The Rule of 72 & the Entrepreneur

The Rule of 72
A useful mathematical tool, many entrepreneurs use the principles of the Rule of 72 on Compound Interests on estimating the potential income of a business endeavor. We may ask how does the Rule of 72 influence the entrepreneur's investment decision?

The Rule of 72 & the Banks
The Rule estimates the number of compound interest cycles an entrepreneur's money would double. If you get 1% per annum interest income on your savings deposit at the bank. Assuming 20% of that is withheld for tax, you are left with a net of 0.8% per annum. If you have 10,000 pesos, it will take 90 interest cycles (72/0.8 = 90) before the money would double into 20,000. pesos. In this case, it would take 90 years.

The Rule of 72 & the Business of Lending & Financing
Some LOAN SHARKS lend their money on people who are in desperate need of funds at an exorbitant interest rate of 20% per month. These loan sharks would estimate that 72 divided by 20 (72/20) would mean 3.6 interest cycles which means that in 3.6 months their P10,000 would grow and become P20,000.

Legal lending companies charges 3% to 5% interest on their micro financing activities, to help and boost small and micro enterprises into full economic activities, of course they have these other non-finance charges above this 3 to 5% interest which takes care of their operating costs. With a minimum 3% net income per month on their micro financing activities, they expect to grow and double their money in 24 months (72/3 = 24) or 2 years.

Some people with surplus cash use their funds, instead of keeping them in the banks, by accepting discounted and re-discounted post-dated checks at an interest rate of 3% per month. Discounting and re-discounting of checks happens when some people in the course of their business activities accepts post dated checks for payments. When their cash funds run short, they are forced to endorse their customers' post dated checks to other businessmen at a discount rate of 3% per month. This is usually accompanied by a personal check as an insurance in case the endorsed check turns out to be unfunded. The 3% per month on discounted checks doubles the surplus money in 2 years with no additional manpower, no sweat, and no hassles.

The Rule of 72 as Applied in Trading
Many creative traders use the Rule of 72 on a daily basis. A Filipino merchant may satisfy himself with a 5 cents net income (5%) for every peso value of the goods he is selling. If he can move P 10,000 or more worth of inventories per day, it will take him only 14.4 market days (72/5 = 14.4) to turn his investment into P 20,000 worth of inventories or cold cash. This costs some sweat and some hassles, but gives better returns and at a very short time.

In these very competitive days, where not just quality but pricing does matter, lowering the product price by reducing the mark-up on cost may mean increasing the volume and rate of inventory turnover, and shortening the number of days a person's investment doubles. For the entrepreneur, the Rule of 72 is a very easy and useful tool.