{"id":175819,"date":"2023-09-21T13:29:08","date_gmt":"2023-09-21T12:29:08","guid":{"rendered":"http:\/\/realbusiness.co.uk\/?p=175819"},"modified":"2023-09-21T13:29:08","modified_gmt":"2023-09-21T12:29:08","slug":"businesses-and-pmt","status":"publish","type":"post","link":"https:\/\/realbusiness.co.uk\/businesses-and-pmt","title":{"rendered":"Businesses And PMT"},"content":{"rendered":"
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The business world is filled with acronyms and business jargon that can leave even the most business-savvy amongst us scratching our heads. As a business owner though, there are certain terms you\u2019ll want to get familiar with quickly to make your life easier – and PMT is one of them. So, what is PMT and how does it relate to businesses and business finance? And perhaps more importantly, how can you start incorporating PMT finance into your business to make it more efficient?<\/b><\/p>\n

What Is PMT In Business Finance?<\/span><\/h2>\n

PMT is actually just an abbreviation – it doesn\u2019t stand for anything other than the word \u2018payment\u2019. So you\u2019re probably wondering why that\u2019s so important in business finance, and the answer is simple. PMT is a function you can use on tools like Microsoft Excel to keep track of regular payments your business has to make.\u00a0<\/span><\/p>\n

What Sort Of Regular Payments Can I Use PMT Finance For?<\/span><\/h3>\n

In order for the PMT function to work for your business, you have to use it with payments that are regular and have the same interest rate every time. Basically, the PMT function is designed for those regular expenses a business has that won\u2019t ever change in frequency or amount. Some examples include:<\/span><\/p>\n

    \n
  • Repayments on a business loan<\/span><\/li>\n
  • Mortgage repayments\u00a0<\/span><\/li>\n
  • Insurance payments<\/span><\/li>\n
  • Payments owed to your business due to a fixed financial arrangement<\/span><\/li>\n
  • Business savings goals<\/span><\/li>\n<\/ul>\n

    There are other examples, but so long as you remember that the payments need to be constant in amount and frequency of payment, then you can use the PMT finance function.<\/span><\/p>\n

    Using PMT In Excel<\/span><\/h2>\n

    Microsoft Excel is basically the standard way to manage finances and record financial information across all businesses and it\u2019s been that way for years. As a result, it\u2019s in Microsoft Excel where you\u2019ll get the most use out of the PMT function as a business owner.\u00a0<\/span><\/p>\n

    Before we jump into a worked example to show you how you can use PMT to your business\u2019 advantage, let us introduce you to the formula behind the PMT function in Excel:<\/span><\/p>\n

    =PMT(rate, nper, pv)<\/b><\/p>\n

    Now we imagine that doesn\u2019t mean anything to you right now, so let us break it down for you.<\/span><\/p>\n

    PMT\u00a0<\/span><\/h3>\n

    PMT is the final value you\u2019ll get from the PMT function – it\u2019ll basically tell you the total payment (both principal and interest included) each month required to settle a loan over a fixed period with a fixed interest rate – such as a business loan or your mortgage.<\/span><\/p>\n

    The rate, nper, and pv are all parts of the calculation that will give you the PMT information.<\/span><\/p>\n

    Rate\u00a0<\/span><\/h3>\n

    The \u2018rate\u2019 refers to the interest rate of the loan or investment, and it\u2019s usually given as an APR or annual percentage rate. Some businesses repay their business loans on an annual basis, in which case you can just give your total APR value here when entering the calculation in Excel.\u00a0<\/span><\/p>\n

    Other business owners prefer to spread out their loan repayments monthly. If that\u2019s the case, you\u2019ll need to divide your total APR on the loan you\u2019re trying to work out the PMT information for by 12, and then put that number into the rate portion of the PMT function in Excel.\u00a0<\/span><\/p>\n

    It\u2019s important that you put in this value as a <\/span><\/i>%<\/i><\/b> into the Excel formula.<\/span><\/i><\/p>\n

    Nper\u00a0<\/span><\/h3>\n

    \u2018Nper\u2019 refers to the number of periods, or, the number of times you\u2019ll have to make a repayment on the loan before it is cleared and you no longer need to pay. This is simple to work out – you simply need to know how often you\u2019re making repayments on your loan.\u00a0<\/span><\/p>\n

    So, if you took out a loan over 3 years that requires payment each month, you simply multiply 12 by 3, so you know there will be 36 total repayments over the course of the loan here. You could work out your own \u2018nper\u2019 value to enter into the PMT finance function in Excel easily enough.<\/span><\/p>\n

    Pv<\/span><\/h3>\n

    The pv is your present value or loan principle. It\u2019s basically how much you still owe on the loan right now. Or, if you\u2019re calculating a PMT based on a customer owing you, then the pv is the total amount that future payments will be worth to you – basically how much they still owe.\u00a0<\/span><\/p>\n

    PMT Function In Basic Terms<\/span><\/h2>\n

    So, if in Excel <\/span>=PMT(rate, nper, pv) <\/b>– what will you actually need to input into the formula bar of Excel to work out your PMT?<\/span><\/p>\n

    Let\u2019s look at an example. Let\u2019s imagine you\u2019ve taken out a business loan of \u00a350,000 over 5 years with a fixed APR of 2.4%. Here\u2019s all the details you would need to carry out the PMT function:<\/span><\/b><\/p>\n

      \n
    • Rate: <\/b>2.4% \/ 12 = 0.2% (your rate per month)<\/span><\/li>\n<\/ul>\n
        \n
      • Nper: <\/b>5 x 12 = 60 (total repayments you\u2019ll need to make)<\/span><\/li>\n
      • Pv: <\/b>Total amount left on the loan – in this case let\u2019s imagine you\u2019ve not started repayment yet, so your pv is still the \u00a350,000 you borrowed in the first place\u00a0<\/span><\/li>\n<\/ul>\n

         <\/p>\n

        Into the formula bar in Excel you would need to type <\/span>=PMT(0.2%, 60, 50,000)<\/b>. This will then give you the PMT value. In this case, your loan repayments each month will amount to \u00a3885.17, meaning you repay a total of \u00a353,110.20 over the entire period (\u00a3885.17 multiplied by the 60 months it will take to repay).<\/span><\/p>\n

        Using PMT To Calculate Investment Decisions<\/span><\/h2>\n

        We\u2019ve already established that the PMT function can be used to calculate business loan repayments and loan repayments that might be owed to your business so you can keep track. But you can also use PMT to work out how much you might invest in a particular product, scheme, or business each month in order to return a specific investment within a specific time frame.\u00a0<\/span><\/p>\n

        You will still need your rate, nper, and pv values here, but instead of loan information you would enter the following information in its place:<\/span><\/p>\n

          \n
        • Rate – the rate of interest per year<\/span><\/li>\n
        • Nper – the period of time you\u2019d like to see a return on investment<\/span><\/li>\n
        • Pv – the amount you would like to see as a return on investment<\/span><\/li>\n<\/ul>\n

          Let\u2019s look at an example.\u00a0<\/span><\/p>\n

          Worked PMT Business Investment Example<\/span><\/h3>\n

          Let\u2019s imagine you want to see a return on investment of \u00a325,000 in a year, with an interest rate of 2.5% on your investments. You want to work out how much each month you would need to invest to make that amount. You would have:<\/span><\/p>\n

            \n
          • rate = 2.5%<\/span><\/li>\n
          • nper = 12<\/span><\/li>\n
          • pv = 25,000
            \n<\/span><\/li>\n<\/ul>\n

            Into Excel you would type \u2018<\/span>=PMT(2.5%, 12, 25000)<\/b>\u2019 which will give you a PMT value of \u00a32437.18 – meaning you\u2019ll need to invest this amount each month to reach your goal.<\/span><\/p>\n

            More Complex Examples<\/span><\/h2>\n

            PMT isn\u2019t just for business loans and answers to the question \u2018how much should I invest each month in order to see the return I like\u2019. You can use it to work out how much you should put into savings each month in order to receive a specific amount in a specific time frame with a specific interest rate on the savings account.<\/span><\/p>\n

            Sounds complicated? It is right now, but that\u2019s because we\u2019re missing a couple of extra pieces of the PMT finance puzzle:<\/span><\/p>\n

              \n
            • Fv<\/span><\/li>\n
            • Type<\/span><\/li>\n<\/ul>\n

              Fv Explained\u00a0<\/span><\/h3>\n

              Fv is an optional number that you can include in the PMT calculation if you like – in the examples above, Excel will simply assume the value is 0 when you don\u2019t put anything in. Fv stands for future value and it refers to the cash balance you would like to have after your last payment is made (such as in savings – hence the example above – but we\u2019ll get back to that shortly).\u00a0<\/span><\/p>\n

              In the PMT calculation in Excel, here is where fv would be included if you were using it:<\/span><\/p>\n

              =PMT(rate, nper, pv, fv)<\/b><\/p>\n

              Type Explained<\/span><\/h3>\n

              Type is another optional value that can be included in the PMT calculation if you need to specify. The \u2018type\u2019 value can only be 0 or 1:<\/span><\/p>\n

                \n
              • 0 shows that payments are due at the end of each period<\/span><\/li>\n
              • 1 shows that payments are due at the beginning of each period<\/span><\/li>\n<\/ul>\n

                In the examples above where we haven\u2019t used the type value in the PMT calculation, Excel will always assume the value is 0, meaning it will always assume the payments will be made at the end of each period. In most scenarios you face as a business owner the type value will be 0, but it\u2019s worth knowing that there\u2019s another option should you ever require your repayments to be made at the beginning of each period.<\/span><\/p>\n

                In the PMT calculation in Excel, here is where the type value can be found if you\u2019re using it:<\/span><\/p>\n

                =PMT(rate, nper, pv, fv, type)<\/b><\/p>\n

                Worked PMT Business Savings Example\u00a0<\/span><\/h3>\n

                Let\u2019s imagine you want to save \u00a3250,000 in a year to open a second location for your business. It\u2019s a lofty goal, but let\u2019s stick with it for the example today. Let\u2019s imagine that at the end of each month you\u2019ll be transferring money into a business savings account with a 4% monthly interest rate.<\/span><\/p>\n

                Here, you\u2019re trying to answer the question – how much will I need to save each month in order to reach my financial goal with interest helping out along the way?<\/span><\/p>\n

                You\u2019ll need the following information:<\/span><\/p>\n

                  \n
                • rate = 4% (monthly interest rate)<\/span><\/li>\n
                • nper = 12 (the goal is for the year, meaning you have 12 payments)<\/span><\/li>\n
                • pv = 0 (pv is not relevant here because you\u2019re trying to reach a goal)<\/span><\/li>\n
                • fv = 250,000 (the amount you would ideally like at the end of the year)<\/span><\/li>\n
                • type = 0 (you\u2019ll be making repayments at the end of each period or month)<\/span><\/li>\n<\/ul>\n

                  Into Excel you would type <\/span>=PMT(4%, 12, 0, 250000, 0) <\/b>which would tell you that you need to save \u00a316,638.04 and place it in your 4% savings account each month to reach your goal of \u00a3250,000 in 12 months.<\/span><\/p>\n

                  Why Is PMT So Important To Business Finances?<\/span><\/h2>\n

                  PMT finance is integral to any business who deals with business loans, mortgages, saving plans, or investments – and as you know, that applies to virtually every business out there, so it\u2019ll almost certainly apply to you and your business.\u00a0<\/span><\/p>\n

                  The reason PMT is such a popular function in Microsoft Excel, and other similar programmes, for business owners is that it takes incredibly complex mathematical equations and makes it very simple. They\u2019re invaluable calculations too, helping you with your monthly finances and ensuring you’re on top of the repayments you\u2019re due to make.\u00a0<\/span><\/p>\n

                  Why Does PMT Return A Negative Value In Excel?<\/span><\/h2>\n

                  If you\u2019ve tried putting the information into Excel to do your own PMT calculation you may have noticed that the PMT value that is returned is shown as a negative. That\u2019s because the calculation assumes it\u2019s money you owe, therefore it will be a negative value.\u00a0<\/span><\/p>\n

                  However, if you\u2019re using PMT to work out how much a customer should be repaying you based on a loan you\u2019ve provided, then you can include the pv variable as a negative number when first entering the PMT equation into Excel. This will then return a positive number, showing how much the customer will be sending to you each month instead.\u00a0<\/span><\/p>\n

                  How To Work Out The Total That Will Be Repaid<\/span><\/h2>\n

                  If you\u2019re wondering how much in total you\u2019ll have paid on a loan over the course of the repayments, you can simply multiply the PMT value by the number of repayments you\u2019ll be making (or the nper value, if you\u2019re still thinking in terms of Excel). This will tell you the total you\u2019ll have repaid by the time it\u2019s all over, including the interest additions.\u00a0<\/span><\/p>\n

                  Businesses And PMT: Conclusion<\/span><\/h2>\n

                  PMT finance is a brilliant tool for any business owner to use, and as we\u2019ve shown today it can be used in a number of creative ways to help you stay on top of your business finances. Trying to do PMT manually is complex and often too time consuming for busy business owners, which is why so many rely on the PMT function in programmes like Excel to support them.\u00a0<\/span><\/p>\n

                  Now that you know what PMT is and how it can be used to make you more efficient at managing your business finances, hopefully you\u2019ll be feeling confident enough to utilise it more in your business to save you time and increase the reliability of your calculations.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

                  The business world is filled with acronyms and business jargon that can leave even the most business-savvy amongst us scratching our heads. As a business owner though, there are certain terms you\u2019ll want to get familiar with quickly to make your life easier – and PMT is one of them. So, what is PMT and […]<\/p>\n","protected":false},"author":26234,"featured_media":175820,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[11878],"tags":[11942,4401,2798,12013,6276],"class_list":["post-175819","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-aug-p","tag-business-finance","tag-excel","tag-p2023","tag-spreadsheets"],"views":1021,"_links":{"self":[{"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/posts\/175819","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/users\/26234"}],"replies":[{"embeddable":true,"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/comments?post=175819"}],"version-history":[{"count":0,"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/posts\/175819\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/media\/175820"}],"wp:attachment":[{"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/media?parent=175819"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/categories?post=175819"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/realbusiness.co.uk\/wp-json\/wp\/v2\/tags?post=175819"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}