Monday, February 24, 2020

MBA in a Nutshell #26 - Accounting and Finance : Other People's Money

Other People's Money (OPM) or float basically means that savvy business people arrange to receive cash owe to them at the earliest opportunity and send money that they are obligated to pay others at the last possible moment. When managed well, this results in a cache of money called float.

You can earn interest on your float. The master of float is Warren Buffett because he gets to invest his float consisting of insurance premiums prior to them being paid out to cover insurance claims.

The book mentions variants of OPM such as :

a) Gift certificates - All that amount of Kino vouchers you are hoarding is earning them interest.
b) Traveler's checks - I never used these but folks prefer to keep them rather than redeem them after a trip.
c) Commemorative stamps - No sane collector will use the stamps in the First Day Cover to send actual mail.
d) Celebrity Checks - Imagine if Billy Eilish or Blackpink's Lisa wrote you a $100 check. The check with her signature is probably worth more on eBay than the value of the check itself.

What is evidently missing in the book and relevant in modern times are the amount of cash value stored in super-apps like Grab and some of the new-fangled multi-currency credit cards like Revolut. Most of us would put a little bit of money in these wallets and then use it at a much later time. I can imagine the amount of float Grab has right now because there is a lot of spare change in our Grab super-app.

If float is used properly, it can be many times more effective than having a margin account.

I guess one way of making your business better is to design it around the idea of getting more float so that you can invest in higher yields and then use the dividends to run your company.

Theoretically speaking, a company can "FIRE" if investment income can cover the costs of running the business.

4 comments:

Unknown said...

It's been used by mom & pop setups in Singapore for many years already e.g. spa & beauty packages, gym subscriptions, newspaper & magazine subscriptions etc.

Our tpt system got into the act in the 1990s when they first rolled out transitlink cards & encouraged all to use by charging higher fares for cash.

Christopher Ng Wai Chung said...

Some barber in Woodlands wanted me to buy membership.

The question is why do I want to lock myself down to one barber ?

Ivanp said...

Actually there is a case where the stored value gets protected from inflation, everything being equal, in which case its original value gets higher over time. My wife got such a haircut package from a local establishment. It is rare however.

Christopher Ng Wai Chung said...

I would not suggest trying to game your savings by doing this too much. Our inflation rate in Singapore is 0.5% and trending lower as we speak.