The most challenging thing for young entrepreneurs is making the most of their money. It entails having a sound idea of your cash flow so you can use excessive money for growth purposes. Most businesses might be in a position where they can provide optimal services or products to their customers.
Now they would want to find the answer to the question, “How do I take my business to the next level?” The best way to do so is to use the time value of money to your benefit.
In this article...
- What is Time Value of Money?
- How Does Time Value of Money Work?
- How Can Equipment Financing Help My Business Reap Rewards of TMV?
- Investing my Business’ Cash to Maximize Compounding Rewards
- Enter: Beacon Funding To Help You Make the Most
We have covered this topic comprehensively in this article and in our video to give you a better idea. You can also talk about your business goals with a consultant so they can help you achieve them.
What is Time Value of Money?
The time value of money is the concept that the amount you have today will be worth more in the future since it can help generate additional funds. It is a basic principle that most retirement planning advisors tell people about. The sooner you invest in these retirement plans, the more time your money has to accumulate a higher interest. This process is usually known as compounding.
Keep in mind that compounding isn’t just related to retirement plans like 401(k). It can also have a significant impact on your business. You can reinvest some of the cash into avenues allowing your business to harness the power of compound interest.
How Does Time Value of Money Work?
The formula for calculating the time value can be challenging (as shown in the picture below). There are different elements of this formula that you need to understand first. Here is a comprehensive overview of those components:
The basic idea of the formula is to multiply the interest rate you’re getting by the amount you have invested. It will take factors such as the number of times you compound interest per year and how long you’ll be compounding it.
The more time you give to compounding, the more worth your existing money will have in the future. A basic understanding of the factors impacting your money’s growth is vital.
However, it might not be easy for everyone to calculate the overall compounding value independently. We suggest that you use an accurate calculator to ensure you have the right numbers in a matter of minutes.
Compounding Interest at Work
Having a real-life example can make it easy for you to understand the power of compounding. Therefore, we would use Beacon Funding’s resident mythological example character, Charlie, so you can better understand how compounding can help your business.
Let’s say Charlie has a small business, and by the end of the financial year, they are able to generate $15,000 in profit. This amount is obtained after subtracting all the expenses, such as salaries, utility bills, etc. Charlie plans on continuing his business for the next 3 decades until they reach retirement age. So, they can choose from either one of the two options:
- Option 1: Put the entire profit into expanding the company’s operations
- Option 2: Take 2/3 of the profit ($10,000) as a bonus at the end of the financial year and reinvest the rest of the amount into the business.
Charlie thinks that they can reinvest profit in a few areas of the business, and it can help them yield a 10% annual interest every year on their investment.
So what do the numbers tell us?
If they choose the first option, the interest Charlie will get on their initial $15,000 will turn their investment into $261,742 after three decades. But this is only possible if they continue to earn 10% every year and make decisions that can help them expand their operations!
Strategic decisions play a critical role in helping you increase your revenue to drive business growth. If they choose the second option, then Charlie will eventually get $87,248 in 30 years for the $5,000 they have invested, given that the conditions remain the same.
There is a wide range of different factors that can help Charlie’s business to either expand or go in a completely opposite direction. This simple example shows how taking out a $10,000 bonus costs Charlie and his business around $174,494!
How Can Equipment Financing Help My Business Reap Rewards of TMV?
As a business owner, you might come across times when you would have to replace or get a new piece of equipment. In that case, you would have to choose either one of the two options. The first one requires you to have a sufficient amount of cash in hand to cover the cost of the equipment you plan on buying.
If you don’t have sufficient funds to facilitate the deal at the moment, then you would need to save money for the later period. On the other hand, you have the option to finance your equipment through a specialty lender. Keep in mind that there are drawbacks and benefits to both options.
However, if you use the money in hand to purchase the piece of equipment, then it could seriously impact your business’s liquidity. It would mean that you might not be able to invest in different strategic avenues or cover any emergencies.
The financing option will allow your company to use the cash it has for different investments. They can improve their revenue by expanding their operations. So, it would be a relatively better option for you to go for financing.
Investing my Business’ Cash to Maximize Compounding Rewards
If you want to invest your business cash to maximize compounding rewards, then you need to do it in a well-thought-out manner. Your investments should align with your business objectives and goals.
Here are a few things that you can ask yourself before allocating the money:
- Which areas of my business have growth potential?
- What avenues can make quick money with minimal cash investment?
- How will I check the investment’s efficacy? What are the benchmarks that I have set for it?
- Is the growth rate fine for me, and am I in the position to scale my business now?
- Do I have the emergency funds to cover an unexpected expenditure?
These answers would vary from business to business since there is no one-size-fits-all solution. You should understand how your business can leverage its profits to maximize the return on your investment. Nevertheless, we’ll give you a few examples of where your company can invest for long-term growth:
- Making your plant or machinery more technically advanced - If you can obtain and maintain the right plants, equipment, or machinery for your business, then it can improve overall productivity. Consequently, it will lay a solid foundation for your business to grow.
- Increasing your marketing efforts - By marketing your brand to your potential customers, you can increase your overall brand image and recognition. Therefore, marketing will help you get a competitive edge over others in this hyper-competitive market. Depending on your target audience, you can invest in traditional or digital marketing.
- Improving the overall sales process - If your sales team has access to robust tools, such as CRM, it will give your business a springboard to grow. They can provide better services to potential leads, allowing them to convert into paying customers.
- Training your current workforce - Training your workforce will allow you to enhance their skills, improving RPE (Revenue Per Employee). Furthermore, it will also help you bring down your employee turnover rate. This means you won’t have to spend time and money finding new employees.
- Expanding your team - Bringing onboard new people will allow your business to explore different avenues. As a result, it can help you increase the overall business operations. However, you need to strategically grow your workforce, regardless of hiring an in-house team or outsourcing some elements.
Enter: Beacon Funding To Help You Make the Most
If you want to maximize the time value of money, then you have to use it smartly. And the best way of doing so is by getting screen printing equipment financing. However, there are a few things that you need to consider, such as account ownership, finance, and operational costs first. You can easily collaborate with a financing company such as Beacon Funding if you have a solid credit track record and a stable financial position.
SCHEDULE A MEETING NOW
If everything is fine, it will only take 24 hours for us to reach you. Working with Beacon Funding has many benefits, such as an easy and flexible financing process. This standard applies to all, no matter what type and size of business you run.
With us, you’ll find it easier to get the best financing plans to meet your business needs while earning compound interest on your money.