Applying The Theory Of Compound Interest To Business

“Long term thinking improves short term decision making” – Men’s Life Advice

As I have said previously in an earlier post, if you truly want to become wealthy and have the ability to stay that wealthy, it is imperative that you really understand the concept of compound interest. Most people think of compound interest as something to do with money in the bank. I don’t. I apply the basic principles of compound interest to many other things, including business decisions.

For example; think about a retail store owner. The retail store owner has a choice of whether or not to put up a sign on his new store. An inexperienced owner might think it is too expensive to do at first. He may decide that the sign won’t bring in enough new customers to justify the expense. An experienced store owner, on the other hand, understands that a good sign will earn compound interest. A good sign may cost a couple thousand dollars up front. But, it will pay off every single day by advertising and branding the store. Let’s say for argument’s sake that the sign brings in five new customers every month. Then of those five customers, one of those customers tells a friend about the store. Do you see where this is leading? The basic point I am trying to make is that the two grand he spent buying the sign is going to earn him compound interest in the form of new customers. This increases his chances of operating a more profitable and more successful retail operation.

Now take it another step farther. The owner could choose between two types of signs to put on his building. The first one would be a small sign that he hangs in the window on the front of the store. The second one would be a huge elaborate sign that lights up at night and gets mounted to the top of the building. The first window sign can be seen okay from the street during the day. The second huge sign can be seen from as far away as the expressway even at night. The window sign will cost $100 to purchase while the huge one will cost $2000. Again, an inexperienced store owner might choose the $100 sign because it is only 5% of the cost of the more elaborate one.

Think about how the theory of compound interest will apply to these two signs. Each of these signs is going to help promote the business. The small window sign will introduce the business to a small number of people who happen to notice it. The huge sign will introduce the business to a much larger number of people. The window sign will project a certain image in the customer’s mind. Maybe the customer will think the business is more of a small family run operation. But, if he goes with the huge sign, customers will get a slightly different impression of the business. Which one is more likely to generate more business? The answer is obvious.

Of course in real life there are more factors involved. The point I am trying to make is that it helps to look at a situation and see if there is any way to make it generate more compound interest. If you were trying to build up your retirement account, would you deposit the $100 or the $2,000?

Teach yourself to think long term. When you have the opportunity to invest in something that will bring in greater returns for longer periods of time, it might make good business sense to implement it.