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Definition
Compound interest applies the rate to the principal plus any interest already added to the balance. The effect depends on compounding frequency: the more often interest is capitalised, the faster the balance grows. It powers both the cost of carrying debt and the growth of savings.
In plain terms
It is the snowball: interest earns interest, which earns more interest. A friend on the savings side, a foe on the borrowing side.
Why it matters for your company
On borrowing, minimise the balance and the compounding you are exposed to; on reserves, let it work for you. Model both with the compound interest calculator. See simple interest.
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