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The Rule of 72 in Construction
Which is more? $5 million or a penny doubled every day for a month? Surprisingly, the answer is the penny. This illustrates the power of the rule of 72. This is a simple financial rule that dramatically shows the power of doubling. It demonstrates the power of time with interest to produce large outcomes.
This solidly points to the importance of expense discipline and financial management for construction firms. Done with frugality, the reward is substantial wealth at a relatively early age. Done poorly and we work longer than we want to.
The math of this rule is simple. It should be the first question when interviewing your next company financial officer or personal investment advisor.
The rule of 72's gives us a standard to determine the doubling period for a given interest rate. For example, if a principal sum is earning a fixed rate of interest of 6%, that sum will double in value in approximately 12 years (72 divided by 6 equals 12). If the principal sum is earning interest at a rate of 12%, it will take only 6 years for the principal sum to double in value (72 divided by 12 equals 6). Divide other interest rates into 72 and observe the time required to double your initial principal.
Using the same logic for expenses provides us an insight about business costs. Let's review the example of a common tax write off; the 6000+ pound vehicle used in a company's business. This is a significant incentive for making a new vehicle purchase of this size.
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Matt Stevens is a management consultant who works only with construction contractors. He has performed training and business consultation for the contracting community since 1994. Matt can be reached at mstevens@stevensci.com.">mstevens@stevensci.com.
search terms: Pre-construction, post-mortem, lessons learned, Financial management, money management, investment, accounting. profit strategies
Posted by Matt Stevens at April 16, 2006 04:35 AM
Comments
money management
Posted by: myron dubina at March 21, 2006 03:14 PM