The Value of Time in Making Business Decisions is Priceless…Or Is It?
Ever come to the disappointing realization that if you had acted on a problem sooner, you could have saved yourself a lot of money? Or worse yet, made a lot of money?
It happens quite often as we frequently forget to include the value of time when making business decisions. Attempting to save money without evaluating the true cost of implementation (which can be significantly greater than the anticipated savings) can significantly impact a business. The true cost doesn’t appear on the company’s profit and loss statement but does result in a decrease in net income. This is called “lost opportunity cost.”
Many business owners spend a great deal of time inadvertently creating lost opportunity costs. One example is when a young business needs working capital but doesn’t qualify for bank financing. The business owner will spend months going from bank to bank only to be repeatedly turned down because the business simply cannot meet banks’ lending criteria such as length of time in business, tangible net worth, profitability, debt to worth, and other financial ratios and assessments. This time (which is time taken away from building the business) and the associated out-of-pocket expenses are part of lost opportunity costs.
Established businesses are not immune to creating lost opportunity costs either when seeking financing. There is often confusion in trying to identify the type of capital needed and the risks and cost factors associated in obtaining it. In the process, some business owners become so obsessed with the capital’s price tag that forget what they could do with that money and how their businesses could benefit from it sooner rather than later.
By way of example, let’s say that a business is doing $1M in sales, and with $1M in additional working capital it could increase business by 50%. Let’s also assume that it has a 20% gross profit and at $1M a month is just about at a break-even point.
If the company did $500K more in sales per month, that’s $6M per year for an increased gross profit of $1.2M. At that level of increase, the business may not incur much more in expenses, perhaps another $500K. So now it has $700K of net profit that it didn’t have before.
Let’s also say that charges for the $1M in additional working capital are $200K for the year. That leaves $500K in new, net profit.
The business owner may be able to get the additional capital at a lower cost, but if it takes up to six months to secure, the firm has lost six months of potential profit – half of the $500K or $250K. Waiting for a lower rate may actually cost more than it would save. And that doesn’t count the time the business owner has put in that’s time away from building the business.
In this example, it’s plain to see the magnitude of loss and the potential for significant profit when a more timely decision is made, even with an increase in financing costs.
Lost opportunity cost is a soft cost that doesn’t show up on a company’s financial statements. But it can be the difference between just getting by and making a reasonable profit. It may even significantly impact the future success or failure of the business.
How can you eliminate or at least lower lost opportunity costs? You need to become more financially aware – not an expert, just more aware when it comes to business financing issues. The following are some steps to take:
Talk with your banker to understand the parameters and limitations under which banks operate. If one or two banks can’t or won’t provide the financing you need, running around to other banks probably won’t get you the results you’re looking for.
Understand alternate financing avenues and under what circumstances you would use them. Alternatives include venture capital, factoring and asset based lending.
Align yourself with experts – CPAs, attorneys and business consultants who can refer you to the right people when you need them.
Keep the proper perspective when evaluating your options and financing proposals. Remember, the cost of funds is not necessarily the most important consideration.
Once you feel comfortable with your options and how to evaluate them, make timely decisions and act on them quickly. This will allow you to turn your company’s dilemmas into opportunities.
About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.
As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.