Value of Time and Money

[buckeyebri]

Need some help if anyone knows how to do this. I am trying to show a potential client the value that our software brings through shortening the time of the process and allowing them to collect their monies faster.

If I can reduce the time it takes them to get through their business process by 60 days then theoretically they can invoice that much faster. Is this then a present value or a future value calculation? Is their a daily rate I would use for the monies?

Thanks in advance for any help....

 

[calibuck]

Bri,
It's been awhile, but it's more of an internal rate of return for the investment in your software.

The investment cost plus installation, is the negative. For the increase in cash flows, you will have to demonstrate how much they will be able to collect faster (speeding up cash flow) per year. If it costs $10,000 and they will collect $3,000 per year faster than before, the payback is 3.3 years before they recoup their investment. Now if you take it for ten years, then that would look like ($10,000) = +$3,000 (yr 1) + $3,000 (yr 2) and so on. Most any calculator will do that, but I still use the HP13.....

Add to it the depreciation write-off of the software (what, divide by 3 years?), and take that on an aftertax basis (use your client's marginal tax rate). I am assuming that the sales are taxed as booked, and this collection process (accounts receivable I believe) is already after tax, so that collection is already taxed, so it comes as a whole number....deduct from year 2(?) your service charge(s) on the software to show the total costs of owning/using it, and net the numbers (remember to reduce the service charges to an after tax basis to compare apples to apples...

You were right, it is a time value of money, and the IRR rate illustrates that, and discounts the cash flows against the initial capital outlay. Your client can compare that to what they would spend on another capital investment to 'rank' it against those, and take the highest returns against the amount of investment capital they have.

Thank you OSU MBA program......if I've made any errors, I'm sure that you good folk will correct me for Bri's sake......or anyone wants to expand on the example...


:gobucks3::gobucks4:

 

[MaxBuck]

If you seriously intend to try to sell something based on IRR, you're in the wrong business.

Nobody understands IRR, least of all the people who commonly use the term. If you can't pitch this in terms of either payback time or ROI, you're sunk.

 

[buckeyebri]

Bri,
It's been awhile, but it's more of an internal rate of return for the investment in your software.

The investment cost plus installation, is the negative. For the increase in cash flows, you will have to demonstrate how much they will be able to collect faster (speeding up cash flow) per year. If it costs $10,000 and they will collect $3,000 per year faster than before, the payback is 3.3 years before they recoup their investment. Now if you take it for ten years, then that would look like ($10,000) = +$3,000 (yr 1) + $3,000 (yr 2) and so on. Most any calculator will do that, but I still use the HP13.....

Add to it the depreciation write-off of the software (what, divide by 3 years?), and take that on an aftertax basis (use your client's marginal tax rate). I am assuming that the sales are taxed as booked, and this collection process (accounts receivable I believe) is already after tax, so that collection is already taxed, so it comes as a whole number....deduct from year 2(?) your service charge(s) on the software to show the total costs of owning/using it, and net the numbers (remember to reduce the service charges to an after tax basis to compare apples to apples...

You were right, it is a time value of money, and the IRR rate illustrates that, and discounts the cash flows against the initial capital outlay. Your client can compare that to what they would spend on another capital investment to 'rank' it against those, and take the highest returns against the amount of investment capital they have.

Thank you OSU MBA program......if I've made any errors, I'm sure that you good folk will correct me for Bri's sake......or anyone wants to expand on the example...


:gobucks3::gobucks4:

Thanks Cali!

 

[buckeyebri]

If you seriously intend to try to sell something based on IRR, you're in the wrong business.

Nobody understands IRR, least of all the people who commonly use the term. If you can't pitch this in terms of either payback time or ROI, you're sunk.

It is all part and parcel of ROI and payback components that we are putting together. It is very difficult from the standpoint that the potential customer is a government agency and they don't necessarily value money in this way. Fortunately, in some respects, that times are tough governments are looking for ways to gain revenues quicker (don't laugh). Currently they have a manual system and are losing monies that aren't getting invoiced or aren't getting collected because they are being "lost".

 

[sandgk]

It is very difficult from the standpoint that the potential customer is a government agency and they don't necessarily value money in this way.

You can lead a horse to water but you cannot make him drink.

(You can lead a man to slaughter, but you cannot make him think).