In Kevin Sheedy’s book Stand Your Ground his old coach, Tom Hafey wrote the Forward. He explained that Kevin realised that sport could offer him so many opportunities but they would only be realised if he worked not just as hard as anyone else but harder. This need to work harder was because Kevin did not have the same natural skills as most of his team mates and opponents. Thanks to my parents’ hard work me and many like me in Australia and other wealthy countries have been given a opportunity to live a wonderful, happy comfortable life. The downside of this great gift is not experiencing the hard work that went into creating it and therefore potentially not valuing it as much as it should be valued.

In earlier articles I discussed surveys that found we are not happier today than in previous times despite having increased wealth and material goods. Perhaps one of the reasons is that many of us have not experienced the happiness that hard work can bring. This does seem weird but when I look back on the moments that have given me most satisfaction, they are the moments that were the results of hard work. They are events like getting through university, sealing work deals, running good times and winning races.

There is evidence that hard work can lead to a happier life. The next question is how to get motivated to do hard work. The following is a six step guide to get motivated to start the hard work and to keep it going during the tough times.

1. Set a Goal: This stems from the Stephen Covey principle of starting with the end in mind. To test the benefit of this principle start with something simple. When you are having breakfast tomorrow morning think of one goal that you want to achieve during the day. As with all goals make this one a SMERT goal. Be Specific about what you want to achieve. Make sure that the goal can be Measured. Check that the goal excites your Emotions (when you think about does it raise the hairs on your neck). Ensure that the goal is Reachable and Realistic but challenging. Finally put a Time limit on the goal. In this case it will be tomorrow.

2. Plan: The benefit of a plan is that it will increase the chances of the hard work resulting in achieving the goal. It can be very easy to be caught in the trap of working hard (I have a real problem of focusing on emails at the expense of other work) on stuff that will not help you achieve your goals. Planning and monitoring the plan will help you invest your time in activities that will help achieve goals. Remember to allow for bush fires in your plan. Bush fires are events that cannot be planned for. The best way to deal with “bush fires” in a plan is to allow more time than expected to achieve the goal. The art is to allow enough but not too much extra time. The plan should also highlight the resources required to get the job done. This could be money and equipment but also remember to plan your support team. This team is people that will give you physical and emotional support.

3. Get the Balance Right: Life is not one dimensional and a life plan with a sole focus on one specific goal is missing out on all life has to offer. It also increases the likelihood of burn out as, in general, humans need some variety in their life to maintain their well being. For example if your goal is a career or study goal make sure that you allow some room in your life for the other things that are important for you. These may be your

o health and fitness,

o key relationships,

o community work,

o hobbies,

o entertainment

4. Develop Self Awareness: This is the ability to know yourself and to respond when things are not going well. For example over the last week my training times have blown out by over a minute per kilometre. It has taken me 31 years but I now recognise that this is my body telling me that it needs to take a break to recharge the batteries. So instead of running I am doing more yoga and core strength exercises this week as well as a bit of cross training such as pool jogging. My hard work has been interrupted but I will be back on the roads again next week with the goal still firmly in mind and the body recharged and ready to face the challenges. Recognise your own signs that suggest that you need to rest and recharge. These signs may include fatigue, a reduction in productivity (not getting as much done in a day that you normally do), lack of sleep or minor illnesses.

5. Keep on Track: Most of us fall off the rails at some stage on the path to achieving something special. The challenge is to recognise that it is OK to fall off and then to get back on the rails the next day and continue with the hard work to achieve the goal. This is where the support team identified in point 2 above comes into play. These people can encourage you to keep focussed on your goal. One thing that some clients have found is that falling off the rails reinforces old self beliefs that they are not good or strong enough to achieve important goals. Dealing with this requires self awareness as outlined above. It is important to recognise the self belief as just that, a belief. It is not true unless you let it be true.

6. Celebrate: We all need bit of celebrations in our life. This time of year is full of them. During the year it can really help to keep these celebrations going. I recommend celebrating the achievement of a goal in an audacious way. Also, it is important to celebrate the achievements along the way to realising the goal. Hard work can become a grind and to keep going week in, week out, it can help to celebrate what has been achieved that day, that week or that month.

Hard work is given a bad rap. It is looked at as a thing to be avoided. However the benefits are perhaps what life is about. Dean Karnazes summaries it well when he says.

“I suppose the enjoyment of hard work is more of an acquired taste than the taste for pleasure and fun, but once you’ve acquired it, you’re blessed with more ways to feel good, and life is better. Harder and better.”

I read an interesting article recently by Brian Traecy that suggested that every decision in life is impacted by the people that are or have been in our life. In a way that is easy to accept and agree with in that the decisions we make will be a result of the information that we have and our perception of the world. Both this information and this perception will be due to the people that have been a part of our lives. However, a lot of us like to consider ourselves as independent beings that make our own decisions. I do not see these two trains of thoughts as being mutually exclusive. By that I mean we do have the power to make independent decisions but that decision will be the outcome of the impact that other people have had on our life.

This concept again has parallels between success in business and success in personal lives. The people that we surround ourselves with will impact the decisions that we make therefore it makes sense to surround ourselves with people that will help us make good decisions. Three examples of when we can make that decision is as a parent, in our own lives and in business

1. As a dad with fairly young children I have the ability not only to make those decisions for myself but also for my kids (or a least I like to think I do). Liz, my wife, and I encourage friendships with other children who we deem will have a positive impact on the lives of our own kids. Liz and my definition of “positive impact” will be different to yours but for us we are looking for other children that are confident, treat others with respect and show a bit of “fire in the belly”. They are things that we value and we hope that our three kids will value.
2. The people who I enjoy spending time with fall into two categories. There are those that share values with me and there are those who I admire for what they have done with their life. My best mates are the ones who both inspire and share the same values. These are the people that motivate me. The ones that help me make the decisions that are consistent with my values and the ones that inspire me to make the most of what I have to offer.
3. In business the people we choose as partners or employers or employees or as board members is the decision that will have a huge impact on the financial success of the business. It is important to have the right product of right service supported by great marketing initiatives servicing a sustainable customer base. However, all this may not be enough to develop an enduring profitable business without the right people.

The rest of this article will focus on four attributes to look for when identifying board members, business partners or coaches. The four are:

1. No fixed point of view

People who do have a fixed point of view may miss opportunities that are not consistent with the way that they view the world. They will look for information that supports that particular point of view and reject information that contradicts the point of view. These are not good attributes for a person that you want to help guide and grow your business.

2. Willing to question

The person who questions the basis of your ideas will be more valuable than the person who has blind faith in your skills and abilities. Look for people who will broaden your view of the world. They may help identify opportunities or risks that otherwise would be missed.

3. Willing to both analyse and listen to intuition

This is the area where science meets art. Analytical skills are always valuable. This is the science. A board member, partner or coach who listens to, and communicates their own intuition can be equally as valuable. This is the art. A good friend of mine talks about checking in with the feeling in a certain body part before making major decisions. A more universal tool to assess your own intuition is to ask does it feel “light” or “heavy”. “Light” and “heavy” can be interchanged with “right” and “wrong” respectively. Discussing and exploring that feeling or intuition may help make even better decision than relying on scientific analysis alone.

4. A prosperity prospective rather than a scarcity prospective

This is talking about choosing board members, partners and coaches that will look for ways to make things happen rather than those that reinforce how hard it is and suggest it could never happen. If you hear anyone say something like “that is just the ways things are” avoid them from a business point of view.

The overall message is to surround yourself with people who will help provide you with the information, motivation and the support to achieve your goals.

These business initiatives are courtesy of Matthew Nolan from the “MyBusiness” magazine. The personal initiatives are courtesy of “The Coach”.

1. Pricing:

a. Business: Maintain your prices. The longer term damage to your margins and brand from a price cut may not be worth the short term advantage. Also you may instigate a destructive price war with your competitors if you reduce your prices.

b. Personal: Maintain your self image. The longer term damage to your self esteem and brand may not be worth the instant gratification of self destructive behaviour and thoughts. Also your competitors may take advantage of your momentary loss of self belief.

2. Investments:

a. Business: Confirm that this is the right time to expand. Review if the likely lower level of business in the future period will justify the investment in the expansion.

b. Personal: Confirm that this is the right time to take that new opportunity. Review if you are in the right state of mind to invest the time required in making this new opportunity successful.

3. Stock:

a. Business: Consider stocking more of your budget items and less of your top of the range items as your customers are likely to become more price sensitive during a recession. Also look at reducing your level of stock and thereby reducing your investment in working capital.

b. Personal: Be appreciative of what you do have. A spending spree may not be the answer to your current problems. Also de-clutter your life and throw away or donate those clothes and books that have not been touched in the past year. You will find that it improves your outlook.

4. Marketing:

a. Business: Focus on customer retention rather than finding new customers. Also it is a good time to renegotiate the rates that you are paying for advertising.

b. Personal: Look for old friends to provide the support that you need.

5. Get Paid:

a. Business: Review your accounts receivable policy or establish one. Invest time to ensure that the policy is being followed.

b. Personal: Ensure that you get the most you can from your experiences. Reinforce what went well and learn from what could have been done better and develop an action plan so that it is done better next time.

6. Borrowing:

a. Business: Resist the temptation to borrow to cover expenses. Instead focus on costs and establish a level of costs that can be supported by the likely downturn in business.

b. Personal: Resist the temptation of short term fixes such as drugs and alcohol. Instead work with a friend and write a list of all your good qualities and then celebrate them with your favourite meal.

7. Staffing:

a. Business: Be clear, consistent and honest with your staff. There may have to lay-offs but honest communication will help maintain morale and productivity.

b. Personal: Be clear, consistent and honest with your self and your friends and family. Honest communication will help maintain morale, give perspective to the issue and make it easier to move on to the next challenge.

8. Diversification:

a. Business: Explore low cost opportunities to supply products or services to markets that are less impacted by the recession than your traditional markets.

b. Personal: Explore those things you always wanted to do if you only had the time. You may find that the extra time that you have may enable these dreams to become reality.

9. Resource Allocation:

a. Business: Evaluate your services, products and customers to determine which ones will be profitable in the event of an economic downturn. Invest your time and resources in the profitable ones and eliminate the others from your business.

b. Personal: Spend time with the people and events that are uplifting and inspiring. Avoid people or situations that hit your hot buttons.

These tips have one thing in common and that is to be proactive and take charge.

• Business reports

• Create financial forecast

• Run horse race sweeps

• Develop a betting program (unsuccessful) and

• Calculate average km times in races

Spreadsheets are very powerful and can be used for a variety of purposes. However, in business, they are prone to error and an incorrect formula or a spreadsheet designed poorly can result in poor business decisions being made.

I have used my own knowledge and an article written by Shahid Ansari and Richard Blockto to provide some rules to develop effective spreadsheets. The following examples help to demonstrate the benefits of the rules.

Option A

Option B

Both option A and option B produce the same results for the total sales of product 1 by quarter. However, option A will be the more effective spreadsheet in the future for the following reasons.

1. Identification and Segregation of Data: Option A clearly identifies each input. For example 800 is the volume of product 1 in quarter 1 and .01 is the % increase in volume of product 1 in quarter 2.

Each formula only has cell references in option A. Compare that with the formulae in option B that are a series of numbers. In option A it can be determined that the sales of product 1 in quarter 2 is the volume of product 1 by the price of volume 1. Alternatively in option B sales in quarter 2 are 800 by 1.01 by 10. The new user (or the original user a couple of weeks later) will have to guess what these numbers refer to.

2. Ease of making changes: Option A has highlighted the cells that can have direct input by giving them a yellow background. In addition the cells that should not be changed i.e. the cells that have a formula have been locked. The easiest way to unlock cells for input and to lock the remainder of the spreadsheet is to right click the cells that can have input, choose format and protection and uncheck the lock check box. Then choose the tools protection option from the main menu and click on protect the sheet.

3. Document Assumptions: Although it is not shown in the above example it is good practice to document the assumptions that you have made in developing the spreadsheet. For example some of the Option A assumptions were:

a. Product 1 Volume Qtr 1: Based on the prior year sales volume in the first quarter + 3 % which was the increase in the prior quarters sales volumes compared to last year.

b. Product 1 Volume % increase: Based on market research which indicates the total market will increase by 3 % in the next twelve months. The assumption is a 1% increase in quarter 2 and a further 2 % increase in quarter 4. This sales volume increase will be supported by a marketing campaign during which we also plan to increase our price by 5 %

These options should be documented in the workbook, preferably in a separate worksheet.

These are three simple rules to help develop effective spreadsheets and provide a better basis for business decision making.

1. Identify and segregate the data

2. Make making changes easy

3. Document the assumptions

• Think yourself happy

• The politics of happiness

• The power of happiness

• The happiness recipe

The scientific tests supporting the series suffered, to some extent, because happiness relies upon the subjective self assessment by an individual of their own happiness rather than an objective measure. However, that suggests that happiness is something that can be objectively measured and that may not be so. Perhaps each of us have our own definition of happiness that are all equally valid.

The instigator for this article was not the BBC series but a lecture that I heard while waiting to pick up my wife and son from the airport after they had competed in the Gold Coast Marathon Running Festival. The lecture was delivered by a guy called Daniel Gilbert. He is a professor in psychology at Harvard University. He has an entertaining delivery style and uses humour to communicate his messages about what makes us happy. Examples of this included:

• Stating that heroin is not a misery drug but a happy drug. He claimed that the moment of taking the drug was the happiest time for the addict. However it was the rest of the addict’s life that was a misery.

• We can sit through hours of a baseball or cricket match where nothing much happens but we can go home happy because we witnessed one or two minutes of magic. Similar to this I remember telling my dad in the 1980s that I could still enjoy seeing my football team lose each week as long as “Roachy” took a specky.

• We can convince ourselves that we are happier with a $85 pair of socks than a $5 pair of socks that perform the same function.

He questioned the belief that it is children that make us truly happy. My two youngest did not like this part of the lecture. He stated that similar to the sporting matches it is the relatively short magic moments that children provide that help us believe our lives our happier overall. Those moments include such times as when they look in our eyes and tell us they love us or give us the unexpected hug.

His overall point is that happiness can be synthesised or manufactured rather than externally found or bought. The science that he uses to justify this includes:

• There was no difference in happiness six months after the event between a person who was made a paraplegic and a person who won the lottery.

• People were asked to rank six Monet prints from their most preferred to their least preferred. They were then told they could choose their 3^rd or 4^th favourite to keep. Most people chose their 3^rd favourite. Some months later they were asked to rank the six Monet prints again. The average results were that the original 3^rd favourite print was now the 2^nd and the original 4^th favourite print was now the 5^th favourite.

Another point made both in the BBC series and by Gilbert is that despite being wealthier than prior generations we are not happier. The assertion here was that it is comparative wealth that makes us happier. That is if everybody is as comparatively as wealthy as us we are not likely to be any happier.

Gilbert is saying that we have the brain power to make us happy no matter what our circumstances. It may be easier to be happy while eating chocolate than it would be when eating brussel sprouts but our brain gives us the power to be happy no matter what our taste buds are experiencing. It is therefore, the tortoise who will win the race to happiness as it take it’s time to make the most of what it is experiencing now as it heads towards its goal.

• Skill Shortage and

• Fuel and interest Costs

are the major issues facing small businesses today.

Two other interesting findings in the survey were that

• the majority of small businesses are doing nothing about reducing their greenhouse gas emissions

• Compliance is not as big an issue as it was 5 years ago for small businesses, however an increasing percentage of small businesses want to see simplification in compliance for Occupational Health and Safety requirements

An issue with surveys is they can provide information but if that information does not result in action (either physical or mental) it is not that useful. In the rest of the article, to overcome that issue, I will provide a more in depth analysis of some of the findings and suggest what actions businesses can take to take advantage of the current conditions.

The findings of the survey included that it was not just a skills shortage but also a shortage of skilled staff with the “right attitude” that was an issue for small businesses. Also it appears that the skills shortage is now an important driver in employing casual staff. In comparison, in a survey done five years ago the lower total costs of casuals compared to full time employees was a more important driver in employing casuals.

A way to alleviate this problem is to keep existing staff. But one way that has been regularly suggested as a means of retaining staff, the offering of flexible employment conditions, is not being used. Only a minority of small businesses offer flexible employment conditions and this percentage is roughly the same as it was five years ago.

Small Business Initiative 1: Develop a retention plan for the staff that you want to retain. Follow the plan.

In regards to confidence in 2008 one of the biggest concerns for small businesses was the increasing cost of fuel and interest. Fuel was rated as a higher concern than interest. This implies that the fuel price increases has had a greater impact on the cash flow of a small business than the interest rate increases. This flags an opportunity for businesses as it would not be surprising if some of the businesses that rated fuel as the highest concern to have their cash flow more adversely impacted by interest rate rises than fuel cost rises.

Small Business Initiative 2: Have an analysis done on the business cost structure to understand the impact of rising costs in general and fuel and interest in particular and implement initiatives to maintain or improve the business cash flow.

One of the surprising findings of the survey was that the majority of small businesses have done nothing to reduce their greenhouse gas emissions. Those that have done something to reduce their emissions have focussed on recycling and reducing energy use. This will be an interesting trend to watch as it is possible that being environmentally aware and taking actions to reflect that may result in a competitive advantage. This will happen if customers increase the value that they place on the well being of the environment and place a greater importance on this when making consumer decisions than they currently do.

This increasing importance on the environment is reflected in a pest control business brochure that my wife picked up from a home show. The brochure included the environmental commitments of the business which were:

1. 100% carbon neutral by July 2007

2. Install solar energy hot water system by January 2008

3. Company vehicle fleet to use carbon neutral fuels by January 2010

4. Investment in solar energy grid power system by January 2015

This is a business whose operations could have an adverse impact on the environment and so they have an incentive to be proactive in regards to environmental management. They have decided to take their environmental message to potential customers and made their environmental commitments prominent in their marketing brochure.

Small Business Initiative 3: Develop an environmental plan for the business and uncover ways of how it can make a return on investment

The survey is available from the CPA Australia website.

At the workshop Wendy outlined some tools and techniques that she uses. One was called a visual debrief. It involved the athlete having a structured process to review their performance after an event. The athletes are asked to measure their performance in 7 areas by giving a point score between 1 and 10. The 7 areas are:

• Switch off: This is the amount of time in the 4 hours before the race that the athlete was completely switched off from swimming related thoughts. A score of 10 would mean that the athlete was “switched off” all of the time.

• Thought Volume: In the 4 hours prior to racing how mush time was spent on thoughts related to the particular race.

• Activity: In the 4 hours prior to the race how busy or active was the athlete. 10 would mean very busy

• Arousal: How “pumped” was the athlete immediately prior to the race.

• Confidence: Immediately before the race how confident was the athlete that they could do the job that they were meant to do.

As a side issue note the terminology “do the job”. This confidence is not how confident the athlete is about winning the race but how confident they are that they will be able to do their job. The reason for this is to keep the athlete focussed on what they have control over. They don’t have control over the outcome of the race but they do have control over what they do during that race.

• Nerves: How nervous the athlete was before the race.

• Control: During the race what was the level of control that the athlete felt.

There is an eighth measure and it is the evaluation of the race performance on a scale of 1 to 10.

This tool is used each time the athlete performs. They record how they were in regards to each of the seven areas and record what was the performance outcome. They then identify what are the consistent factors when they do their best performances and then plan to do the same things before future performances. Thus they are moving forward by looking back.

The exciting thing is to use this tool to improve the outcomes in our everyday life. The seven categories may have to change but the principle is a simple and effective one. It is to identify what we did and how we felt before the times that we did really well so that we can repeat that in the future. Possibilities for using the tool in our own life includes:

• Sports: I could see this helping with golf, running, squash, triathlons in fact probably all sports.

• Job Interviews:

• Exams:

• Presentations:

• Sales: This tool could identify the actions and feelings that result in the highest percentage of conversion of potential clients

• Dating:

• Public Speaking:

• One on one talks: e.g. Parent child, teacher student, supervisor employee

Doing these reviews is a time investment in you. It is an investment that will generate a healthy return.

Do businesses and individuals get value from these high fees? To answer this question I reviewed the 2008 Beaton Consulting Annual Business and Professions survey. This survey looked at the demographics of the business professions and client perceptions of the value that these professions provided. The professions were:

• Legal
• Accounting
• Actuarial
• Patent and trade mark attorney
• Architecture
• Management Consulting
• IT Services
• Consulting Engineering

The demographic part of the survey found that there are more female lawyers than male lawyers and that females also dominated in the accounting profession. At the other end of the spectrum 82% of consulting engineers are male as are 72% of IT service professionals.

The survey asked clients what they looked for in their professionals that they used. The two keys attributes overall were “proactive innovation” and “excellent service, communication and client focus”. However there were significant differences between how theses were valued in the different professions. “Proactive / innovation” was rated much above the average in the IT services professions while “service, communication and client focus” rated much lower in the IT and consulting engineer’s professions. The Legal and actuarial professions rated very high on this client focus attribute.

The clients were then asked how the professionals performed in providing innovation. In the IT world innovation was valued highly. However. The survey found that the IT profession was a relatively poor performer in delivering innovative solutions. The high performers in providing innovation were the Patent and Trade mark Attorneys and the Legal profession.

In regards to client relationship management the professions are focusing on the following.

• Making Efforts to build personal relationships
• Providing a client relationship contact
• Acting on feedback

The areas of relationship management in which clients indicated there had been the least amount of work were:

• Providing metrics on the service provided
• Identifying opportunities and referring business

Fees were typically viewed as high; however, this did not naturally lead to a perceived deficiency in value provided. It was suggested that fees were only one component that determined overall value. The ones perceived with the highest fees were management consultants, accountants and lawyers. Patent and trade mark attorneys were perceived as having the lowest fees and providing the highest value. However, the IT profession who were ranked second lowest in regards to fees were ranked last in regard to value. Also lawyers who were perceived as charging high fees were also judged as providing a high level of value.

What are some of the take aways from this survey?

• There is a huge opportunity for IT professionals

Unmet demand from clients in regards to innovation

• Lawyers may cost but they are satisfying their client needs
• Patent and Trade Mark Attorneys are potentially exceeding client expectations
• Generally these professions do have a high cost but overall they are delivering value

A message from the survey for the business professionals with a strategy of developing client relationships is that to differentiate yourself from competitors you will need to do more than develop a personal relationship. Referring business and providing metrics are two opportunities to help retain those valuable clients.

As with most business decisions it is important to start with the end in mind when engaging a business professional. This should be communicated to the professional and ideally done in writing before work commences. This will help clarify expectations and keep the professional focussed on solving your issue. This perhaps painful process up front will increase the likelihood of you extracting the value that the professional offers.

This again made me think about finding time to be alone and how difficult this can be living in a large city. Running has been my time alone for over 30 years and it has helped me make some sense of what is happening around me from the hormone driven teenage years to the mutli vitamin driven middle age years.

But what is the value of spending this alone?

Neither the Dalai Lama nor the massage therapist let me know their thoughts, so I did a bit of research. One of the articles that I discovered was by Keith Renninson. He is a Vietnam vet turned motivational speaker and author. He talked about using the time alone to develop a personal life philosophy and then to check in with ourselves on a regular basis to confirm what is working and what isn’t working. This seems like a good idea but I was never taught how to check in with myself to develop my own personal philosophy. I was taught how to get high marks so that I could do whatever I wanted to do.

In hind sight it seems a bit strange that there was not more emphasis on how to develop my self knowledge. This would have helped determine what it was that I wanted to do.

So in the absence of self knowledge I did the next best thing and that is did what my family, friends, media, politicians or teachers told me is the right thing to do.

As a dad I see this is a challenge to help my kids work out their own philosophies, to determine what they want to do with there life.

One of the things that I will encourage is for them to spend time alone. I will probably have to get over being called a freak but I will actively make opportunities for them to have those deep and meaningful solo conversations.

The following are some specific thought starters that I intend to share with my kids to initiate this solo discussion:

• Reflect on your past present and future. What makes you happy? What makes you angry?, How can you get more of the former and less of the later
• Discover how you really feel about issues without anyone else’s input.
• Listen to your thoughts.
• Compare your ideas and options.
• Appreciate that you can make good choices.

How to create this time alone in our life? A real commitment needs to be made. There is no need to become a monk or a nun or sail solo around the world. Renninson asks himself each morning if he is happy with the direction of his health and fitness, his professional life and his social life. I use my time running or doing yoga to have that inner conversation about the status of my life. For some it is really tough to find that time that can be spent alone. This is usually because of family and work commitments and when any time is available being deep and meaningful is not at the top of the “to do list”.

However just like an advertising campaign “take the challenge”, you may find that the time you give yourself helps create time in your life overall. Set 15 minutes in your diary or in outlook or your PDA or whatever time management tool you use 4 times per week over the next 4 weeks. You may find it helpful to have a pen and paper handy to write any insights or decisions that you make.

You will then have your own answer to the topic of this article “Why create time to be alone”.

NPV is a fundamental element of business finance and it is based on the concept of the time value of money. The time value of money suggests that a dollar is worth more the sooner it is received. To see how this works consider that you were offered the option of receiving $100 now or $100 in one year’s time. What would you choose?

The $100 now is always worth more than the $100 in one year’s time. If you wanted to spend the money you could do so now rather than waiting for a year. Alternatively if you did not want to spend it immediately you invest it for a year and earn some interest. If you did invest you would have more than $100 in one year’s time. Either way you are better off receiving the $100 now rather than waiting twelve months.

NPV is a tool that helps evaluate investment options when the numbers are more complex than the $100 example. However, it is still based on the concept that a dollar is worth more the sooner it is received.

For example, you are presented with an investment option whereby if you invest $20,000 now you will receive $2,000 in one year’s time and $22,000 in two years time. For investments of this kind you expect to get a 5% return. Should you go ahead with this investment? A quick answer to this question is, yes, the investment is good as you will receive $24,000 (2,000 + 22,000) and only outlay $20,000. However, that answer does not take into account the time value of money.

NPV is a tool that does take into account the time value of money. It does this by putting those three cash flows (the $20,000 outflow and the $2,000 and $22,000 inflows) in “today’s” dollars. What does that mean “today’s” dollars?

Remember that we said that $100 is worth more today than in one year’s time. NPV quantifies that by outlining what $100 in one year’s time is worth today. You require a 5% return on your investment so that means that the $100 is one year’s time is worth $95.24 ($100/1.05) in today’s dollars. In other words if you invested $95.24 today at your required return of 5% you would have $100 in one years time.

This NPV tool can be used to evaluate the $20,000 investment option produces the following result.

The rule is if the NPV is zero or positive it is a good investment. Note that we need to divide the year two cash flows by “1.05 * 1.05” because the $22,000 is received in two years time so to convert it to today’s dollars we need to allow for the required return over two years.

NPV and its relative the Internal Rate of Return (IRR) are important tools when evaluating investment options including deciding when to expand. However they are just part of the tool kit and need to be complemented by such things as:

ü Business Environment Analysis

ü Industry Environment Analysis

ü Sensitivity of Assumptions Analysis

ü Marketing Plan

ü Business Action Plan

ü Skills Gap analysis

Whether you do the NPV analysis yourself or you employ a financial expert to do it for you it is important to understand what the results mean so that you can make the most effective decisions.