The Hindu Business Line : The money value of time

A lakh of rupees received today is not the same as the same amount received exactly a year hence. How much more valuable it is would depend on the alternative uses you have for that money.

Time is money," is an old saying. The public sector and the Government are often treated as the worst offenders because delays are taken for granted, be it in acknowledging a letter or finishing a road project. The distance of the Government from the real business of the world is such that it coined a fancy phrase "time-bound action programmes" as if it were a special managerial achievement to do something within budget and the allotted time!

Nonetheless, here is a splendid example of what can be done by dealing with this cost of time effectively. Some years ago, the Chairman of a public utility company called on an institute of management, with which I was connected, to bring a sense of cost and time consciousness along with basic notions of customer focus to a group of dyed-in-the-wool middle-level engineers. To the eternal credit of this unusual IAS officer, some 200-odd middle-level people were put through an intensive week's course in small batches. At the inauguration, in the presence of a Minister, the Chairman gave this graphic example of what he wanted. On an inspection visit, he said, he had come across some Rs 10-12 lakh worth of equipment idling and along with it a far higher value of other machinery for the power management system. He pointed out that for every week the machinery lay idle, lakhs were being drained away — all your money and mine! A piece of important equipment ordered from a public sector organisation came in with some problems. Payments were held up and the dispute went on — as is usual — in this case between two arms of the same publicly owned system. Yet, no one had said that the key thing was to get the project up and running.

A simple calculation would have shown that a couple of months delay avoided (equal let us say to 2 per cent at an annual rate of interest of 12 per cent) would have more than paid for the equipment under dispute. In other words, if only the government employee would think of the real cost as the full cost — of a project, machinery or supplementary equipment, it should indeed occur to him to find ways of minimising the overall cost. Keeping a (let us say) Rs 20 crore project standing by for six months is equivalent to throwing away Rs 120 lakhs, i.e. 6 per cent of the total cost, at the same rate of 12 per cent a year quoted above. Here was a dramatic and yet simple example that showed how by insisting on procedural wrangling over quality and delivery, one could prove all the proverbs to be totally relevant and true: penny wise and pound foolish; and, for want of a shoe nail, the battle was lost! The textbook way of treating the money value of time is to account for the return you would have got if you had the money in your hand for a certain period of time. In other words, a lakh of rupees received today is not the same as the same amount received exactly a year hence. How much more valuable it is would depend on the alternative uses you have for that money.

If it is some investment that (other risk elements being equal) would earn you Rs 10,000 or 10 per cent per annum, then a lakh of Rupees today can be said to be the same as Rs 110,000 this day next year. Discounting basically works the same principle backwards to arrive at the present value of a future cash inflow — in this case, a project that gave you Rs 110,000 next year would have a present value of Rs 100,000 . But a project typically yields benefits of varying amounts over a long term. One can deal with all the future years' cash flows by working the compound interest table backwards (which calculators and ready-reckoners will do, no problem!).

The most important point to keep in mind, however, is the principle rather than fancy calculations of choice of the right discount rate and so on. All managers need to think of is to see every hour of delay as potential profit drained away. This is true of all idle things: machines, people, inventories or unused cash.

(The writer, a former Director of IFMR, is a management consultant.)

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