How Does the Time Value of Money Affect Businesses?

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The time value of money is important to businesses because it helps determine a company's feasibility in making worthwhile investments without decreasing output. A business is only viable if it meets consumers' needs, survives economic fluctuation and increases in value over time. The time value of money encourages business owners to make wise investments that have desirable long-term returns. Several critical factors influence business investment growth without sacrificing productivity.

Net Cash Flow

Evaluate your company's net cash flow to determine if investment funds are available. Interest on investments allows your company's monetary value to grow over time. Subtract cash payments from cash receipts and include tax deductions, like depreciation and business exemptions, in your net cash flow calculation. The remaining funds are what you, as a business owner, can invest without negatively affecting your business operations. Money can only grow over time if your investments don't negatively impact your ability to produce necessary current output.

Opportunity Cost

Consider the opportunity cost associated with increasing your business investments. According to McGraw-Hill Higher Education, "Saving or investing a dollar instead of spending it today results in a future amount greater than a dollar." Opportunity cost requires you to forgo current benefits you could have received by making alternative choices that increase future monetary gain. In business, every time you spend, invest or borrow, you must see the time value of that money as an opportunity cost. For example, the expense of repairing current equipment rather than buying new equipment may free up funds for investing. The time value of saving and investing that money has positive long-term results.

Interest Calculations

Calculate the benefit of earning interest on your investments. Multiply your investment amount times the annual interest rate times the time period you plan to keep the investment without cashing it out. The interest you earn is equal to the increased value of your money over time. The total value of your investment is not available immediately, but your business profits in the long run. The time value of money affects businesses because it encourages owners to sacrifice now for future monetary growth.

Business Planning

Determine short-term needs and long-term goals so the time value of money doesn't hinder business viability. The time value of money can negatively affect a business if investments take priority over upgrades. For example, a film camera business in the early 1990s might have forgone interest-bearing investments to pay for equipment upgrades necessary for producing digital cameras. Evolving industries often require immediate expenditures to meet short-term demands. The time value of money takes second place to immediate monetary expenses if the survival of your business is dependent upon spending the money now.

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