Why 2+2 Doesn’t = 4 in Money

Why 2+2 Doesn’t = 4 in Money

First let me preface by saying it’s not your fault. School doesn’t teach you money. It teaches you math (2+2=4), but in money 2+2=2.5. Why? Truth is there are a myriad of reasons, but to keep it simple, here are three:   1. Time value: The value of money diminishes over time. What a dollar could buy as little as a year ago, that same dollar cannot i.e. candy bars last year on average were $1.29, today they are $1.39 and up.   2. Cost of money: When you borrow money it usually has a positive rate associated with it i.e. 5,10, 20%. This is your cost of funds. We educate that the cost is not as important as the return. If it cost 20% but my return is 60% it may be worth it. Obviously, this is a case by case basis.   3. Cash flow: When you are extending credit to your clients or customers you are minimizing your access to utilize that money as you see fit. Therefore; you must consider and monitor your outstanding receivables vigilantly, as the longer it is outstanding the less buying power it has.   How does this apply to you?   Time value: by understanding this you can price accordingly to reduce diminishing return. When you have financial controls in place you will know your average outstanding receivables timeline, therefore you can plan accordingly. Create a budget and better manage sales cycles, inventory, production cost, etc.   Cost of money: always understand return v. borrow ratio. If your cost of funds is high make progress to adjust. Interest rates are in...