
When is a dollar not a dollar? - mooreds
https://codingvc.com/when-is-a-dollar-not-a-dollar/
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abalashov
I don't know if it's economically correct, but as a self-employed person—been
at it for a decade now—who still struggles profoundly with cash flow issues
(combination of recurring revenue from software and one-off revenue from
consulting to get to break-even), I tend to look at dollars as having
different values based on whether they occur in a predictable stream.

To me, $1 of recurring revenue, paid on any schedule, is worth at least 4x-5x
any sort of one-off project revenue. And conversely, because of cash flow,
$100k in self-employed dollars is worth a lot less than $100k in W-2 dollars,
despite the higher effective tax rate on the W-2 income. Once you take a
discount for cash flow volatility, $100k in unsteady self-employed dollars can
afford you a lot less lifestyle, savings, etc., since you can afford fewer and
smaller recurring costs if you don't want to be eaten alive in late fees,
interest, hits to credit, etc. because you get paid tomorrow but the bill is
due today—the bane of my particular existence, living the dream. I suppose
that goes with "a dollar today is worth more than a dollar tomorrow".

W-2 income is also more valuable, pound for pound, because of specialisation.
In our industry, one can earn a steady six-figure paycheck for doing more or
less one job in W-2 land, or one can earn an unsteady six-figure paycheck for
doing all the jobs in SE land.

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ThrustVectoring
You need to have _way_ more of a buffer held in cash and probably a
significant lifestyle cut. Paycheck-to-paycheck sucks but is workable if
you're a W-2, but absolutely insane if you're self employed.

Like, money you earn today should get earmarked to expenses you need to pay
six months from now. The discount for self-employed dollars should be keeping
six months of expenses in cash rather than invested in the market - if that's
$30k and you lose out on 4% gains, that's only $1.2k per year.

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ryanmarsh
Yes this has been really tough for me to learn. My cash outflows can vary by
up to $30k per month. I’m self employed and often have to travel and various
clients pay me net 30,45, or 60. I thought maybe 60 days of cash would cover
net 60 but it turns out I need more like 180 days of cash.

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kayhi
Maybe instead of negotiating rate, you get all your clients to pay on net 30

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sokoloff
Get clients to agree to pay net-30 is easy. Getting them to actually pay
net-30 is much harder.

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Maultasche
One tactic I've heard is to increase the price by 5% and then give them a 5%
discount if they pay within 30 days. I've never tried this myself, but I've
heard that this greatly encourages prompt payment because everyone loves a
discount.

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abalashov
I offer significantly higher discounts than that for quarterly or annual
prepayment, in the case of recurring revenue. Cash is king. Even to the degree
where taking a 12-25% haircut can be worth it.

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larrik
A lot of the points in this article are good, but I don't agree with the Cost
vs Revenue section.

There are often a _lot_ of benefits that come with higher sales beyond simply
revenue. For instance, you may reach a higher order threshold with your
supplier, unlocking better pricing across the board. Or you may show better
growth, attracting investors or other momentum.

There are definitely customers where cost is more important than revenue,
which in my experience are companies "run by the accountants". In my years of
consulting and being inside growing and dying businesses, I see there's 2 main
drivers of a company: sales, or the accountants. One focuses on growing at any
expense, the other focuses on cutting costs and minimizing risk. They aren't
generally compatible, but they both have their place. Some company heads focus
on one or the other, and some can balance it.

There's no way that you can claim cost savings are more valuable than
increased revenue, it's just too complex.

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lpolovets
(I'm the post's author.)

This is another great perspective on how not every dollar is equal: unlocking
better pricing as your volume increases.

When I wrote this, I was especially thinking about low-margin industries like
grocery stores. For a high-margin industry (e.g. 75% margins), it doesn't
really matter if you save the customer $1k or help them earn an additional
$1k. Those are roughly the same to them in terms of money added to the bottom
line. But if the customer's margins are more like 2% or 5%, then the
difference between $1k in cost and revenue is much more dramatic to them.

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cher88
Another scenario where gaining an incremental dollar of revenue may be more
valuable than saving an incremental dollar of cost: optics for fundraising. A
startup with $500k revenue and $600k cost would probably find it easier to
raise funds than a startup with $100k revenue and $200k cost.

~~~
lpolovets
That's a great point.

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dandare
> In my college economics class, I was taught that money is fungible because
> there's no difference between one dollar and another dollar. Over the last
> five years as a VC, I've learned that that's not exactly true and that some
> dollars are much more valuable than others to a business.

I understand the author is trying to write creatively but such parallels only
create confusion. Of course, money is fungible, no, some dollars are not much
more valuable than others. If your dollars come attached to a condition or
cost you money to get that is a different story.

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leggomylibro
I'm trying to think of a way to ask: "did the author's college economics class
not cover 'opportunity costs'?" without sounding like an asshole.

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walshemj
or the time value of money

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jerrre
> a customer's VP of Engineering has ten direct reports and feels very
> overworked. If a product saves each engineer 1 hour every month but creates
> 2 hours of work for the VP, that will be a hard sell if the VP is the buyer.

This is true not only because the vp of engineering is the one to decide. This
is about saturation, he/she can't work another 2 hours, because there is no
time.

From the time I studied tournament poker I learned your last dollar is way
more valuable than your millionth. There's a similar saturation there. Bill
Gates doesn't notice a $1000 added, but some factory worker in India probably
will.

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ctdonath
From CarTalk years ago: "The difference between two headlights and one
headlight is a lot less than the difference between one headlight and no
headlights."

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XR0CSWV3h3kZWg
Same as the difference in price between costing 2$ and 1$ vs 1$ and 0$.

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osullivj
All points aligned with conventional wisdom, IMHO, bar one: that it's easier
to sell cost savings than revenue gains. Revenue gains can be quantified
accurately, because revenue is recorded in all businesses. Cost savings,
especially for staff time, can be much harder to measure.

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thaeli
I don't think it was saying that cost savings are easier to sell, but rather
that they're worth much more.

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osullivj
FWIW my own experience is that cost savings are a much harder sell than
revenue gains.

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georgeecollins
I think for startups, trying to show growth, savings are less valuable then
revenue growth. For mature businesses measuring profit, a dollar of cost
savings is worth more than a dollar of revenue.

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siddharthdeswal
Agreed, mature markets have usually been carved up, and competitors have to
fight to gain even an inch of market share. In such a scenario, a dollar saved
is a full dollar in the pocket.

A dollar gained would have many costs to gain that dollar.

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zeveb
> Example: a customer's VP of Engineering has ten direct reports and feels
> very overworked. If a product saves each engineer 1 hour every month but
> creates 2 hours of work for the VP, that will be a hard sell if the VP is
> the buyer. But if the product saves each engineer 30 minutes while also
> saving the VP three hours, that'll be a much easier sell. In each case, the
> customer's company saves 8 hours of engineering time per month (1 x 10 - 2 =
> 0.5 x 10 + 3 = 8), but the second product will be much easier to sell than
> the first.

Or, indeed, if the product creates an extra hour of work for each engineer but
saves the VP 30 minutes, it'll be an easy sell. The VP _ought_ to care about
his people's time, but that not nearly as common as it ought to be.

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shostack
You can also map this to dollars by figuring out what that time is worth for
each individual based on assumed utilization and compensation. A VP's time is
typically worth more than the junior people that report to them.

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cs702
Great post. Its key ideas are:

* A dollar has different value to a customer depending on where it falls on the customer's financial statements.

* Some dollars require a more effort to earn than other dollars.

* A dollar today is worth more than a dollar next year.

The post is filled with examples of these three principles.

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tboyd47
This is a great exploration into the relationship between software and cash
flow. Keep writing!

One topic that continues to fascinate me is the question of how to create
higher-value software. How can I, as an engineer, ensure that the software I
create justifies its production costs? I feel this is a larger question than
just how much the software affects the cash flow of its parent company
(although that may go into the valuation), and it's a topic that's crucial to
our industry but as of yet, mostly unexplored.

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skywhopper
In other words, accounting is often far more important than economics in
determining business success.

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c3534l
Are you confusing finance for accounting? There's still not a terribly great
distinction here, but accounting is way off.

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lisper
A dollar of long-term capital gains is worth about 20% more than a dollar of
dividend, and about 40% more than a dollar of wages.

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sokoloff
Most dividends (meaning all "qualified dividends") are taxed the same as long-
term capital gains.

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walshemj
Depends on which country your in normally dividends are taxed as income and
capital increase taxed as capital gains.

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sokoloff
My comment was for the US. I should have specified.

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loourr
You're forgetting about taxes, perhaps the single biggest reason why some
dollars are worth more than others.

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runevault
Actually this is a good point, how both your revenue is taxable and how buying
your product is/isn't tax deductible to your prospective clients can
dramatically impact actual value of money.

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pbreit
#1 is dangerous since growing sales is much harder than cutting costs.

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thaeli
When it's a Tether?

..joking about the title aside, this article makes good points.

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mpblampo
tl;dr: When it's a jar.

