help. The fact is, you probably do have the money… in theory. The problem is, that most of your clients don’t pay for your goods or services until a month or three after receiving your invoice. You can’t really blame them: they’re using the Time Value of Money to their advantage.
On the other hand, if you could get cash for your invoices now, you could invest it in your business and it will hopefully be worth much more in the future. That’s where The Invoice Market can help. Using our fee-free flexible invoice funding system, you can sell as many of your invoices to tim as you want, and get cash within 24 hours. What will that money be worth, when it’s working for you?