Compounding (In Business)
We often hear about compound interest in terms of investments. $100 compounded annually at 10% would give you $110 at the end of the first year. $110 becomes your new base, and you now have an extra $10 in the bank.
At the end of year two, you would get 10% off $110, or $11. The new base now becomes $121. However, this time, along with the sum, the interest received has also increased.
With a long enough period (the longer, the better), the results can take off exponentially, as you have a multi-faceted increase in both the capital and interest.
The downside is that you either need a significant amount of capital or have to wait a very long time for the results to matter. You also can’t control the interest rate you receive.
Compounding can also play a part when you build your own business. However, in this case, you can control most of the variables to your advantage.
The initial capital would be comparable to the quality or value of your product. The better your product and the more effort you put into improving it each year, the higher this would become.
The interest rate would be similar to your revenue or the number of people excited about your product. The more people who use and recommend your product, the higher this would become.
With a long enough period, you can start seeing your returns growing exponentially, with an improvement in both product (valuation) and customers (revenue).
Compounding in business can provide tremendous returns, far surpassing those generated by investments alone.