DON'T IGNORE THE TIME VALUE OF MONEY
Here's how it works: Typically, the money you currently have in your hands is worth more than it would be years from now. That's because you're able to spend or invest the funds now instead of waiting to receive them. In other words, there's an "opportunity cost" attached to any delay.
For example, let's say that you're entitled to a $100 payment. If you receive the $100 now and you're able to invest it at a 5% annual interest rate, you'll have $105 after one year. Assuming you don't need the money for expenses, it will be worth $110.25 after two years, and so on. This amount is known as the "future value" of the money.
Similarly, you can compute the "present value" of money. Suppose you won't receive the $100 payment until one year from now. The value of the money must be discounted due to the opportunity cost. Using the same 5% interest rate, the present value of the $100 you'll receive a year from now is $95.24 ($100 value divided by 1.05).
The future value of money may also be increased by inflation and decreased by deflation. The opposite is true for the present value.
It's easy to see how this concept can affect your business. Accelerating payments from customers will enable you to better meet your current obligations and provide reserves for investment. On the other hand, delays hamper cash flow, and reduce the opportunity for investment. Computing the time value of money may also encourage your business to lease, rather than buy, assets.
At the very least, the time value of money should be factored into business decisions. For help in running the numbers and analyzing the results, give us a call.