Telling the truth about SME life today

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’ll 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?

What Is PMT In Business Finance?

PMT is actually just an abbreviation – it doesn’t stand for anything other than the word ‘payment’. So you’re probably wondering why that’s 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. 

What Sort Of Regular Payments Can I Use PMT Finance For?

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’t ever change in frequency or amount. Some examples include:

  • Repayments on a business loan
  • Mortgage repayments 
  • Insurance payments
  • Payments owed to your business due to a fixed financial arrangement
  • Business savings goals

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.

Using PMT In Excel

Microsoft Excel is basically the standard way to manage finances and record financial information across all businesses and it’s been that way for years. As a result, it’s in Microsoft Excel where you’ll get the most use out of the PMT function as a business owner. 

Before we jump into a worked example to show you how you can use PMT to your business’ advantage, let us introduce you to the formula behind the PMT function in Excel:

=PMT(rate, nper, pv)

Now we imagine that doesn’t mean anything to you right now, so let us break it down for you.

PMT 

PMT is the final value you’ll get from the PMT function – it’ll 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.

The rate, nper, and pv are all parts of the calculation that will give you the PMT information.

Rate 

The ‘rate’ refers to the interest rate of the loan or investment, and it’s 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. 

Other business owners prefer to spread out their loan repayments monthly. If that’s the case, you’ll need to divide your total APR on the loan you’re 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. 

It’s important that you put in this value as a % into the Excel formula.

Nper 

‘Nper’ refers to the number of periods, or, the number of times you’ll 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’re making repayments on your loan. 

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 ‘nper’ value to enter into the PMT finance function in Excel easily enough.

Pv

The pv is your present value or loan principle. It’s basically how much you still owe on the loan right now. Or, if you’re 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. 

PMT Function In Basic Terms

So, if in Excel =PMT(rate, nper, pv) – what will you actually need to input into the formula bar of Excel to work out your PMT?

Let’s look at an example. Let’s imagine you’ve taken out a business loan of £50,000 over 5 years with a fixed APR of 2.4%. Here’s all the details you would need to carry out the PMT function:

  • Rate: 2.4% / 12 = 0.2% (your rate per month)
  • Nper: 5 x 12 = 60 (total repayments you’ll need to make)
  • Pv: Total amount left on the loan – in this case let’s imagine you’ve not started repayment yet, so your pv is still the £50,000 you borrowed in the first place 

 

Into the formula bar in Excel you would need to type =PMT(0.2%, 60, 50,000). This will then give you the PMT value. In this case, your loan repayments each month will amount to £885.17, meaning you repay a total of £53,110.20 over the entire period (£885.17 multiplied by the 60 months it will take to repay).

Using PMT To Calculate Investment Decisions

We’ve 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. 

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:

  • Rate – the rate of interest per year
  • Nper – the period of time you’d like to see a return on investment
  • Pv – the amount you would like to see as a return on investment

Let’s look at an example. 

Worked PMT Business Investment Example

Let’s imagine you want to see a return on investment of £25,000 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:

  • rate = 2.5%
  • nper = 12
  • pv = 25,000

Into Excel you would type ‘=PMT(2.5%, 12, 25000)’ which will give you a PMT value of £2437.18 – meaning you’ll need to invest this amount each month to reach your goal.

More Complex Examples

PMT isn’t just for business loans and answers to the question ‘how much should I invest each month in order to see the return I like’. 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.

Sounds complicated? It is right now, but that’s because we’re missing a couple of extra pieces of the PMT finance puzzle:

  • Fv
  • Type

Fv Explained 

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’t 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’ll get back to that shortly). 

In the PMT calculation in Excel, here is where fv would be included if you were using it:

=PMT(rate, nper, pv, fv)

Type Explained

Type is another optional value that can be included in the PMT calculation if you need to specify. The ‘type’ value can only be 0 or 1:

  • 0 shows that payments are due at the end of each period
  • 1 shows that payments are due at the beginning of each period

In the examples above where we haven’t 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’s worth knowing that there’s another option should you ever require your repayments to be made at the beginning of each period.

In the PMT calculation in Excel, here is where the type value can be found if you’re using it:

=PMT(rate, nper, pv, fv, type)

Worked PMT Business Savings Example 

Let’s imagine you want to save £250,000 in a year to open a second location for your business. It’s a lofty goal, but let’s stick with it for the example today. Let’s imagine that at the end of each month you’ll be transferring money into a business savings account with a 4% monthly interest rate.

Here, you’re 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?

You’ll need the following information:

  • rate = 4% (monthly interest rate)
  • nper = 12 (the goal is for the year, meaning you have 12 payments)
  • pv = 0 (pv is not relevant here because you’re trying to reach a goal)
  • fv = 250,000 (the amount you would ideally like at the end of the year)
  • type = 0 (you’ll be making repayments at the end of each period or month)

Into Excel you would type =PMT(4%, 12, 0, 250000, 0) which would tell you that you need to save £16,638.04 and place it in your 4% savings account each month to reach your goal of £250,000 in 12 months.

Why Is PMT So Important To Business Finances?

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’ll almost certainly apply to you and your business. 

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’re invaluable calculations too, helping you with your monthly finances and ensuring you’re on top of the repayments you’re due to make. 

Why Does PMT Return A Negative Value In Excel?

If you’ve 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’s because the calculation assumes it’s money you owe, therefore it will be a negative value. 

However, if you’re using PMT to work out how much a customer should be repaying you based on a loan you’ve 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. 

How To Work Out The Total That Will Be Repaid

If you’re wondering how much in total you’ll have paid on a loan over the course of the repayments, you can simply multiply the PMT value by the number of repayments you’ll be making (or the nper value, if you’re still thinking in terms of Excel). This will tell you the total you’ll have repaid by the time it’s all over, including the interest additions. 

Businesses And PMT: Conclusion

PMT finance is a brilliant tool for any business owner to use, and as we’ve 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. 

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’ll be feeling confident enough to utilise it more in your business to save you time and increase the reliability of your calculations.

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!