Why Time Is More Important Than Money for Business
How Should Business Efficiency Be Measured?
The goal of any business is profit. And we are used to measuring profit in money. But how reasonable is that? For example, last year your company made a net profit of 10 million rubles, and this year it made 15 million. Progress? But what if last year you could buy 1,000 key components for your business with that profit, and this year only 700? That is not such progress.
It is no accident that many entrepreneurs keep internal accounts in foreign currency. However, the situation where profit grows but its purchasing power falls happens every day even in markets dominated by dollars and euros.
Where is the invariant that is universal regardless of exchange rate or purchasing power? The answer lies in the concept of value created by your business.
Let me remind you once again that value is not equal to price and is not measured in money; it is measured in the time created or saved, adjusted for the probability that such saving is realized:
V = T × P
(V – value of the product or service, T – time created by the product or service, P – probability that the product or service will deliver the expected time.)
We discussed the nature of value in detail in the first article, and how to use it in pricing in the second one.
Time or Money?
Let us compare how business results can be assessed in the usual way – through money – and then through created value.
Money as a performance or value metric has one huge advantage – it is easy to count. And that is where the advantages end.
For 3 rubles in pre‑Petrine Russia you could buy a cow; in the USSR it would buy you a meal in a café; in modern Russia you can hardly buy anything with it. The main drawback of money is that money today and money tomorrow are two different substances, and to compare them people have to invent various indirect conversion methods.
This is most evident when valuing a business or assets. As a current or potential entrepreneur, sooner or later you will have to buy or sell something in business, including the business itself. Therefore, it is important to understand the principles of how this is done. The main method of business valuation today is the discounted cash flow (DCF) method.
Business Valuation – How Feasible Is It?
Let me remind you of the essence of the DCF method:
In essence, you have to guess:
And you have to determine:
Overall, a method intended to produce an individual valuation for a specific business and situation boils down to a large number of subjective assumptions and expectations.
But the scariest part is that changing almost any of the above valuation parameters by just 2–3 percentage points can result in a difference in business value of tens of percent!
Do you want to lose 40% of your business’s value when selling it, just because someone convinced you to change the discount rate by “only 2%”?
That is precisely why most Russian entrepreneurs prefer to resolve the price issue through direct negotiation. In the end, there is always one losing side – someone overpaid or someone under‑received. And most often the loser is the one who does not know how to measure the value created by the business. Let us make sure that is not you.
After All, Time Matters More
Now let us see how a business can be valued through created value – using the PTTV method, that is, the Probability‑Time Theory of Value. First, I will explain the general idea of the method, and then we will calculate everything using a concrete example.
Since value is determined by the time created for the customer and is expressed in hours, this method has a huge advantage: an hour today lasts exactly as long as it will tomorrow and in 100 years. That is, there is no need to bring “tomorrow’s” time to “today’s” time. Of course, we are not talking about subjective perception of time.
Let us begin.
Step 1
You need to calculate how much time your business creates for your customers right now. This is the most non‑trivial task in the whole method. It is also the most important – the key point of the PTTV method. I will show how this is done in practice in the example analysis.
Step 2
Estimate how the size of your business is likely to change. This can be taken from statistics for similar enterprises. Based on that, you can estimate the time created for each year of the forecast.
Step 3
Estimate the probability of your business going bankrupt within a year and the expected total lifespan of the business. Alas, it is a sad fact – most businesses live for a limited time. Classical valuation methods do not take this fact into account at all.
Data can be taken from statistics for your industry, business size and age. Ideally, you should also know this indicator for your specific region.
Multiply the time created for each year by the survival probability of the business, taking into account the number of years until such an event.
Step 4
Sum up all the hours created by your business.
Step 5
Multiply them by the revenue of an hour for your customers.
Step 6
In a similar way, calculate the business’s expenses through employees’ working hours, their wages, as well as business size and default probability.
Step 7
Subtract the value consumed to run the business from the value created for your customers. This is the value of your enterprise in current prices.
The result: you get the value of the business being valued in current monetary units. Simple and reliable, and – importantly – with significantly lower sensitivity to forecast errors.
It is important to understand that objective value is not a single price for everyone, nor even a function; it is a distribution of possible prices. With this method, we obtain the most probable outcome for the business, which in reality could be anything.
A particular enterprise may close in a year, or it may become the next Amazon, with the only difference being that these outcomes have very different probabilities of realization.
From Theory to Practice
For clarity and simplicity, let us evaluate a simple mono‑business – for example, a B2C food delivery service called “Instant and Accurate”.
The company is 2 years old, has 1,000 customers per month, the probability of bankruptcy for such a company is 10% per year, and its expected lifespan is 10 years.
Each customer, on average, saves 2 hours of their time by using the company instead of going to the store. The target audience lives in areas with an average income of 1,000 rubles per hour.
The company’s employees spend on average 1 hour per customer, and they deliver the products without delays, mis‑sorting, confusion or losses in 9 out of 10 trips.
An employee’s hour costs 500 rubles.
Statistics say that similar companies, having survived to 2 years, then grow by an average of 10% per year for another 5 years, and then start losing their customer base at a rate of 20% per year.
Step 1
Today, the company can save – i.e. create – value for its customers in the amount of:
1,000 customers × 2 hours × 9/10 delivery probability × 12 months = 21,600 hours per year.
Step 2
Since growth of 10% per year is expected for the next 5 years, in one year the company will have:
1,000 × 1.1 = 1,100 customers,
for whom the company will create value equal to:
21,600 × 1.1 = 23,760 hours.
The year after:
23,760 × 1.1 = 26,136 hours,
and so on, until growth is replaced by annual contraction of 20%, when we will use a multiplier of 0.8.
All these and subsequent calculations are very easy to perform and understand in a simple Excel table (see the table below).
Step 3
Since the probability of bankruptcy within a year is 10%, the survival probability is 90%, so in one year the company will create not 23,760 hours, but:
23,760 × 0.9 = 21,384 hours.
Apply the 90% multiplier for each year of the forecast.
Step 4
Sum the hours saved for customers over all forecast years, giving a total of 147,403 hours of created value.
Step 5
Since for customers their hour is worth on average 1,000 rubles, the maximum price they are willing to pay is close to this rate.
We obtain in today’s money the value created by the company:
147,403 hours × 1,000 rubles = 147.4 million rubles.
Step 6
Perform the same steps to estimate the value consumed by the company – i.e. the time spent by couriers, adjusted for the company’s growth schedule and bankruptcy risk, multiplied by the current hourly wage rate.
We get a total of 40.9 million rubles.
Step 7
The final value of “Instant and Accurate” is:
147.4 – 40.9 = 106.5 million rubles.
As you can see, all calculations can be quickly done in a simple Excel table.
The goal of any business is profit. And we are used to measuring profit in money. But how reasonable is that? For example, last year your company made a net profit of 10 million rubles, and this year it made 15 million. Progress? But what if last year you could buy 1,000 key components for your business with that profit, and this year only 700? That is not such progress.
It is no accident that many entrepreneurs keep internal accounts in foreign currency. However, the situation where profit grows but its purchasing power falls happens every day even in markets dominated by dollars and euros.
Where is the invariant that is universal regardless of exchange rate or purchasing power? The answer lies in the concept of value created by your business.
Let me remind you once again that value is not equal to price and is not measured in money; it is measured in the time created or saved, adjusted for the probability that such saving is realized:
V = T × P
(V – value of the product or service, T – time created by the product or service, P – probability that the product or service will deliver the expected time.)
We discussed the nature of value in detail in the first article, and how to use it in pricing in the second one.
Time or Money?
Let us compare how business results can be assessed in the usual way – through money – and then through created value.
Money as a performance or value metric has one huge advantage – it is easy to count. And that is where the advantages end.
For 3 rubles in pre‑Petrine Russia you could buy a cow; in the USSR it would buy you a meal in a café; in modern Russia you can hardly buy anything with it. The main drawback of money is that money today and money tomorrow are two different substances, and to compare them people have to invent various indirect conversion methods.
This is most evident when valuing a business or assets. As a current or potential entrepreneur, sooner or later you will have to buy or sell something in business, including the business itself. Therefore, it is important to understand the principles of how this is done. The main method of business valuation today is the discounted cash flow (DCF) method.
Business Valuation – How Feasible Is It?
Let me remind you of the essence of the DCF method:
- For a certain time horizon, a forecast is made of the cash flows that the business will generate for its owners. The horizon is usually five years, and «free cash flows» are assessed – that is, what remains after all obligations and expenses have been met.
- Then all these future cash flows are discounted, i.e. brought to today’s value of money, with a certain adjustment. The discount rate should reflect the risks associated with the business, and it may differ for each year of the forecast, but for simplicity it is usually taken as constant. To be precise, it is the same for every year, but if you need to bring money from, say, five years ahead to today, you divide the future money by the discount rate raised to the fifth power.
- A terminal value is added – that is, the discounted cash flows generated by the business beyond the forecast horizon.
In essence, you have to guess:
- how sales will change over the forecast horizon,
- what the margin will be,
- what the debt burden will be,
- how effective investment and marketing plans will be.
And you have to determine:
- the discount rate, which depends on the country, type of business, its size, cost of debt, and any other factors reflecting possible risks,
- the terminal value, for which you need to consider how the overall market will behave for many years ahead, how the business’s share of that market will grow, and what the risks to cash flows will be over such a long horizon.
Overall, a method intended to produce an individual valuation for a specific business and situation boils down to a large number of subjective assumptions and expectations.
But the scariest part is that changing almost any of the above valuation parameters by just 2–3 percentage points can result in a difference in business value of tens of percent!
Do you want to lose 40% of your business’s value when selling it, just because someone convinced you to change the discount rate by “only 2%”?
That is precisely why most Russian entrepreneurs prefer to resolve the price issue through direct negotiation. In the end, there is always one losing side – someone overpaid or someone under‑received. And most often the loser is the one who does not know how to measure the value created by the business. Let us make sure that is not you.
After All, Time Matters More
Now let us see how a business can be valued through created value – using the PTTV method, that is, the Probability‑Time Theory of Value. First, I will explain the general idea of the method, and then we will calculate everything using a concrete example.
Since value is determined by the time created for the customer and is expressed in hours, this method has a huge advantage: an hour today lasts exactly as long as it will tomorrow and in 100 years. That is, there is no need to bring “tomorrow’s” time to “today’s” time. Of course, we are not talking about subjective perception of time.
Let us begin.
Step 1
You need to calculate how much time your business creates for your customers right now. This is the most non‑trivial task in the whole method. It is also the most important – the key point of the PTTV method. I will show how this is done in practice in the example analysis.
Step 2
Estimate how the size of your business is likely to change. This can be taken from statistics for similar enterprises. Based on that, you can estimate the time created for each year of the forecast.
Step 3
Estimate the probability of your business going bankrupt within a year and the expected total lifespan of the business. Alas, it is a sad fact – most businesses live for a limited time. Classical valuation methods do not take this fact into account at all.
Data can be taken from statistics for your industry, business size and age. Ideally, you should also know this indicator for your specific region.
Multiply the time created for each year by the survival probability of the business, taking into account the number of years until such an event.
Step 4
Sum up all the hours created by your business.
Step 5
Multiply them by the revenue of an hour for your customers.
Step 6
In a similar way, calculate the business’s expenses through employees’ working hours, their wages, as well as business size and default probability.
Step 7
Subtract the value consumed to run the business from the value created for your customers. This is the value of your enterprise in current prices.
The result: you get the value of the business being valued in current monetary units. Simple and reliable, and – importantly – with significantly lower sensitivity to forecast errors.
It is important to understand that objective value is not a single price for everyone, nor even a function; it is a distribution of possible prices. With this method, we obtain the most probable outcome for the business, which in reality could be anything.
A particular enterprise may close in a year, or it may become the next Amazon, with the only difference being that these outcomes have very different probabilities of realization.
From Theory to Practice
For clarity and simplicity, let us evaluate a simple mono‑business – for example, a B2C food delivery service called “Instant and Accurate”.
The company is 2 years old, has 1,000 customers per month, the probability of bankruptcy for such a company is 10% per year, and its expected lifespan is 10 years.
Each customer, on average, saves 2 hours of their time by using the company instead of going to the store. The target audience lives in areas with an average income of 1,000 rubles per hour.
The company’s employees spend on average 1 hour per customer, and they deliver the products without delays, mis‑sorting, confusion or losses in 9 out of 10 trips.
An employee’s hour costs 500 rubles.
Statistics say that similar companies, having survived to 2 years, then grow by an average of 10% per year for another 5 years, and then start losing their customer base at a rate of 20% per year.
Step 1
Today, the company can save – i.e. create – value for its customers in the amount of:
1,000 customers × 2 hours × 9/10 delivery probability × 12 months = 21,600 hours per year.
Step 2
Since growth of 10% per year is expected for the next 5 years, in one year the company will have:
1,000 × 1.1 = 1,100 customers,
for whom the company will create value equal to:
21,600 × 1.1 = 23,760 hours.
The year after:
23,760 × 1.1 = 26,136 hours,
and so on, until growth is replaced by annual contraction of 20%, when we will use a multiplier of 0.8.
All these and subsequent calculations are very easy to perform and understand in a simple Excel table (see the table below).
Step 3
Since the probability of bankruptcy within a year is 10%, the survival probability is 90%, so in one year the company will create not 23,760 hours, but:
23,760 × 0.9 = 21,384 hours.
Apply the 90% multiplier for each year of the forecast.
Step 4
Sum the hours saved for customers over all forecast years, giving a total of 147,403 hours of created value.
Step 5
Since for customers their hour is worth on average 1,000 rubles, the maximum price they are willing to pay is close to this rate.
We obtain in today’s money the value created by the company:
147,403 hours × 1,000 rubles = 147.4 million rubles.
Step 6
Perform the same steps to estimate the value consumed by the company – i.e. the time spent by couriers, adjusted for the company’s growth schedule and bankruptcy risk, multiplied by the current hourly wage rate.
We get a total of 40.9 million rubles.
Step 7
The final value of “Instant and Accurate” is:
147.4 – 40.9 = 106.5 million rubles.
As you can see, all calculations can be quickly done in a simple Excel table.
Notice that we never estimate future cash flows or the future value of money, as the classical DCF method requires. That simply does not matter, because the PTTV method assesses value as worth, not as money, and only at the very end converts value into price – i.e. money. An hour is an hour even after 100 years, but a ruble today is never equal to a ruble even tomorrow.
The main advantage of the method is that every assumption can be measured and assessed; you do not need to guess how cash flows will change as a result of specific actions or what the future value of money will be. Hours are summed and multiplied by the current rate of money per hour.
Note that no financial statements are required, and with this method you can value not only yourself but also any competitor without knowing their accounting books, by estimating key operating metrics such as business size, reliability, company age, and so on.
The key challenge of the method remains the need for an individual approach to estimating the time created in each type of business. But this does not create room for arbitrariness or guessing, because time and probability are measurable indicators, and it is much easier for the parties to a deal to agree on common numbers than in the case of estimating how specific commercial decisions will play out or what the future value of money will be in today's units.
If “Instant and Accurate” were valued using the DCF method, the valuer would most likely propose some perpetual growth for the terminal value, since this method in principle does not assume the possibility of bankruptcy and almost always proceeds from the idea of an infinite business life. Moreover, the terminal value itself can account for 40–60% of the entire business valuation. That is, a significant portion of the valuation comes from a period about which we can say nothing with certainty.
Money Is a Tool, Value Lies in Time
Conclusion: money is only an accounting instrument that constantly depreciates, while time is the only invariant that remains stable.
What can you do for your business right now?
You do not have to immediately value your business for sale, although doing so regularly is very useful, because there is no point in growing indicators if the value of the business is falling.
To begin with, try converting just one key metric into hours:
Once you start seeing your business in hours and probabilities, you will notice opportunities for optimization and value growth that are hidden behind the figures in the profit and loss statement.
Original version of the article is here.
The main advantage of the method is that every assumption can be measured and assessed; you do not need to guess how cash flows will change as a result of specific actions or what the future value of money will be. Hours are summed and multiplied by the current rate of money per hour.
Note that no financial statements are required, and with this method you can value not only yourself but also any competitor without knowing their accounting books, by estimating key operating metrics such as business size, reliability, company age, and so on.
The key challenge of the method remains the need for an individual approach to estimating the time created in each type of business. But this does not create room for arbitrariness or guessing, because time and probability are measurable indicators, and it is much easier for the parties to a deal to agree on common numbers than in the case of estimating how specific commercial decisions will play out or what the future value of money will be in today's units.
If “Instant and Accurate” were valued using the DCF method, the valuer would most likely propose some perpetual growth for the terminal value, since this method in principle does not assume the possibility of bankruptcy and almost always proceeds from the idea of an infinite business life. Moreover, the terminal value itself can account for 40–60% of the entire business valuation. That is, a significant portion of the valuation comes from a period about which we can say nothing with certainty.
Money Is a Tool, Value Lies in Time
Conclusion: money is only an accounting instrument that constantly depreciates, while time is the only invariant that remains stable.
What can you do for your business right now?
You do not have to immediately value your business for sale, although doing so regularly is very useful, because there is no point in growing indicators if the value of the business is falling.
To begin with, try converting just one key metric into hours:
- how much time your product saves a customer per year (what is the value of T),
- how reliable your service or product is (what is the value of P),
- how many hours of employees’ lives a particular business process consumes.
Once you start seeing your business in hours and probabilities, you will notice opportunities for optimization and value growth that are hidden behind the figures in the profit and loss statement.
Original version of the article is here.