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When is a dollar not a dollar? (codingvc.com)
150 points by mooreds 8 months ago | hide | past | web | favorite | 58 comments

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.

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.

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.

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

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

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.

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.

LOL my clients are Fortune 100. Im lucky if I get to negotiate anything. I usually get the same payment terms as all of their suppliers.

Shouldn't you have ~6mo living expenses as an emergency fund regardless?

The difference between consistent and non-consistent revenue becomes a lot less extreme if you keep a healthy amount in a highly liquid bank or (preferably) credit union account. 3 months annual expenses at least (as a goal). Or, if you projects are REALLY chunky and few and far between, then more like 6 months or a year.

This is very true, IF you can get over the psychology. I passed 5y of savings and investments a long time ago, but my relationship with money changes dramatically depending on whether I have good cash flow or not.

Indeed. Crap cash flow can lead to a poverty-type mindset of privileging the short term at the expense of the long, even if you're not actually poor (not from the IRS's point of view, anyway—possibly the bank's), because the unpredictability can undermine any effort systematic and long-term decision-making.

After a while it can feel Sisyphean. Just when you secure more recurring revenue, you lose an old customer or get slapped with an unexpected large expense. One step forward, two steps back kind of thing. Every day.

So, it's easy to preach very sanctimoniously about the paramount importance of good money management as a self-employed person, but it's another thing to do it, and I find that's true for a lot of self-employed folks. Back when I had W-2 income, I really had it together; great credit, putting away $1k+ every month, all bills always paid on time, etc. Since then, not so much, and it's not because I suddenly got massively profligate. You just give up trying to put the ducks in a row when life keeps sinking them over and over.

You need to establish a revolving line of credit (held by your business) with a bank you already work with. These sorts of scenarios are exactly what revolving lines are for. Interest rates are typically quite low if the bank sees overall positive cash flow through your business account.

I suspect you could get a 20k line with minimal effort.

Not a chance. Been having that conversation with banks for years.

Banks don't see any assets in a pure service business like software/consulting that can be collateralised, and my personal credit is long-ago shot. Nobody lends or writes credit on prospectus for a business they don't understand.

A credit card with a ~$1000 limit is about the snow-capped summit of what I could reasonably get.

Yeah, that's volatility. I'd talk to a financial advisor. There's plenty of financial products and investments that can help you reduce that.

What you're saying isn't about inherent worth of a dollar, but rather the basic management of money. Your future expectations of a recurring stream of income changes your behavior, that is you are effectively worth more if you have a recurring salary, but the inherent worth of a dollar doesn't change.

So it's not that the recurring $1 is "worth more", but rather you have more than just $1, you have all the future accumulation of that recurring income. At least that's how people perceive it. Similarly debt is in the same sense future earnings perceived as current earning, and it leads to very poor financial planning.

Even if you have a recurring stream of income you shouldn't spend your future income now, unless of course it's some kind of investment that will put your money to work in some way.

You have received great advice already. I just wanted to add in case you don't do this already. Your hourly rate should be a lot higher when they only hire you for a few hours than when it is a recurring revenue. You want to motivate your customers to opt for the recurring revenue.

>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.

What on earth are you doing, not maintaining a buffer?

Two problems with buffers: (1) never making quite enough money to get ahead of expenses enough to create one, (2) I owe significant back-taxes. Any larger liquidity event that could otherwise be used to establish a buffer goes to try to pay down taxes owed.

There's little point in accumulating assets when they can just be levied by someone you owe a lot of money to. At that point you might as well just cut them off at the pass and give it to them voluntarily.

If latency is not a problem, but the production/consumption is unsteady, use a large buffer. Works in programming, works in personal finance.

This is a great example of different sources of money being valued differently by someone. Thanks for sharing! (I'm the post's author.)

Self employed you should aim for 3x your W2 rate at least that's what IT contractors aim for in the UK

> To me, $1 of recurring revenue, paid on any schedule, is worth at least 4x-5x any sort of one-off project revenue.

Congratulations, you have discovered Present Value.

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.

(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.

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.

It's also easier to optimize business processes when there is some volume. Optimizing 10% of a $10 million process is real money where doing this with a $100k process is often not worth the effort.

That's a great point.

Could you please add details about when you agree with Cost vs Revenue section, and when you don't... that'll throw more light on your actual position.

Or do you absolutely disagree with the Cost vs Revenue section?

> 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.

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.

or the time value of money

Yeah, I thought this was going to be something like Planet Money's report on Myanmar, where people value crisp new bills more because they don't have easy access to banking:


I think in certain situations the worth of a dollar amount changes. For example if I'm running a project and I run into a financial bump and require getting 100K ASAP, that 100K is "worth more" to me now as that 100K can mean the difference between losing millions, or gaining millions more.

> 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.

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."

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

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.

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

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

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.

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.

> 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.

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.

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.

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.

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

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

You have to have both, right? Accounting is important in the short term, economics inthe long term.

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.

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

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

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

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

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.

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

When it's a Tether?

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

tl;dr: When it's a jar.

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