Calculation For The Real Cost Of Money In Finance For A
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Calculate facility cost of money factors. Divide each facilities capital cost of money pool by the appropriate allocation base. CAS 414 requires that the calculation be taken to five decimal places. (Column 5/Column 6 = Column 7) Government Facilities Cost of Capital Factor Analysis (FAR 15.402(a), 15.404-2(a), and DFARS 230.7004-1). Calculation of Financing Cost with Examples Usually, borrowing costs are calculated in terms of Annual Percentage rate (APR). Usually, interest rates for finance costs are not published by the Companies. Hence the investors use the following formula to calculate financing costs.

Cost of money refers to the average interest rate at which you are able to borrow money. Think of the cost of money as the rent you have to pay for using someone else’s money.

Yes, there is a cost of money even if you are using all of your own money. How? Since you are using your own money instead of putting it into a savings account, you are foregoing the 1.5% interest you could make on it. Thus, the cost of money in this case is 1.5%.

As a small business owner, you probably borrow money from several sources, e.g., bank, credit cards, friends. You probably also keep money in various places, e.g., checking account, savings account. Each of these sources has its own cost of money: A bank loan could cost you 10%, a credit card could cost you as much as 30%, and so on and so forth. So how do you come up with the combined cost of money that tells you how much interest you are paying for all of this borrowed money?

The short answer is that your cost of money is the weighted average of your borrowing and deposit interest rates. Too much jargon? Don’t worry. In the next section I will explain how to calculate your cost of money in 4 simple steps.

4 Simple Steps to Calculate the Cost of Money for Your Small Business

Let us create a spreadsheet with 4 columns.

Step 1 (Column A) – Identify all of the sources of money for your business and list them in order. These sources are often:

Small business loans from a bank or SBA.
Credit cards. If you use multiple credit cards, then list the amounts your have charged on each one of them separately. (Note: Do not list your credit limit, but rather your outstanding balance. If your outstanding balance changes every month, your cost of money will also change every month.)
Friends or family who have lent you money to run your business. (Write down the amount even if they are not charging you any “interest” on the loan.)
If your business has cash lying in a checking or saving account, list that too.

Step 2 (Column B) – Next to each source, write down the interest rate you are paying. For SBA, this rate can be easily found in your documents. If you use multiple credit cards, write down the APR of each card separately. You can find out the APR from your credit card statements, or you can call the credit card companies.

Step 3 (Column C) – Apply a + or – sign to each source.

If your business has “borrowed” money from that source, then use a + sign. Bank loans, SBA loans, Credit cards, Friends/Family will get a + sign.
If you business has “deposited” money into that source, then use a – sign. Your business checking account balance and your savings account balance will all have – signs.

Step 4 (Column D) – Time to find your weighted average. You can do this by simply multiplying column A with Column B, and applying the sign in Column C to get Column D. (See table below.)

Once you finish Step 4, now, add all of the rows in Column A and all of the rows in Column D. Free online poker where you can win real money. After you do that, divide the Column A total by the column D total. This amount is the cost of money for your business. Simple, huh?

Based on the table above –

Cost of Money = $21,406.89 / $238,665.54 = 0.0897 = 8.97%

As you can see, the cost of money is the weighted average interest rate for the money supply into your business.

Applying cost of money as a metric

Cost of money is a very useful metric in making business decisions. For example, cost of money can be used to decide whether to offer / accept early payment discounts.

In this chapter:

1. Cap Cost Is Important

Don't let the dealer tell you not to worry about the cap cost because it doesn't affect you. It does! It makes a difference in your payments. They keep quoting monthly payments as a distraction. Pay attention to the value of the entire deal.

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2. How Your Monthly Lease Payment is Calculated

There are 3 components:

Monthly Depreciation Fee = ( Net Cap Cost - Residual ) ÷ Lease Term
Monthly Finance Charge = ( Net Cap Cost + Residual ) x Money Factor
Sales Tax (Depreciation Fee + Finance Fee) x Tax Rate

In states like Illinois, Texas and a few others, they tax you according to the gross cap cost up front. This is very unfair because you are only using about 50% equity then returning the vehicle.

Example

Assume you lease a car for 36 months, with an adjusted cap cost of $35,000. They give you a residual of 54% after 36 months ($18,900). You can verify this too if you have the ALG Lease Residual Value Software. They disclose the money factor is .00333 (equivalent to 8% APR).

Monthly Depreciation Fee = ( $35,000 - $18,900 ) ÷ 36 = $447.22
Monthly Finance Charge = ( $35,000 + $18,900 ) x .00333 = $179.49
Sales Tax = ($447.22 + $179.49) x .06 (Florida Tax is 6%) = $37.60

Total Monthly Payment = $447.22 + $179.49 + $37.60 = $664.31

Over 36 months it will cost you $23,915. If you buy the car at the end at its $18,900 residual value, your total cost would be $42,815 + up front fees (bank fee, dealer service fee, security, etc.) Buying is usually cheaper in the long run. If you had bought the car with 8% APR over the same 3 years your monthly payments would be $1,162.57, but your total cost is only $41,852.84.

Lease Calculator Spreadsheet Download

I created an Excel spreadsheet to calculate your lease payments (click here to download it). I based it on the FTC's Regulation M Model Lease form with several enhancements. I highly suggest that you download it and get practice with it on an old lease or some of the examples on this page. The enhancements I made are the inclusion of the money factor and lines for other closing costs like dealer acquisition. It will show you how much the entire lease will cost you. This is what dealers never tell you. The instructions are on the 'Instructions' tab. Sell pubg crates for real money. Even better than this spreadsheet though, is the Expert Lease Pro Software that has the ALG Residual Values built right into it. You will need this software to accurately calculate Ford leases which are slightly different due to their 'hidden' money factors which makes my spreadsheet off for them.

You'll notice in the spreadsheet I made no cell for you to enter MSRP. You never want to see MSRP listed on the lease because you want a negotiated cap cost that is less than MSRP. The only thing MSRP is used for is calculating the residual value but the spreadsheet just allows you to enter the calculated residual value.

3. Real World Example #1

Here's one from a visitor who emailed me to say how they got scammed. Before going in, the buyer researched all the prices and calculated the numbers in the table below. The dealer also calculated the numbers and showed them a lower monthly payment. Good deal right? Wrong! Examine the costs in the table:

Item

What the buyer calculated

Calculation For The Real Cost Of Money In Finance