What keeps businesses from investing in new equipment to improve production or in recruiting better people? These types of investments are meant to provide companies with better returns over the course of time. But why do many business owners forego good investment deals that usually fall under capital expenditure? One possible reason is that most deals only look good on paper.
It’s always best to research and do the math when shelling out a load of money that would impact the business’ cash flow at present and in the future. Would expanding the business to a category that may have been recently heavily taxed by the Tax Reform for Acceleration and Inclusion or TRAIN Law, still be a good idea? Are the current players in the category still doing well considering the impact TRAIN has had on many businesses, and more so now that it’s nearing its second year of implementation? With the information at hand on the current state of such category, your business needs to have a competitive edge over the competition. More importantly earn profit, if not in the next three months, at least until cash flow allows the business to do so.
Another pivotal factor in business decisions is the time value of money. We know for a fact that the value of money changes over time. Inflation is the first to blame when it comes to rising market prices like oil, which is so much higher now than it was ten years ago. This concept is common knowledge, but for business owners the question in focus is, which investment will give the most value and which one should be avoided?
Time Value 101 for Business Owners
There’s actually a way for business owners to determine the impact of their investments and business decisions involving cash spending accurately. The two methods of doing this is through the Finance concepts of Present Value and Future Value. There are a lot of entrepreneurs who have been winging business decisions based on gut feel, which may have been working to their advantage, but if a company has a Business Planning or Finance Group these Finance concepts would already be set in motion.
Picking up on the discussion on the time value of money, calculating for the Present Value of an investment can save a business owner from negative consequences before investing. For example, a new high-speed machine is supposed to lessen manpower to five instead of eight people and increase output by twice the volume after six months, therefore improving efficiency in the long run. The Present Value should be worth the output produced over time. The bottom line analysis should lead business owners toward deciding to take on an investment (without discussing the formula), only when the present value is less than what it stands to gain within the agreed period of the investment. In the case of a machine that provides better output, the margins gained over the calculated period, say five years, should be more than the cost of the machine spent when it was purchased.
On the other hand, the significance of an investment’s Future Value is getting an accurate calculation of money gained after a period of time for the investment. For example, business owners should earn more for a hypothetical investment of P10,000 after five years. If the money earned is not more than the money spent on the investment, it would be better not to invest. This would help in deciding where to put the extra cash when an opportunity to increase its value comes knocking.
Quick Tip to Resolve Tight Cash Flow
In cases where an entrepreneur’s business may be a brand new startup and he or she would eventually encounter bigger business decisions such as those discussed above, it would be best to look up the concepts discussed to be guided with more accuracy on the actual rate of losses and gains the business could potentially stand to lose and win, respectively.
For those who have been going with their gut when it comes to making financial decisions so far, challenges in the slow turnover of invoices and purchase orders have most likely already been a recurring problem. With the growing shift to a credit economy, what does one entrepreneur do to lessen the days in receiving cash?
One way not to worry about negative cash flow is to study if it’s possible to give customers a 5% discount for paying in cash. The cost of earning less now is actually better than getting paid three to six months after, when the business would have been left with few resources or no choice but to take on bad loan that might provide no benefit whatsoever.
It’s also best for businesses to set long-term goals. If at any point the investment, expansion, upgrade, or loan a company is about to take on does not align with company’s goal, then it might not be good to pursue it. If the goal is to increase the business’ cash liquidity, it’s best to make sure that the Future Value is worth more than the money spent upfront.
Where to Get Fast Financing for Investments
Seeking financing for businesses is not just a quick fix for cash flow hurdles. It’s actually a strategy employed by corporations, not just Small to Medium Enterprises (SMEs). When planned and well-researched, it provides the best benefits for SMEs.
Short-term financing these days provide friendly rates and can be availed more conveniently compared to traditional financing services. The vetting to approve loans is just as thorough, but the requirements are much less. For businesses looking for faster options, it’s best to go online and consider the FinTech industry.
First Circle offers short-term business financing services to assist SMEs who need to fill temporary capital gaps. Through our business loans, businesses are given more opportunities to expand their operations and support their growing clientele. First Circle has also been lauded by the Bangko Sentral ng Pilipinas, and its partners — GoNegosyo and the Department of Trade and Industry — for supporting the growth of Filipino SMEs and advocating inclusivity.