Manolos on a Mission

The concept of payback period is an important part in computing the profitability of a business. In its simplest sense, payback period is the amount of time when the business starts to recover from all the initial expenses that it has made due to its start up. After the computed payback period has elapsed, it is expected that any income generated is equivalent to the profit of the business since it already has recovered all of its preliminary investment expenditures. Depending on the size of the money invested, there is a range of payback period that is acceptable to consider a business to be a feasible one.

The computation of payback period is very direct to the point with no complicated mathematical equations involved. Payback period is just equal to the cost of investment divided by the annual cash inflow of the business. The cost of investment is the amount of money spent to start the business considering all expenses made say for the purchase of machines, payment for rent, wage of manpower, and legal fees. Annual cash inflow involves all the income that the business obtains from its operation. The quotient of the two is approximated as the payback period and this is taken into consideration in deciding whether to pursue a business or not.

So when you want to have a quick measure of the viability of a business, you can compute its payback period and use it as a preliminary basis. But keep in mind that this measure also has a few setbacks such as its inconsideration to the value of money at a given time and it cannot measure the behavior after the payback period has elapsed. But among all, it can be a good quantitative basis for making outright minor decisions for a business.

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