By. Russ Allred MBA www.russallred.com
A tenant applied to live in a newly constructed apartment. The landlord denied the application because the tenant was habitually late paying rent in their current apartment. The tenant was irritated because they had always paid a $25 late fee, and thought that was ample compensation for a few days wait. The landlord explained that it costs $200 in time every time he has to make an additional deposit. The conflict here is between the Time Value of Money and the Money Value of Time.
Time Value of Money is the term for the opportunity cost of not having cash when you should or the discount charged for the use of money over time. For example, it is often better to have $100 today than to have $105 in a year. The discount rate or interest earned for waiting a year is 5%. All loans and most investments can be evaluated by the Time Value of Money.
The Money Value of Time is seldom considered among entrepreneurs, but grows in importance as the business becomes more successful. A start up entrepreneur’s time is less valuable than that of a successful business person. It has been said that Bill Gate’s time is so valuable, it isn’t worth the time for him to stoop down and scoop up a $100 bill. In the case of Gates, that is probably true for $500.
Entrepreneurs must learn to capitalize on both of these principles. Step 1 is to practice delegating. If you are running your register, then you are paying your cashier too much. Delegate each activity to the lowest paid employee possible. Step 2 Make policies to protect you from their incompetence or potential dishonesty. Step 3 Determine the value of your time so you can compare what you are doing against what you should be doing. For example, should you be taking the deposit to the bank or negotiating a new loan? What is a better use of your valuable time? Step 4 Invest your excess capital where it will earn the highest yield. Often that is back into your own business, but you should know if an alternate investment will yield more. You should also be making more money from your business than if you got a job and invested your initial capital into something else, like an apartment building.
You may have heard Robert Kiyosaki, author of Rich Dad, Poor Dad, say on the radio, “There is no job security. You can’t afford not to be an entrepreneur.” If you understand these two principles, you will know why.