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Cost of Capital

Six Sigma – iSixSigma Forums Old Forums General Cost of Capital

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  • #34424

    DL
    Participant

    Can anyone tell me what the rule of thumb is regarding calculating payment savings. For example if current standard bi-monthly payments (cash outflows) are being switched to monthly, what would the savings be to the company? Based on cost of capital, short term interest rates, other??
    Any advice?…thanks
    DL
     

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    #94930

    lin
    Participant

    I think what you are suggesting is that rather than making two payments a month you will be only making one payment a month. The benefit will be that you will have the first payment in the company bank for two weeks(approx) extra. If we were to do this we would calculate the benefit as being the cash outflow times the WACC. Calculate the benefit for one day and then times it by the number of days between payments.
    You need to consider the siz of the benfit to see if it is not worth doing. The other point to consider is to ensure that you are not receiving discounts for early payment. If you are then these would need to be deducted from the benefit as you would certainly lose these.
    Thanks to my collegue for help on this.

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    #94934

    Andrew M. Brody
    Participant

    It’s been a while since I’ve workied with this, but the rule of thumb, at least in mortgage payments, is to do everything you can to get bi-monthly payments as it significantly reduces the interest portion of the payment.  Everytime a payment is made the interest clock is reset.  Please don’t hold me to this as gospel, like I said its been a while. I would suggest consulting a Financial Consultant (a known reputable one).
    Andy Brody

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    #94952

    KBailey
    Participant

    My rule of thumb is this:  single piece flow processes lead to the lowest overall cost for the entire supply chain in the long run.
    Batching may save you a few $$ in the short term, but add cost to the total value stream in the long run. Over time, you’ll pay for it in the form of higher prices. Even in the short term, it can create hidden costs for you. Errors, disputes, and other issues, take longer to come to light and more effort to resolve as you batch transactions into larger, infrequent batches.
    If you’re going to do it, the Six Sigma rule of thumb is that savings depend on what the company is doing with the extra capital during that time. If you’re able to reduce borrowing, it’s the costs associated with that credit line. If you’re able to invest the capital, it’s the return on the investment. If it’s sitting as cash in a non-interest bearing account, there may not be any legitimate savings.

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