Finance for Business PDF

FINANCE ROLE OF FINANCE FOR BUSINESS - Business cannot survive without finance - Businesses need capital for a variety of reasons, including: 1. To start up or to expand the business 2. To pay for its day-to-day expenses such as fuel and labour costs 3. To provide a reward for the owner...

FINANCE ROLE OF FINANCE FOR BUSINESS - Business cannot survive without finance - Businesses need capital for a variety of reasons, including: 1. To start up or to expand the business 2. To pay for its day-to-day expenses such as fuel and labour costs 3. To provide a reward for the owners for taking the risk in starting the business 4. To pay taxes to governments and other authorities - Finance provides a means to measure the performance of a business - Common to judge the success of a business by the amount of profits that it makes - Can indicate if a business is at risk of collapsing - If a business doesn't have enough finances to pay day-to-day expenses, it may fail CAPITAL EXPENDITURE AND REVENUE EXPENDITURE - The expenditures carried out by a business are divided into 2 categories: **revenue expenditure** and **capital expenditure** - **Capital expenditure --** on items that may be used many times and used for more than one year, mainly non-current assets - Expenditure on items required to start up or to expand a business can be classified as capital expenditure - These will be shown in the business's **statement of financial position** or **balance sheet** includes the purchase of non-current assets - **A balance sheet** -- known as a statement of financial position - **Revenue expenditure** -- on the goods and services needed by a business that will be used up in the short-term as a normal part of its trading activities - Shown on a business's statement of profit or loss as it is part of a business's trading costs or expenses 2 TYPES OF SOURCES: - **Internal sources of finance** -- the source of finance that exists within a business, such as savings belonging to the owner of the business - from within the business - the major internal sources of finance are owners' investments, retained profit, sale of unwanted assets, sale and leaseback of non-current assets, and working capital - **External sources of finance** -- injections of funds into the business by individuals, other businesses, or financial institutions - Outside of the business - Ex. Bank loan - Bus INTERNAL SOURCES OF FINANCE PERSONAL FUNDS - **Personal funds** - finance for the owners of the business to provide the funds from their own resources - May involve the use of savings - If the owners are not willing to risk investment in their own business, it will be more difficult to raise finance from other sources SALE OF ASSETS - Sale of assets -- businesses can raise cash by selling assets that they no longer need - The sale of assets can raise a large amount of finance for businesses - A business may have land, buildings or other assets that are not required - A popular technique of raising funds in recent years has been **sale and leaseback** companies sell valuable assets and lease them back again READ PAGE 260 RETAINED PROFIT - Retained profit -- profit from previous years that have not been paid to shareholders as dividends - Profits that remain in the business and are not paid to owners - Major source of finance mostly for small businesses +-----------------------------------+-----------------------------------+ | ADVATAGES | DISADVANTAGES | +===================================+===================================+ | Using this source of finance may | Using this source of finance can | | avoid the need for a company to | have substantial opportunity | | sell further shares, enabling | costs -- that is, the business | | existing shareholders to retain | may lose out from not using these | | control if they continue to hold | funds in another way | | the majority of the shares | | | | Reinvesting retained profit may | | | not be popular with shareholders | | | who could receive higher | | | dividends if retained profit was | | | reduced | +-----------------------------------+-----------------------------------+ EXTERNAL SOURCES OF FINANCE 3.1 - Funds are needed to undertake even the most basic of activities - Day-to-day operations - Starting up a new business - Future growth and expansion - Finance plays a dual role in a company - Capital expenditure - Revenue expenditure 3.2 - Funds obtained from within the business - Easier to access by businesses that are already established - Personal funds - Retained profit - Sale of assets PERSONAL FUNDS - The major source of finance comes from personal savings - Sole traders most known for using it, maximize control over the business - Shows commitment to the business by investing in the venture - It's a signal to other potential investors - Adds to the business risk of the entrepreneur - Advantages: - The sole trader knows exactly how much money is available to run the business - Provides the entrepreneur with much more control over the finances than other finance options. There is no pressure in terms of paying back loans or respecting deadlines imposed by outside investors, who may change their minds and withdraw the funds at any time - Disadvantages: - This poses a large risk to the owners or sole traders because the could be investing their entire life's savings (may put strain on family or personal life) - If the savings are insufficient, it may be difficult to start or maintain a business, especially if no other sources are available RETAINED PROFIT - Profit that remains after a business has paid out dividends to its shareholders - Aka 'Ploughed-back profit', which is reinvested back into the business for growth purposes - Considered one of the most important long-term sources of finance for a business SALE OF ASSETS - When a business sells its unwanted or unused assets in order to raise funds - Usually, assets that are not being used or not needed anymore - Eg. Obsolete machinery or redundant buildings EXTERNAL SOURCES OF FINANCE - Money obtained from sources outside the business - Financial institutions, other businesses, or individuals - Share capital, Loan capital, overdraft, trade credit, crowdfunding, leasing, microfinance providers, business angles SHARE CAPITAL - Money raised from the sale of shares of a limited company - Buyer of shares = shareholders - Have the right to receive dividends in case of profits - Authorized share capital - Maximum amount that shareholders intend to raise - Stock exchange - A special share market where stocks of public limited liability companies are traded LOAN CAPITAL - Money sourced from financial institutions (banks, most likely) - Principal + loan - Interest is charged on the loan to be repaid - The installments are spread evenly until the full amount is paid off - The interest rates can be fixed or variable - Fixed interest remains fixed for the entire term of the loan repayment - Variable interest rates change periodically based on the prevailing market conditions OVERDRAFTS - When a lending institution allows a business to withdraw more money than there currently is in the account - Overdrawing from the account - The maximum overdraft amount is previously agreed upon and capped - Interest is only charged on the amount overdrawn TRADE CREDIT - An agreement between 2 or more businesses that allows the buyer to pay at a later date - The seller is de facto financing the buyer - No immediate cash transaction - No financial institutions involved - The credit period offered by most suppliers (trade credit providers) lasts from 30 to 90 days CROWDFUNDING - When a business venture or project is funded by a large number of people each contributing a small amount of money - Makes use of the vast networks of people who can be accessed online either through crowdfunding websites or social media - There is a set of financial targets to be reached - Must appeal to a sufficiently large group of potential contributors - Indiegogo, 40Billion, Fundable LEASING - A source of finance that allows a firm to use an asset without having to purchase it with cash - A business enters into a contract with a leasing company to acquire or use particular assets such as machinery, property, or equipment - Periodic or monthly payments cover the cost of the use of assets, as per contract specifications - Finance lease agreement - At the end of the leasing period, the lessee is given the option of purchasing the assets MICROFINANCE PROVIDERS - Institutions that provide banking services to low-income or unemployed individuals pr groups who would otherwise have no other access to financial services - The ultimate goal is to reach excluded customers and provide them with an opportunity to become self-sufficient - Small business or minority entrepreneurs - Microfinance services: - Microcredit -- provision of small loans to poor clients - Microinsurance - Savings and current accounts - Microfinance providers: 51Give, Bank Rakyat Indonesia, Faulu Kenya DTM, Kiva BUSINESS ANGLES - Affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for partial equity ownership - Invest in high-risk businesses with demonstrated potential for high returns or future growth - May provide one-time initial capital injection or continual financial support VENTURE CAPITAL - Risk capital invested in business startups or expanding small businesses, which have good profit potential, but do not find it easy to gain finance from other sources - Specialist organizations prepared to lend risk capital to business start-ups or purchase shares in them - Venture capitalists take great risks and could lose all of their money -- but the rewards can be great - Generally expect a share of the future profits or a sizeable stake in the business in return for their investment SUBSIDIES - Financial benefits given by the government to a business to reduce costs and encourage increased production (output): - Subsidies are most commonly offered to businesses which: - Might otherwise fail causing significant unemployment and regional imbalances - Need assistance to start up due to high costs or high risk of failure - Produce strategically important products e.g. agriculture - Need help to reduce costs to remain competitive against foreign rivals - Often subject to critique as encouraging inefficiencies - The full cost of production is not covered by producers but shifted to other instead - Inferior allocation of resources -- moving funds from successful to unsuccessful - Encouraging dependency SHORT AND LONG-TERM FINANCE - The Gold rule - Always match the type of finance to the type of asset being financed - Finance long-term assets with long-term sources - Finance short-term assets with short-term sources - Be mindful of investors' preferences - Short-term finance (12 months or less) - Money needed for the day-to-day running of the business provides the necessary working capital - Long-term finance (12 months or more) - Money needed for overall improvement of business (e.g. purchase of long-term fixed assets) FACTORS INFLUENCING THE CHOICE OF A SOURCE OF FINANCE - Purpose or use of funds - Match source of finance carefully to specific requirments - Cost - Interest payments, administering, opportunity cost - Status and size - The bugger, the better (it's a matter of reputation) - Amount required (the smaller the amount, the larger the alternatives) - Flexibility - How much can the company flex and stretch its financial muscle - State of the external environment (no control over factors) - Gearing - High geared if loan\>share, low geared if loan\ - Expenses that must be paid regardless of any business activity the firm engages in - Time-related paid on a recurring basis - Remain fixed in the short run - Ex. Rent, insurance, salaries, interest payments VARIABLE COSTS - Costs that vary or change according to the number of goods or services produced - Expenses that change in proportion to business activity - Volume-related, paid per quantity produced - Can be incurred both in the short and in the long run - Pegged to sales -- the higher the production, the higher the total costs \ [*Total* *Cost* = *Fixed* *Cost* + *Variable* *Cost*]{.math.display}\ DIRECT COSTS - Costs that can be clearly attributed to the production of specific goods or services - Can be traced directly to a particular product, department, or process aka Cost center - In general, direct costs include raw materials, direct labor, packaging INDIRECT COSTS - Costs that are not clearly identified with the production of specific goods or services - Not directly traceable to a given cost center -- difficult to assign to any cost center, in particular, aka overhead - In general, indirect costs include rent, office staff salaries, legal expenses, audit fees, insurance, advertising expenditures, security, interest on loans, warehouse costs TOTAL REVENUE - Money generated from normal business operations - The total amount of money a firm receives from the sale of goods and services, found by multiplying the price per unit by the number of units sold \ [*Total* *revenue* = *Number* *of* *Units* *Sold* \* *Cost* *per* *Unit*]{.math.display}\ - REVENUE -- a measure of the money generated from the sale of goods and services OTHER REVENUE STREAMS - Rental income -- collecting rent on property not currently being used for core business activities - Sale of fixed assets -releasing revenue from unused or underutilized assets - Dividends -- if the business is a shareholder in other businesses, it is entitled to a share of the profits - Interest on deposits -- if large sums of money are being held in a bank deposit, they can earn substantial interest - Donations -- in the case of charitable organizations, gifts can be significant revenue contributors ABSORPTION COSTING - An accounting method where all costs are absorbed into production - Operating statements do not distinguish between FC and VC DESCRIPTIVE STATISTICS - useful for presenting a large amount of data in a simplified and meaningful form - to  3.4 PURPOSE OF ACCOUNTS - final accounts are financial statements compiled by businesses at the end of the particular accounting period, such as the end of a fiscal or trading year - Internal stakeholders: shareholders, managers, employees - External stakeholders: customers, suppliers, the government, competitors, financiers, local communities For internal stakeholders: - Shareholders -- interested in knowing how valuable is the business they have invested in - Check how efficiently the business is investing capital - Performance of directors is also of interest: are they (still) motivated to manage the organization? - Managers -- used by managers to set targets - Helpful for strategic planning, decision-making, and operationalization - Employees -- sending signals about job security and potential pay rises For external stakeholders: - Customers -- is the supply of products/services reliable, and will it remain that way in the future? - Suppliers -- looking for information to negotiate better cash or credit terms with companies - Government -- is the business in compliance with lay and the tax code - Competitors -- is the company more profitable than the competition? Is it generating more sales revenue? - Financiers -- what is the company's credit standing? Is it able to service its debt? - Local community -- will there be job opportunities in the future? Is the business environmentally friendly? FINANCIAL STATEMENTS THE PROFIT AND LOSS STATEMENT or INCOME STATEMENT - Shows the record of income and expenditure flows of a business over a given time period - It establishes whether a business has made a profit or a loss, and how it was distributed at the end - Dynamic in nature (flow) - Divided into three parts: trading account, profit and loss account, appropriation account THE PROFIT AND LOSS ACCOUNT - Shows the profit before interest and tax, profit before tax, and profit for the period - To find out profit before interest and tax, subtract the expenses - NB: these are INDIRECT expenses (overheads), not directly linked to the units sold 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥 = 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 -- 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 − 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑖𝑜𝑛 𝑡𝑎𝑥 - ADVANTAGES -- shows if any profit is left over after accounting for costs - Simple - Clearly shows a business's strengths and weaknesses in regard to gross profits and costs - DISADVANTAGES -- shows the historical accounts of a business and does not guarantee future performance - Window dressing can occur in which the business legally makes their accounts see better - There is no standardized format in different countries THE TRADING ACCOUNT - Shows the difference between the sales revenue and the cost to the business of those sales - Top part of the income statement -- establishes the gross profit - **Sales revenue --** the income earned from selling goods or services over a given period - **Cost of sales/Cost of goods sold (COGS) --** the direct cost of producing or purchasing the goods that were sold during that period 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 + 𝑃𝑢𝑟𝑐h𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 APPROPRIATION ACCOUNT - Sows how the company\'s profit for the period is distributed - If there is profit, it will be distributed as either - Dividends to shareholders - Retained profit 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 ETHICS - Ethics in accounting is the study of moral values and judgments as applied in the accounting process - A code of ethics is therefore a set of principles, usually based on the firm's core values, that guides accountants on the standards that need to be upheld - A code spells out the 'rules' for behavior with respective pre-emptive warnings. - Research how ethics has influenced the finance and accounting practices of one or more organizations THE BALANCE SHEET - Financial statement that outlines the assets, liabilities, and equity of a firm at a specific point in time - It shows what the business owns, is owned, and owns - A snapshot of the financial position of a firm, used to calculate its net worth \ [*Assets* = *Liabilities* + *Stakeholders*^′^Equity]{.math.display}\ - - easy to understand - Provides plenty of information to debtors and creditors - Helps to ascertain the owners' equity - Very useful for decision-making - Disadvantages: - Doesn't mean a lot by itself, need another document to compare it against - The available information may be misleading, given that it only reflects a point in time - Only assets that count are those obtained through a transaction - Many items are reported at their historical cost basis,which has often little to do with fair market value - Resources of value that a business owns or that are owned to it - Non-current assets (Fixed assets) - Long-term assets that last in a business for a year or more - Buildings, equipment, vehicles, machiners - Some assets may be subject to depreciation (loss of value) over time - Current assets - Short term assets that last in a business for up to a year, but not more - Cash -- money received from the sale of goods and services, could be held at the bank or by the business - Debtors -- individuals who owe money to the business after having purchased goods or services from it - Stock -- aka as inventory includes raw materials, semi-finished, and finished goals \ [*Tatal* *asstes* = *Non* − *current* *Assets* + *Current* *Assets*]{.math.display}\ LIABILITIES - A firm's debts or what it owns to other firms, institutions, or individuals - Arise during the course of business operations and are a source of funding for the firm - Non-current liabilities - Debts or borrowing payable after a year or more long term liabilities - Bank loans and mortgages - Current liabilities - Short-term debts payable by the business within a year or less - Creditors, bank overdraft, and tax 3.5 page20image49731888 page22image49319584  3.7. CASH FLOW - The money that flows in and out of a business over a given period of time - Cash inflows -- the money flowing into the company's account - Cash outflows -- the money flowing out of the company's account - A key indicator of a firm's ability to meet its financial obligation [*Net* *cash* *flow* = *Cash* *inflow* − *Cash* *outflow*]{.math.inline} PROFIT - The positive difference between sales revenue and total costs - Another key indicator of the financial success of a firm's core operations \ [*Profit* = *Sales* *revenue* − *Total* *cost*]{.math.display}\ WHEN DIFFERENTIATING BETWEEN PROFIT AND CASH FLOW a. A business can be profitable but have little or no cash (insolvency), mainly due to: - poor collection of funds, possibly by allowing customers a very long credit period - paying suppliers too early and leaving little or no cash for operations - purchasing capital equipment or many non-current assets at the same time - overtrading -- purchasing too much stock with cash that is eventually tied up in the business - servicing loans with cash b. A business can have a positive cash flow but be unprofitable. However, cash could be: - Sourced from bank loans - Gained from the sale of a firm's fixed assets - Obtained from shareholders' funds WORKING CAPITAL - The money needed to pay for the day-to-day running costs of a business - Paying wages, purchasing raw materials, covering electricity and gas - Also known as *net current assets* \ [*Working* *capital* = *Current* *assets* − *Current* *liabilities*]{.math.display}\ - If current liabilities \ current assets, the business is liquid and cannot cover its short-term debts - In this case, the business will have to be liquidated WORKING CAPITAL MANAGEMENT - An assessment of the way the current assets and current liabilities are being administered - important to manage WC effectively (maximize gains from net current assets while maintaining optimal levels) WORKING CAPITAL CYCLE - The period of time between payment for goods supplied to a business and the business receiving cash from their sale - Shows movements of cash and other liquid assets in and out of the business - Keep the cycle as short as possible - The longer the interval, the greater the WC needs - High levels of working capital can be problematic as well CASH FLOW FORECASTS - A financial document showing the future predictions of a firm's cash inflows and outflows over a given period of time - Shows the expected receipts and payments on a month-by-month basis that have not yet occurred - Cash inflows: cash sales from selling goods or assets, cash investments from shareholders, borrowing from banks - Cash outflows: purchasing materials or fixed assets for cash, cash expenses (rent, wages), paying creditors, repaying loans, making dividend payments to shareholders CONSTRUCTING CASH FLOW FORECASTS - Operating cash balance -- the cash the business starts with every month - Also, the cash held by a business at the start of a trading period - Total cash inflows -- the sum of all cash inflows during a particular month - Total cash outflows -- the sum of all cash outflows during a particular month - Net cash flow -- the difference between the total cash inflows and total cash outflows - Closing cash balance- the estimated cash available at the end of the month - Found by adding the net cash flow of one month to the opening balance of the same month +-----------------------------------+-----------------------------------+ | BENEFITS | LIMITATIONS | +===================================+===================================+ | - Useful planning document as | - Unexpected changes in the | | it helps clarify the purpose | economy -- fluctuating | | of the business and provides | interest rates | | estimated projections for | | | future performance | - Poor market research -- being | | | way of in expectations | | - Provides a good support base | | | for business intending to | - Difficulty in predicting | | apply for funding | competitors' behavior -- | | | strategic interactions | | - Can help manages identify in | | | advance periods when the | - Unforeseen machine or | | business may need cash, and | equipment failure -- | | therefore plan according to | difficult to predict | | source it | | | | - Demotivated employees -- | | - Can help with monitoring and | reduced productivity can | | managing cash flow | reduce outputs | +-----------------------------------+-----------------------------------+  STRATEGIES FOR DEALING WITH CASH FLOW PROBLEMS - Reducing cash outflows - negotiate with suppliers or creditors to delay payment - Will prop up working capital in the short-term, but may affect future relationships - Delay purchase of fixed assets - may lead to lower efficiency and higher costs in the long-term run - Decrease specific expenses that should not affect production capacity (e.g. advertising) - May decrease future demand - Look into sourcing cheaper suppliers - this may compromise the quality of the finished product - Improving cash flow - Insist that customers pay with cash only when buying goods - May lose those customers who prefer/can pay only on credit - Offering discounts or incentives can encourage debtors to pay early - You end up with less cash in the end (it will be on time, though) - Diversify its product offering - Comes with higher costs and no clear guarantee of sales LOOKING FOR ADDITIONAL FINANCE SOURCE - Sales of assets -- get rid of what's obsolete or just sitting around unused - Arranging a bank overdraft -- giving the company some room to breathe comes at a high price (interest payments on the loan to go up) - Sales and leaseback -- sell your assets to release some cash and then hire them back - Debt factoring -- recover a portion of the funds and let someone else do the dirty work - Grants and subsidies -- look for governmental/EU support, though it comes with strings attached 3.8 INVESTMENT APPRAISAL - The quantitative techniques used in evaluating the viability or attractiveness of an investment proposal - Versatile methodology - attempts to assess and justify the capital expenditure allocated to a particular project - aims to establish whether a particular business venture is worth pursuing and whether it will be profitable - assists businesses in comparing different investment projects - Three particular methods - Payback period - Average rate of return - Net present value PAYBACK PERIOD - Estimates the length of time required for an investment project to pay back its initial cost outlay \ [\$\$\\text{Payback\\ period\\ }\\left( \\text{PBP} \\right) = \\frac{\\text{Initial\\ investment\\ cost}}{\\text{Annual\\ cash\\ flow\\ from\\ investment}}\$\$]{.math.display}\ +-----------------------------------+-----------------------------------+ | ADVANTAGES | DISADVANTAGES | +===================================+===================================+ | - Simple and fast calculate | - Doesn't consider the cash | | | earned after the payback | | - Useful, especially in rapidly | period -- it could influence | | changing industries | major investing decisions | | | | | - Helps with cash flow problems | - Ignores overall profitability | | | of an investment project | | - Less prone to inaccurate of | | | long-term forecasting | - The annual cash flow could be | | | affected by unexpected | | - Easily understood and used | external changes -- could be | | | negatively impact the payback | | | period | +-----------------------------------+-----------------------------------+ AVERAGE RATE OF RETURN - Measures the annual net return on an investment as a percentage of a capital cost - Assesses the profitability per annum generated by a project over a period of time \ [\$\$\\text{Avarage\\ rate\\ of\\ retunr\\ }\\left( \\text{ARR} \\right) = \\ \\frac{\\frac{(Total\\ returns - Capital\\ cost)}{\\text{Years\\ of\\ usage}}}{\\text{Capital\\ cost}} \\times 100\$\$]{.math.display}\ +-----------------------------------+-----------------------------------+ | ADVANTAGES | DISADVANTAGES | +===================================+===================================+ | - Shows the profitability of an | - Likely to be forecasting | | investment over a given | errors since it considers a | | period of time | longer time period of useful | | | life of the project | | - Unlike the payback period, it | | | uses all of the cash flow in | - Does not consider the timing | | a business | of cash inflows -- two | | | projects with the same ARR | | - It allows for easy comparison | can have wildly different PBP | | with other competing projects | | | for better allocation of | - Doesn't consider the effects | | investment funds | of time value of money | | | | | - A business can use its own | | | criterion rate and check this | | | with the ARR for a project to | | | assess the viability of the | | | venture | | +-----------------------------------+-----------------------------------+ THE VALUE OF MONEY - Investors prefer to receive money today rather than the same amount of money in the future because a sum of money, once invested, grows over time - The principle of the time value of money means that it can grow only through investing so a delayed investment is a lost opportunity - The formula for computing the time value of money considers the amount of money, its future value, the amount it can earn, and the time frame - If not invested, the value of the money erodes over time - Inflation has a negative impact on the time value of money because your purchasing power decreases as prices rise COMPOUND INTEREST  DISCOUNTING  3.8. 3.9.