Time value of money (TVM) is a critical concept in the financing, stating that the amount of money in the present is worth more than the same amount received in the future. Therefore, it is a widely accepted idea in the financial realm that there is a greater benefit associated with receiving money today than the same amount of money in the future. The notion that a sum of money at present is worth more is attributed to the potentiality of its earning capacity. In finance, the concept of money operates under the core principle that it can earn interest; therefore, it is worth much more the sooner it is received.
TMV affects major areas of financial management, including business loans and long-term financial decisions. According to Petters and Dong (2016), the principle of TMV influences the interests on the monetary value of investments and loans. In this regard, Petters and Dong (2016) advise that it is preferable to save and lay off debts. In doing so, a business will have enough money from the savings to invest in the future. In other words, TVM discourages companies from securing loans. Also, the principle of TVM allows businesses to negotiate favorable terms of loans. For instance, minimal interest rates and fees and a longer repayment period.
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The concept of TVM is invaluable to business, especially where long-term decisions are concerned. Usually, firms have limited resources to invest in various activities, projects, and operations. TVM contributes immensely to how and what to invest. As Alamad (2019), TVM helps in long-term financial decision-making by offering insights into uncertainty, inflation, preferences, and opportunities for investment. Whether acquiring a fixed asset or securing a loan, major financial decisions affect a company's cash flows in the present and future. TVM helps ensure the timing of the cashflow is ideal for the business.
References
Alamad, S. (2019). Money, Its Origins, Nature and the Time Value of Money. In Financial and Accounting Principles in Islamic Finance (pp. 21-47). Springer, Cham.
Petters, A. O., & Dong, X. (2016). The Time Value of Money. In An Introduction to Mathematical Finance with Applications (pp. 13-82). Springer, New York, NY.
