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Data Interview Question

Facebook Ad Payment Options

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Solution & Explanation

When evaluating the two payment options for Facebook Ads, we need to consider several factors, including the cost structure, cash flow implications, and the potential return on investment (ROI) of the ads. Here’s a detailed analysis of each option:

Option 1: Pay within 90 days with a 6% fee

  • Cost Analysis:
    • If you invest 1000,thefeewouldbe1000, the fee would be 60, resulting in a total payment of $1060 after 90 days.
  • Cost per Day:
    • The effective daily cost for this option is lower than the 45-day option when calculated as an annualized rate (approximately 24.3% annualized).
  • Cash Flow Considerations:
    • This option allows for greater liquidity in the short term, freeing up cash that can be used for other business operations or investments.
  • ROI Implications:
    • If your business expects a significant return from the ad spend that can be reinvested or used to cover operational costs, this option can be beneficial.

Option 2: Pay within 45 days with a 3% fee

  • Cost Analysis:
    • For the same 1000investment,thefeewouldbe1000 investment, the fee would be 30, leading to a total payment of $1030 after 45 days.
  • Cost per Day:
    • The effective daily cost is higher when annualized (approximately 24.8% annualized).
  • Cash Flow Considerations:
    • This option requires a quicker payment, potentially straining cash flow if the ad spend does not immediately convert into revenue.
  • ROI Implications:
    • If your business model or historical data shows that ad campaigns yield quick returns, this option might be more appealing to avoid longer-term interest costs.

Decision Factors

  1. Liquidity Needs:
    • If maintaining liquidity is crucial for your operations, the 90-day option provides more flexibility.
  2. Expected Return on Ad Spend (ROAS):
    • If you anticipate a quick and substantial return, the 45-day option may be preferable to minimize fee costs.
  3. External Financing:
    • Consider if you can secure cheaper financing elsewhere to cover the ad costs upfront, potentially avoiding the fees altogether.
  4. Business Strategy:
    • Evaluate whether your business strategy aligns with quicker reinvestment of returns or if longer-term planning is more beneficial.
  5. Market Conditions:
    • Consider market conditions and the potential for ad saturation, which could affect the effectiveness of the campaign over time.

Conclusion

  • Preferred Option: If liquidity and cash flow management are priorities, the 90-day option is advantageous despite a higher nominal fee due to its lower effective cost and greater flexibility.
  • Alternative Consideration: If the business can handle the cash flow impact and expects rapid returns, the 45-day option minimizes fees and might be more cost-effective in the short term.

Ultimately, the decision hinges on the specific financial health, strategic priorities, and market conditions facing the business at the time of the investment.