Question.3278 - How does the concept of the time value of money affect decisions made across the four executive roles of management – planning, organizing, leading, and controlling? Why is this concept important for the contemporary executive to understand?
Answer Below:
Time value of money is an important concept in financial management. The central idea of the concept is that a $1 today is worth more than the expected $1 in the future. Therefore a given amount of interest in a given amount of time is figured to determine the value of money. For instance, $100 invested today at a 2% interest for a year will be $102 at the end of one year. The $100 today is equivalent to the $102 expected in a year. Time value of money allows one to calculate the Present Value of the money expected in the future or the future value of a current investment, depending on the given interest rate. Thus, time value of money concepts can be used to compare investments, or to decide on loans or annuities. The decisions made across the following defined functions of management can be affected by the concepts of time value of money: (1) Planning: The time value of money can be an important factor in planning. Planning involves setting of goals and defining the set of actions required to achieve those goals. Planning requires the managers to be aware of current economic conditions, know their competitors, customers and overall environment conditions. It also requires forecasting the future. For instance, if management’s goal is to increase production and the action plan to achieve the goal is the purchase of new machinery, the investment needs to be analyzed using the time value of money concepts to evaluate the success of the plan. (2) Organizing: The organizing function involves organizational design and allocation of human resources to achieve management’s goal. The decisions on accruing additional expenses of reorganization of labor or hiring new job specific employees depending on the expected return can be made using the time value of money concepts. (3) Leading: This function involves effective leadership to motivate employees to achieve the set goals. A leadership’s effectiveness depends on the knowledge of the employees’ aptitude, expectations, and working styles. The leadership effectiveness can be measured based on the achievement of goal in expected amount of time. And thus monetary profits of on time achievement or expenses of delayed processes can be estimated with time value of money concepts. (4) Controlling: The controlling function of Management involves performance measurement against set standards. The performance is measured in profits or production. The time value of money concepts will entail the profitability of the investments depending on given expected profits in given amount of time. Today’s economic and environmental conditions demand much aggressive management styles. Even though the management functions are same the increasing competition has necessitated quicker and quantifiable gains. Management is measured by the achievement of goals both effectively and efficiently. Such efficiency is achieved when the cost of achieving the objective is not excessive in comparison to the expected profits. Thus, the time value of money concepts play an important role in management’s success in today’s environment. Reference: Barnett, Tim. (2013). Management Functions. In Encyclopedia of Business, 2nd ed. Retrieved from http://www.referenceforbusiness.com/management/Log-Mar/Management- Functions.html#ixzz25qzC7E8aMore Articles From Finance
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