Is Time Money?
Just for some light entertainment, here’s a question to test your sense of time and money.
Suppose you own a business that produces very stable cash flows.
Extremely stable, in fact: Let’s say the cash flow produced by the business is $1000 per day, seven days a week, week in week out. The business is expected to continue to chug along in this way indefinitely.
The only slight annoyance is that the cash takes a little while to find its way into your bank balance. Some complex logistics means that each day’s cash flow takes a full 3 days to show up in your bank account. Despite your best efforts, you can’t improve this aspect of the business.
However, a business consultant tells you he can improve the logistics so that cash will only take two days to reach your account instead of three.
Assuming he’s right, how much is his advice worth to you?
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To learn more about our funds please click here.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Chris B
:
I just want to say that “Time is money” is an incorrect statement. Time is worth much more than money. Time is an irreplaceable resource. Don’t forget it!
Don’t think this point is trivial. It is very important. Time is worth much more than money. I wish I knew that 20 years ago.
Matthew Rackham
:
If the process can be protected & licensed it’s worth a lot
It’s worth many times the value of this hypothetical business
brian dawes
:
I’d say, back of envelope guesstimate, that the advice would be worth somewhat less than his fee…..depending somewhat on when he wanted paying!
Tim Kelley
:
Quite a few alert readers were quick to point out the answer is $1000, with Jack Ross first in. The easy way to get there is to compare the two cashflow scenarios side by side; the harder way is to calculate present value for the perpetuity stream and multiply by the time value of a single day at the same discount rate.
Looks like we’ll need to make it a little harder next time!
Andrew Legget
:
looks like i was too late to the party. The other thing is that it should lead to higher asset turnover so all things remaining the same would result in an increase in ROE.
martin evans
:
The advise isn’t worth much-one days takings ($1000) by the current interest
rate (say3%) for a full year. ie $30.
If you can’t invest the extra $1000 then the advise is not worth anything.
harry rankin
:
Assume a discount rate of 10% and 365 days in the year. The difference between the discounted cash flows in the two periods results in a npv increase of 27 cents. Just my 27 cents..
fyang1024
:
Suppose discount rate is R, the difference would be 1000/(1+R)/(1+R)
leekadish
:
I’d say his advice is worth $1000 to you.
Consider the following cash flows:
(1) With his advice: Day 1 = 0, Day 2 = 0, Day 3 = $1000, Day 4 = $1000, Day 5 & every other day indefinitely cash flows = $1000.
(2) Without his advice: Day 1 = 0, Day 2 = 0, Day 3 = 0, Day 4 = $1000, Day 5 & every other day indefinitely cash flows = $1000
Now you subtract cash flows (2) from cash flows (1) and you’re left with $1000 surplus on day 3. Every other day (from day 4 onward) the net cash flow will be zero. For example: day 4’s net cash flows will be: $1000-$1000 = 0 as will every other day going forward into the indefinite future.
Strictly speaking you should also discount the future value of $1000 to present value to account for the time value of money. The value of his advice is likely to be worth slightly less than $1000 in present value terms.
Yes, time is money.
Phil Crossan
:
For one day you’ll get $2000 instead of $1000, so the advice is worth up to that amount.
Jack Ross
:
If he can do it, the daily cash balance of the company will go from:
0, 0, 0,1000, 2000, 3000, 4000, 5000, 6000
To:
0, 0,1000, 2000, 3000, 4000, 5000, 6000, 7000
So on any given date, the balance of the company will be $1000 more. After a 30-day month the balance would be $28K instead of $27K (3.7% increase). Next month would be $58K instead of $57K(1.7% increase) and this percentage will continue to decrease each month.
So unless the company puts the money it makes back into the business to grow earning, the advice given isn’t worth that much. But if it does, the value of this advice will be determined by the rate the company can convert this extra cash to profits.