My brain hurts - term change

[Legend83]

If I was looking to change a customers terms to pay me weekly instead of monthly what would be the cash benefit?

Annual revenue x cost of capital x ???

It's the change in duration bit that's making me sleepy.

Is it 21/365?

Or 7/365 * 12?

[surveyor]

fk all as they will ignore the change in terms....

[louiebaby]

With interest rates as low as they are, I suspect the benefit of getting:

1 week 3 weeks earlier
1 week 2 weeks earlier
1 week 1 week earlier

...would be approximately naff all.

[Legend83]

Agreed, but depends what the annual revenue number is...

[Feirny]

He'll probably be along shortly.

[Wacky Racer]

surveyor said:

fk all as they will ignore the change in terms....

This.

[Legend83]

Ok, assume a dream world where the customer will agree.

[NickCQ]

You could calculate it as (annual revenue) x ((1 + cost of capital) ^ ((number of days you have reduced your payment terms by) / 365) - 1)

So in going from monthly to weekly you have accelerated payments by 3 weeks / 21 days, so you benefit by the 21-day time value of your annual revenue at your cost of capital.

i.e. annual revenue £1 m, cost of capital 10%, value to you equals about £16,295

[Legend83]

NickCQ said:

You could calculate it as (annual revenue) x ((1 + cost of capital) ^ ((number of days you have reduced your payment terms by) / 365) - 1)

So in going from monthly to weekly you have accelerated payments by 3 weeks / 21 days, so you benefit by the 21-day time value of your annual revenue at your cost of capital.

i.e. annual revenue £1 m, cost of capital 10%, value to you equals about £16,295

Is it as simple as that though? Am I not getting a 1/4 of my monthly revenue 3 weeks early, 1/4 2 weeks early and 1/4 1 week early?

ETA - as Louiebaby says above.

[NickCQ]

Legend83 said:

Is it as simple as that though? Am I not getting a 1/4 of my monthly revenue 3 weeks early, 1/4 2 weeks early and 1/4 1 week early?

ETA - as Louiebaby says above.

Depends whether your previous terms were end of calendar month or 1 month after invoice I think.

[Actual]

The cash benefit is that you could potentially receive payment for working on February 29th.

[WindyCommon]

Legend83 said:

NickCQ said:

You could calculate it as (annual revenue) x ((1 + cost of capital) ^ ((number of days you have reduced your payment terms by) / 365) - 1)

So in going from monthly to weekly you have accelerated payments by 3 weeks / 21 days, so you benefit by the 21-day time value of your annual revenue at your cost of capital.

i.e. annual revenue £1 m, cost of capital 10%, value to you equals about £16,295

Is it as simple as that though? Am I not getting a 1/4 of my monthly revenue 3 weeks early, 1/4 2 weeks early and 1/4 1 week early?

ETA - as Louiebaby says above.

I think you are correct.

Simplifying to 1yr = 12 4 week periods, and assuming weekly compounding:

First calculate your weekly interest rate, which is: (1 + annual rate)^(1 / 48) – 1
Using the numbers above that is (1 + 0.1)/(1 / 48) - 1 = 0.1988%

If your current annual revenue is a, then your weekly revenue w = a/48
Using the numbers above that is £1,000,000 /4 = £20,833

In moving from monthly to weekly, each month you are gaining the opportunity to earn (3 weeks interest on one weeks revenue + 2 weeks interest on one weeks revenue + 1 weeks interest on one weeks revenue) = 6 weeks of interest on one weeks revenue. As you'll do this 12 times in a year, that's an additional 72 weeks of interest on one week of revenue

At 10% pa interest the value to you is your weekly revenue £20,833 * ((1 + 0.1988)^72 - 1) = £3,202

Naff all as per Louiebaby....!

Edited by WindyCommon on Friday 3rd February 21:33

[Condi]

NickCQ said:

Depends whether your previous terms were end of calendar month or 1 month after invoice I think.

This.

If previous terms were 28 days from invoice and you invoiced at the end of the job then every bill is 3 weeks earlier.

If previous terms were invoiced at the end of the month and pay within 7 days then its 1 quater at 21 days early, 1 quater at 14 days early, and 1 quater at 7 days early. This obviously assumes you finish jobs on Fridays.

[surveyor]

WindyCommon said:

Legend83 said:

NickCQ said:

You could calculate it as (annual revenue) x ((1 + cost of capital) ^ ((number of days you have reduced your payment terms by) / 365) - 1)

So in going from monthly to weekly you have accelerated payments by 3 weeks / 21 days, so you benefit by the 21-day time value of your annual revenue at your cost of capital.

i.e. annual revenue £1 m, cost of capital 10%, value to you equals about £16,295

Is it as simple as that though? Am I not getting a 1/4 of my monthly revenue 3 weeks early, 1/4 2 weeks early and 1/4 1 week early?

ETA - as Louiebaby says above.

I think you are correct.

Simplifying to 1yr = 12 4 week periods, and assuming weekly compounding:

First calculate your weekly interest rate, which is: (1 + annual rate)^(1 / 48) – 1
Using the numbers above that is (1 + 0.1)/(1 / 48) - 1 = 0.1988%

If your current annual revenue is a, then your weekly revenue w = a/48
Using the numbers above that is £1,000,000 /4 = £20,833

In moving from monthly to weekly, each month you are gaining the opportunity to earn (3 weeks interest on one weeks revenue + 2 weeks interest on one weeks revenue + 1 weeks interest on one weeks revenue) = 6 weeks of interest on one weeks revenue. As you'll do this 12 times in a year, that's an additional 72 weeks of interest on one week of revenue

At 10% pa interest the value to you is your weekly revenue £20,833 * ((1 + 0.1988)^72 - 1) = £3,202

Naff all as per Louiebaby....!

Edited by WindyCommon on Friday 3rd February 21:33

You forgot to include the extra cost of chasing people who paid outside 7 days....