When planning and starting your own business, the most important thing is to correctly calculate its profitability so that the money invested in it does not burn out. The development of your own business is influenced by many factors and parameters that must be taken into account so that the business is not unprofitable and fails. One of the important indicators is the payback of the business, its profitability, that is, the period for which the invested money will pay for itself and bring profit. The shorter the payback period, the higher the profitability of the business and enterprise.

One of the main problems of novice businessmen is the question of the payback of a new project. This is one of the main criteria when making a positive decision on starting a business, in order to know how long the profit from doing business will only return on investment.

Two indicators are important here - this is absolute and relative. Absolute it is the result that was obtained from the investment and is measured by the increase in profits.

One way to calculate the payback period is non-discounted calculation method.

Let's look at an example to make it easier to understand the essence of the method. For example, for the production of a product, you buy equipment for a total of 100,000 rubles. To do this, you must calculate the cost of the goods produced, it includes the cost of raw materials, production costs, equipment depreciation. Let's take that the cost of a unit of goods will be equal to 100 rubles, and that it is made in one hour. This means that 8 items will be produced per shift. Based on this, it is possible to calculate for what period of time it will be possible to return the funds that were invested in production. Payback formula: Payback period = cost of production equipment / cost of goods for one month = 100000/800*25=5 months.

But this is a very simple calculation, here you can see by what principle and order you need to calculate.

For a complex and serious project, it is necessary to take into account all the costs incurred in the production and sale of goods, the risks, which, ultimately, all together and affect the payback of the spent Money.

For a person who wants to start his own business, you need to correctly calculate the payback of the project and its profitability. This can be done independently, and by contacting a financial specialist.

It is necessary to take into account market factors, what is the demand for the product, at what stage there may be delays in the sale or production of the product. There is a lot of information now, both in books and various sites.

Payback of rental business

A rental business is one of the easiest and most reliable investment options.

It is also important that the constant presence and involvement of the owner in the process itself is not required here. If the premises and the tenant are chosen correctly, then renting it out can bring a constant and stable income. At the same time, such activities can be combined with other businesses.

At first glance, evaluating the profitability and payback of a rental business should not be difficult, but you need to compare rental income and cost to get the payback period, the main indicator of the rental business.

Standard payback period commercial real estate is 9-10 years old. It is already quite difficult to find a payback period of 7-8 years for commercial real estate with a tenant.

At the same time, sellers, buyers and appraisers can calculate the payback period in different ways. Here the difference will be in what indicator will be considered income when calculating the payback.

The seller usually takes the annual rental amount and divides the sale price by this amount. If a room of 220 square meters is for sale, which is rented for 1,000 rubles per square meter per month for 22 million rubles, then the calculation will be as follows. The income is 200 thousand rubles a month, and 2 million 400 thousand rubles a year, then the payback will be 20 million / 2.4 million8,3 years. And at sale of such real estate this term will be specified.

It also happens that a long-term lease agreement is concluded with the tenant, and every year there is an indexation of 7.5%. In this case, the amount of rent is calculated for each year, taking into account indexation, everything is summed up. That is, the payback period will be shorter here.

Buyers settlement

Buyers approach the calculation a little differently, the emphasis is on cash income, so to speak, net income, minus all expenses.

Expenses include a tax of 6% of income, expenses for security, cleaning, rent or payment of some utilities. The larger and larger the object, the more expenses with it fall on the owner.

With a room of 200 square meters, it is possible that all costs associated with maintenance are borne by the tenant, and the remaining costs are insignificant.

Also, if the buyer is an individual entrepreneur with the simplified tax system, then he will have a 6% tax. And the calculation of profit and payback will take into account the amount of tax in 144 thousand rubles. Net income for two years will be 2256 thousand rubles, and the payback will be 8.9 years. Therefore, rounding up the term to 9 years, the buyer will decide that this is a sufficiently long period, the difference from the declared 7 years is significant.

For larger objects of the rental business, for example, a shopping center, which will have an area of ​​​​about 4,000 or 20,000 square meters, according to the buyer's calculations, the payback period can be even higher, up to 12 years.

A real estate object becomes more attractive with a good location, number of storeys, good condition, prestige, an adequate rental rate and price per square meter, and the absence of legal fraud.

But the main criterion is precisely the payback, and if it is higher than the period for which the buyer is ready, then this object is not considered.

Supplier calculation

Appraisers, as a rule, conduct their analysis of the market at rental rates for such premises, and with some adjustments determine what the market level of the rental rate for a given object is. At the same time, they do not take into account already concluded real estate lease agreements, and this does not affect the assessment.

Appraisers analyze ads from sites and thus determine the market rental rate. Here, the experience and professionalism of the appraiser is important, as well as knowledge of the important factors that affect the rental rate, so as not to make a mistake in the assessment.

And in ads, the price of an object may not correspond to the market price, but be overpriced, and because of this, do not give up for six months.

Appraisers, based on a comparative approach to valuation, focus not only on the income approach, but also on the calculation of the value of real estate and its square meter. It does not take into account the presence of a tenant, rental income. And the final cost is determined as the average value between the calculations for rental yield and the cost of a meter.

This is where the averaging mechanism comes into play, and as a result, appraisers get a value just between the number of buyers and sellers.

Each participant in the transaction forms an assessment based on their goals.

The seller's goal is to sell the object at a higher price, and as soon as possible, so he does not pay attention to expenses.

For the buyer, it is more important to recoup the invested funds with a good return, and the buyer takes into account the net income.

Appraisers, as a rule, are not interested in what will happen next with the object, the main thing is to make an appraisal report for examination.

Before directing investments to modernize production or purchase goods, it is necessary to understand how quickly they will return. In this article, we will figure out how to calculate this indicator yourself.

You will learn:

• What is ROI and why is it important to a company.
• How to calculate return on investment.
• How to determine cost recovery for different business areas.

What is ROI and why is it important to a company?

The indicator is used for different purposes, and depending on them, there are nuances in its definition. For example, if investing in a business is considered, then the indicator indicates the period of time for which the money spent will be equal in size to income.

In most cases, it is the payback indicator that determines the entrepreneur's determination to invest in an idea. If the size of the indicator is small, then this indicates that you can quickly make a profit, which means it makes sense to invest in the business.

If we are talking about capital investments in a company, then the return on investment is the time it takes for the money spent on equipment or modernization to return to the company due to the proceeds received. Accordingly, if it is planned to reconstruct or open new workshops, the coefficient will play important role in decision making .

You can calculate the criterion for a piece of equipment, for example, if an organization needs to change one machine or buy a truck. In this case, the criterion will show how quickly the funds will be returned from the income from this equipment.

The indicator is used in all segments of the economy and is one of the first factors, starting from which, the founders make decisions on the contribution of their finances to the development of the company or opening a new business. It is equally important for Agriculture, and when buying a batch of Chinese goods, as it helps to eliminate situations with the “freezing” of money into an illiquid asset.

How to Calculate ROI

Real example of cost recovery calculation

Specialists use 2 main approaches to the calculation. They are subdivided depending on the change in the value of the money spent on modernization. Let's consider them in more detail.

Simple Calculation Method

This option does not take into account the depreciation of finance due to inflation and other factors. In serious business, this approach is rarely used and makes sense only if the following conditions are met:

• To study several startups with the same period of work.
• With a one-time payment at the beginning of the case.
• If the expected profit from the case will have equal shares in each of the time periods.

To understand how to determine the payback period with a simple approach, you should first check the implementation of all principles for the accuracy of the calculation. Then the data obtained will be able to show the exact value of the return on investment.

The low accuracy is due to the fact that changes in the value of money are not taken into account and the procedure for making a profit may be outside the estimated period. Despite this, the approach is quite common in the business environment, as it allows for a quick assessment of prospects.

With a simple version, a forecast can be made immediately by the value of the criterion: if it turns out to be clearly large, then there is no need for complex calculations, the idea is unpromising for investment.

SO = RI / NGP

• RI - the amount of investment.
• NGP is net income for the year.

With this simple equation, you can quickly calculate the ratio and understand whether you should invest in a business.

Discounted calculation method

It is used when a simple approach is not enough to accurately understand the benefits of the contribution. The method takes into account the changes that occur with finance over the period of work from various market influence factors. Together, they are expressed in an additional criterion - the discount rate.

It will show in which direction the value of the investor's money will change. For example, if investments amounted to 100 in thousands of rubles, the rate is 10%, and the project implementation time is 3 years, during this time the initial amount will turn into 133,100 due to cost growth. It becomes clear that the profitability of a startup will have to recoup the amount received with discount.

The formula for calculating the cost recovery in this case will look like this:

DR \u003d NDP / (1 + D) * Pv

• NPV is net cash flow.
• D is the rate expressed as a percentage.
• PV - the period of time for which income is received.

This option will allow you to accurately predict the speed with which the funds spent will be returned. The result may differ from simple to a greater extent, but it guarantees the veracity of the data, therefore it is often used on large projects or when upgrading an enterprise.

Where to invest money to recoup costs for 1 quarter

Anyone who plans to open a new business or invest in an existing one, as a rule, asks two key questions: how not to make mistakes when investing money and how to recoup all costs in the shortest possible time.

The electronic magazine "Commercial Director" answers these questions in the article at the link.

How to determine cost recovery for different business areas

Calculations are made according to the formulas discussed above, while they look similar for different areas of business. For clarity, consider examples in three different directions.

Agriculture

This area is different long cycle business turnover, so it is especially important to check the value of the indicator if you need to invest assets. Consider an example of calculating the cost recovery using the formula in agriculture:

Manufacturing organization fresh vegetables, offers to invest in it finances for 250,000 rubles, while promising to bring 70,000 rubles of net profit per year. Let's calculate the expected time for the return of funds by a simple method:

SD = 250 / 70 = 3.5 years

These figures can be used to make a quick decision on a company's proposal, but they do not take into account market changes and the fact that new costs may arise.

Manufacturing organization

In any case, there comes a time when the need for modernization becomes obvious. It can be carried out step by step with the change of the most promising sections of equipment or immediately with the renewal of the entire line. In this case, the evaluation process needs to be taken more seriously and calculate the payback of production according to the formula, taking into account costs.

It is necessary to check the profitability of the workplace modernization project, which requires an investment of 150,000 rubles and promises to bring up to 50,000 rubles in net profit, but management also foresees possible expenses up to 20,000 rubles per year. The calculation will look like this:

NPV = 30 (excluding costs)

SD = 150 / 30 = 5 years

The example shows how to determine the payback period, taking into account additional costs and how they significantly increase the time to pay back.

Trade

In the field of retail, for example, the purchase of goods is done for large amounts of money, so you should start by calculating the coefficient. In this case, accuracy will be required, since the specialist must take into account the uneven receipt of profits, the cost of paying for warehouse space and the shelf life of products.

The trading company is going to purchase goods for 100,000 ₽, the planned income in the first and second periods is 40,000 ₽, in the last - 60,000 ₽. The estimated cost of the warehouse for the entire time is 15,000 ₽. Let's calculate the payback of products according to the formula:

Income = 40 + 40 + 60 = 140,000 ₽

Given the size of the initial amount, it becomes clear that the goods will be beaten off between the second and third quarters.

Payback is a value that determines the time during which the costs of creating a business will pay off. The result obtained gives a general idea of ​​the expediency of starting the project. Let's take a closer look at what is meant by this term, how to calculate the indicator, concrete examples payback calculation.

To calculate the payback, it is necessary to determine the amount that will be needed to start the project (1), and the expected profit for each month or the first year of its existence (2).

• Purchase or rental of equipment, furniture, appliances.
• Purchase/rent/renovation of the premises where the activity will be carried out.
• Obtaining appropriate permits (license, registration of IP, etc.)
• Purchase of goods to start sales (in case you will not provide services).
• Hiring employees and their employment.

Example. You want to open a shawarma shop in Moscow. Let's calculate the approximate amount that is needed to start a business:

1. Purchase of a trading stall - 250.000 rubles.
2. Purchase of equipment (grill, refrigerator, coffee machine, etc.) - 100.000 rubles.
3. Obtaining the necessary permits from the market administration or the tax office, electricity wire - 100,000 rubles.
4. Purchase of ingredients for shawarma, additional goods (water, tea, coffee) - 30.000 rubles.

Thus, to open your own shawarma you need more than 500,000 rubles.

The second indicator is expected profit from the project. You won’t be able to find out the exact figure, but focusing on the statistics of the success of a particular business in your city, you can understand how much you will earn approximately per month.

Example. Let's return to the business project for the sale of shawarma. On average, in Moscow, one portion costs 200 rubles, taking into account additional costs (tea, coffee, water), the buyer leaves the seller 250 rubles. When a kiosk operates in a 12-hour shift, the average number of customers per day is 30–35. We calculate the average profit per month:

(250 * 30) * 30 = 225 thousand rubles of monthly profit.

Where 250 is the average check of the buyer; 30 - the number of customers daily; 30 is the average number of days in a month.

The formula for calculating the payback of a business?

To calculate the payback of a business project, economists use the following formula:

INV / R = CURRENT,

• where INV are the initial costs required to start a business;
• R - expected profit (per month);
• TOK - the final payback period of the project.

Important! It is worth noting that within a few months after opening a business, additional expenses will need to be paid (rent of premises, equipment, employee salaries). These costs must be taken into account when calculating the payback of the business.

Below we will consider specific examples of the payback of business projects in various areas.

Business with a quick and long payback

With a quick payback

With a long payback

Nail extension. To open such a business, you need to spend about 150,000 rubles. The costs include the rent of the premises and the purchase of equipment. In the future, it is necessary to spend up to 10,000 rubles to maintain the project. But considering that the average income of a nail extension master is 50-70 thousand rubles. monthly, the business will pay off in 3-4 months. We calculate according to the formula: 150,000 / 50,000 = 3 months. Considering monthly expenses, the return on investment will take approximately 4 months.

Renting out housing. Suppose you buy an apartment in the Moscow region, St. Petersburg for 3.5 million rubles, and then rent it out for 40,000 rubles / month. You do not need to spend money on maintaining this business (except for small household expenses), however, its payback will be slow. Based on the calculations (3.500.000 / 40.000 = 87.5 months), the investment will pay off only after 7-8 years if the apartment is constantly rented out, which is unlikely. Total: payback period - 10-12 years, taking into account downtime and minor repairs.

Average business payback

According to experts, on average, a business pays off within 6-12 months. This is the average time for profitable projects, which include:

• Sale of food and fast food.
• Provision of services in the field of beauty, cosmetology.
• Repair of clothes and shoes.
• Production of keys.
• Making hand soap.
• Organization of sports trainings, author's courses.

For more complex projects that require significant investment (for example, opening an expensive restaurant or jewelry store), the payback period can be several years. This indicator is individual and depends on the demand for the product or service provided, the location and traffic of the outlet.

Business payback by region

Depending on the city in which you plan to start your own business, its specifics and start-up capital, the payback period may vary. Let's look at a few examples.

In the first case, business clothing repair shop.

Moscow

Moscow region

The following expenses will be spent on organizing a business: Room rental - 80.000 rub. for the first three months. Purchase of equipment and devices for clothing repair - 20.000 rubles. Additional expenses (obtaining permits for activities, supplying electricity) - 20,000 rubles. Thus, the starting capital for opening a clothing repair shop is 120,000 rubles. According to statistics, the average profit for such a business is 50,000 rubles / month. We count according to the formula: 120,000 / 50,000 = 2.4 (payback in the region of 2-3 months).

In the cities of the Moscow region (Podolsk, Dmitrov, Serpukhov), renting a room will cost less - about 50,000 rubles. for the first three months. You will have to spend about 10,000 rubles on additional expenses, 20,000 rubles on threads, needles and other tools for repairs. It turns out that to organize a sewing business, you need a capital of 80,000 rubles. At the same time, income will also be less - about 35,000 rubles / month. Payback calculation according to the formula: 80,000 / 35,000 = 2.2 (2-3 months).

Now let's look at how quickly business pays off in St. Petersburg and the region. For example, let's take a business selling coffee to go(Eng. Coffee To Go) is a popular option for earning money in megacities.

Saint Petersburg

Leningrad region

Basic expenses for starting a business: Room rental. You don’t need a lot of space to sell coffee: you can rent an extension in a 2–3 square meter trade pavilion. It will cost about 15 thousand rubles for three months. Buying a coffee machine The device of average power will cost 80 thousand rubles. Purchase of goods for sale. In addition to coffee beans, sugar, milk, you will need tea, products for simple sandwiches, sweets. You need to spend about 20 thousand rubles for this. In total, at least 115 thousand rubles are needed to start a business. On average, such a project can earn up to 40 thousand rubles a month. We count according to the formula: 115,000 /40,000 = 2.8. Thus, the business will pay off in about 3 months.

In the cities of the Leningrad region, renting a room will cost less: an average of 3,000 rubles per month for a small room. Total - 9 thousand rubles for rent for 3 months. Equipment and raw materials to start selling will cost the same amount as in the case of St. Petersburg: statistics show that prices do not differ much. To start selling, you need to have at least 109 thousand rubles. At the same time, incomes will be less than in the metropolis, since the demand for coffee to go in small cities is small. On average, earnings will reach 30 thousand rubles a month. We calculate the payback using the formula: 109 000 /30 000 = 3.6. The investment will pay off in 3-4 months.

Ekaterinburg. For example, let's take the concept of a mini-cafe with an area of ​​100 squares and 40 seats. For Yekaterinburg, the cost plan will be something like this:

• Staff. For shift work, you need to hire at least 4 waiters, 4 cooks, an administrator, a cashier, a cleaner. Staff costs in this scenario will cost 250-300 thousand rubles.
• Purchase of equipment and furniture for internal use (refrigerators, slicers, kitchen tables, etc.) - 400 thousand rubles.
• Room rent per month - 60 thousand rubles.
• Purchase of furniture and decorative elements for the premises - 250 thousand rubles.
• Preparation of documentation and obtaining all necessary permits - 25 thousand rubles.

In total, to open a small cafe in Yekaterinburg, you need to invest at least 1,210,000 rubles.

The average check for a visitor is 800 rubles. Provided that 30 people visit the cafe daily, the revenue will be 24,000 rubles every day. To determine the monthly income, we multiply this amount by the average number of days in a month (24,000 * 30), we get 720,000 rubles.

• Payment of wages - 250,000 rubles;
• Premises rental - 60,000 rubles;
• Utilities - 10,000 rubles.

Monthly expenses amount to 320,000 rubles. This amount is subtracted from net profit (720,000 - 320,000), we get 400,000 rubles of net earnings every month.

Taking into account the fact that we initially spent 1,210,000 rubles to launch the project, its payback is 4–5 months.

The payback period of capital expenditures is the time during which capital expenditures are reimbursed by savings from cost reductions or from profits as a result of implementation. new technology.

Distinguish general and additional capital investments.

IN total capital investment when introducing new technologies and techniques in processing enterprises, the cost of equipment, instruments, delivery costs and construction and installation works are included.

The payback period of total capital investments is determined by the following formula:

Where TABOUT– payback period of total capital investments, years;

TOABOUT- the total amount of capital investments, thousand rubles;

P- profit received from capital investments in the process of production of products and their sale, thousand rubles.

Payback period of additional capital investments as a result of the introduction of new technologies and equipment:

TD= (25)

Where TD– payback period for additional capital investments, years;

Additional capital investments in new technologies and equipment, thousand rubles;

-Increase in annual profit from sales resulting from the use of new technologies and equipment, thousand rubles

TD= (26)

Where EG– annual savings from reducing the cost of production, thousand rubles

The calculation can be carried out for all technical measures, but it is especially important for events with a complete production cycle. in this case, the payback period for capital expenditures is determined by the ratio of capital expenditures to net profit for the year:

TABOUT= (27)

Where HETC– net profit, thousand rubles

To calculate net profit, at the beginning, determine the wholesale selling price of a unit of production:

Where CABOUT– wholesale selling price of a unit of production, rub.;

WITH- unit cost of production, rub.;

R– profitability of products, %.

Profitability can be taken in the amount of 10-15%. The specific size of the profitability of products manufactured on the new technology should be taken into account the price of existing equipment.

If the cost of products manufactured using new technology is less, then the level of profitability can be increased so that the profit is greater, but this is advisable when the price of new equipment is less than the price of existing equipment.

Profit from the sale of products (gross) is determined by the formula:

Pr \u003d (CABOUT–C)PG2, (29)

Net profit can be defined as the difference between the profit from the sale of products and the amount of income taxes and various payments from profit (in accordance with applicable law):

HETC\u003d Pr -N,(30)

Where H - the amount of income taxes and various payments at the expense of profit, rub.

If the payback period is more than one year, it is necessary to take into account the equivalence of money and determine the net present value.

Discounting("discounting" - markdown) - the comparison of indicators of costs and results at different times, which is carried out by bringing them to the initial or predetermined other point in time.

HPD= HETCTOD, (31)

Where HPD– net discounted profit, rub.;

TOD– discount factor.

TOD = , (32)

Where E - rate of return (a coefficient that takes into account the change in the value of money, is applied at the level of the average interest rate of the Central Bank divided by 100),

t– Estimated time from the beginning of the implementation of costs to the moment the result is obtained, years.

Then the total payback period of capital costs is determined as the sum of the payback period for the first period of development of new equipment and the payback period for unreimbursed capital costs in each subsequent year at the expense of discounted profit, taking into account the production volumes of each year.

In addition to the payback period for capital expenditures, it is possible to determine the profitability index:

• with the full development of new technology and a payback period of one year, the profitability index is determined by the formula:

id= ,(33)

• with a payback period of more than one year:

id= ,(34)

A new technology project with a profitability index of more than one or equal to one is considered cost-effective.

In the conclusion on economic efficiency, a summary table of technical and economic indicators of the project should be compiled in comparison with the best existing equipment, in the form of Table 17.

Table 17 - Technical and economic indicators of the project

Based on the data in Table.

17 it is necessary to characterize the essence of the advantages that provide the introduction of the designed technology: how much the labor intensity of manufacturing a unit of production is reduced, what is provided by cost savings per unit of production, annual output; what profit per unit of production, annual output; for how long capital investments are paid for, what is the index of profitability.

Payback period: formula. Investment and profit

The payback formula for a project is one of the important indicators in its evaluation. The payback period for investors is fundamental. It generally characterizes how liquid and profitable the project is. To correctly determine the optimality of investments, it is important to understand how the indicator is obtained and calculated.

The meaning of the calculation

One of the most important indicators in determining the effectiveness of investments is the payback period. Its formula shows for what period of time the income from the project will cover all one-time costs for it. The method makes it possible to calculate the time for the return of funds, which the investor then correlates with his economically advantageous and acceptable period.

Economic analysis involves the use of various methods in the calculation of the above indicators. It is used if a comparative analysis is carried out to determine the most profitable project.

It is important at the same time that it is not used as the main and only parameter, but is calculated and analyzed in conjunction with the rest, showing the effectiveness of one or another investment option.

The calculation of the payback period as the main indicator can be used if the company is aimed at a quick return on investment. For example, when choosing ways to improve the company.

Other things being equal, the project with the shortest return period is accepted for implementation.

Return on investment is a formula that shows the number of periods (years or months) for which the investor will return his investment in full. In other words, this is the refund period. At the same time, it should be remembered that the named period should be shorter than the period of time during which the use of external loans is carried out.

What is needed for the calculation

The payback period (the formula for its use) requires knowledge of the following indicators:

• project costs - this includes all investments made since its inception;
• net income per year is the revenue from the implementation of the project received for the year, but after deducting all costs, including taxes;
• depreciation for the period (year) - the amount of money that was spent on improving the project and methods of its implementation (modernization and repair of equipment, improvement of technology, etc.);
• duration of costs (meaning investment).

And to calculate the discounted return on investment, it is important to take into account:

• receipt of all funds made during the period under consideration;
• discount rate;
• period for which to discount;
• initial investment.

Payback Formula

The determination of the period of return on investment takes into account the nature of the receipt of net income from the project. If it is assumed that cash flows are received evenly throughout the life of the project, the payback period, the formula of which is presented below, can be calculated as follows:

Where T is the return on investment period;

I - investments;

D is the total profit.

In this case, the total amount of income consists of net profit and depreciation.

To understand how expedient the project under consideration is when using this methodology, it will help that the resulting value of the return on investment should be lower than the one that was set by the investor.

In the real conditions of the project, the investor refuses it if the return period of investments is higher than the limit value set by him. Or he is looking for methods to reduce the payback period.

For example, an investor invests 100 thousand rubles in a project. Project income:

• in the first month amounted to 25 thousand rubles;
• in the second month - 35 thousand rubles;
• in the third month - 45 thousand rubles.

In the first two months, the project did not pay off, since 25 + 35 = 60 thousand rubles, which is lower than the amount of investments. Thus, it can be understood that the project paid off in three months, since 60 + 45 = 105 thousand rubles.

Advantages of the method

The advantages of the method described above are:

1. Ease of calculation.
2. visibility.
3. Possibility to classify investments taking into account the value set by the investor.

In general, according to this indicator, it is also possible to calculate the investment risk, since there is an inverse relationship: if the payback period, the formula of which is indicated above, decreases, the risks of the project also decrease. And vice versa, with an increase in the waiting period for a return on investment, the risk also increases - investments may become irretrievable.

Disadvantages of the method

If we talk about the shortcomings of the method, then among them are: the inaccuracy of the calculation, due to the fact that when calculating it, the time factor is not taken into account.

In fact, the proceeds that will be received outside the return period does not affect its period in any way.

In order to correctly calculate the indicator, it is important to understand by investments the costs of formation, reconstruction, and improvement of the fixed assets of the enterprise. As a result, the effect of them cannot come immediately.

An investor, when investing money in the improvement of any direction, is obliged to understand the fact that only after some time he will receive a non-negative value of the cash flow of capital. Because of this, it is important to use dynamic methods in calculations that discount flows, bringing the price of money to one point in time.

The need for such complex calculations is due to the fact that the price of money at the start date of the investment does not coincide with the value of money at the end of the project.

Discounted calculation method

The payback period, the formula of which is presented below, involves taking into account the time factor. This is the calculation of NPV - net present value. The calculation is carried out according to the formula:

where T is the period of return of funds;

IC - investment in the project;

FV is the planned income for the project.

This takes into account the value of future money, and therefore the planned income is discounted using the discount rate. This rate includes project risks. Among them are the main ones:

• inflation risks;
• country risks;
• risks of non-profit.

All of them are defined as percentages and summarized. The discount rate is determined as follows: the risk-free rate of return + all project risks.

If the flow of money is not the same

If the revenue from the project is different every year, the cost recovery formula discussed in this article is determined in several steps.

1. First, it is necessary to determine the number of periods (moreover, it must be an integer) when the amount of profit on a cumulative total becomes close to the amount of investments.
2. Then it is necessary to determine the balance: from the amount of investments, we subtract the amount of the accumulated amount of income from the project.
3. After that, the value of the uncovered balance is divided by the value of cash inflows of the next period of time. Main economic indicator in this case, the discount rate, which is determined in fractions of a unit or as a percentage per year.

conclusions

The payback period, the formula of which was discussed above, shows for what period of time a full return on investment will occur and the moment will come when the project will begin to generate income. The investment option with the shortest return period is selected.

For the calculation, several methods are used, which have their own characteristics. The simplest is to divide the amount of costs by the amount of annual revenue that the funded project brings.

What is payback in economics

Business lawyer > Accounting > What is payback in economics

To determine the attractiveness of investment programs, the implementation of capital investments, a universal indicator is used - payback. What is payback, we will describe below.

Economic understanding of payback

Before investing in a new or existing business project, any investor evaluates his own risks, the time interval for the return on invested funds, and the prospects for making a profit.

Return on investment is the level of return on invested funds to their owner after a certain period.

Cost recovery is the ratio of the income received from the project to the costs incurred.

The payback point is the moment at which the invested funds are fully covered by the income received. After that, using a coefficient or as a percentage, the yield or interest rate of return on invested capital (expenses incurred) is determined.

If the enterprise makes capital investments for the reconstruction of an existing facility, the calculation of the effectiveness of long-term costs is performed.

Payback period and how to determine it

The time interval for which the invested costs are returned by the income received is determined by simplified statistical methods, or taking into account the discounted cash flow.

A simple arithmetic calculation of the period of return on invested capital is defined as the amount of income (cash) received compared to investments invested in a business project.

The second method is economically more accurate and correct. Over time, financial resources are subject to inflationary processes, so it makes sense to take into account the discount rate that has developed in the region or a particular sector of the economy.

For shareholders, a simple method of determining the effectiveness of the acquisition of shares is to use indicators of net income per share, or accrued dividends per share.

Calculation formulas

For a simplified calculation of the effectiveness of investments, the following formula is used:

Payback period = investment / average annual profit

To calculate the payback period, taking into account inflationary expectations and applying a discount, complex formulas are used, for example:

Payback period with discount = P - (S DCFt / DCF+1),

• where P is the number full years project, after which the payback point comes
• S DCFt is the total accumulated balance of financial flows (taking into account the discount) up to the year of the payback point
• DCF+1 - discounted financial flow in the period of reaching the payback point

Calculation examples

Example 1. JSC "Ecoprom" made an investment in the production of food products using new technologies. The cost of the new project is 2 million rubles. It is planned to receive net profit from the project:

• 1 year - 50 thousand rubles.
• 2 year - 250 thousand rubles.
• 3 year - 500 thousand rubles.
• 4, 5 year - 750 thousand rubles.

For 5 years, the planned total net profit will be 2,300 thousand rubles or 460 thousand rubles per year. Payback period = 2000 / 460 = 4.3 years.

Example 2. The initial data for the business project of Ecoprom OJSC are set out in Table 1 (thousand rubles).

* calculation of the discounted amount - 100 / 105 x 50 = 47.6. Round up to 48.

Thus, taking into account inflationary expectations, the payback period for the new direction of the joint-stock company's activities exceeds 5 years. For example, if in the sixth year of activity it is planned to receive a net profit of 800 thousand rubles, then the total discounted payback period is 5 - (-88/800) = 5.11 years.

In addition to the discount for a real calculation of the repayment period, one should take into account the general economic situation in the region, the investment industry.

Evaluation of these factors will help determine the likelihood of additional investments needed during project implementation, unexpected costs, interruptions in sales and logistics processes.

Determination of cost recovery

The efficiency of the costs incurred is usually calculated in cases where the initial capital investment requires annual additional current costs. They are also calculated by two methods: simplified and discounted.

Example 3. A thorough analysis of the project of JSC "Ecoprom" revealed that in the process of its implementation, the current costs of the investor in the amount of 100 thousand rubles annually are additionally required. These changes will affect the net profit and financial flows of the project.

Table 2. (thousand rubles).

The table shows that the investor's costs, even according to a simplified calculation, will pay off only in the 6th year after the implementation of the business project.

For a potential investor or owners of an operating enterprise, the level of profitability of the business after reaching the “zero mark” of return on funds is important.

For example, if in 6-10 years of activity a business entity reaches a high level of profitability (over 25%), its participants will consider investments profitable and ready for further financing of activities. The planned estimate should include calculations of the return on invested capital for a long period (8-12 years).

To calculate the profitability of an investment, the formula is often used:

R inv. = (Income.inv - expenses.inv) / 100%

The calculation takes into account investments, income and expenses (including taxes, obligatory payments) related to the business object.

If a long-term bank loan is used in full or in part for investment, the experts of the creditor bank additionally pay special attention to the solvency of the borrower on the key dates of repayment of the loan, interest for its use using estimated debt coverage ratios.

What to consider when purchasing a business?

In the modern business world, potential investors are offered a huge number of prepared projects of economic activity:

Usually, when selling a business, it is presented “in a pink light” and talk about the bright prospects for the development of the proposed industry. The payback period for business sellers rarely exceeds 3 years, they promise high returns.

The payback period for the buyer in the calculation may turn out to be many times longer if he carefully studies the proposed business plan, analyzes the situation on a specific product market in a given industry and region, gets acquainted with the suppliers of raw materials, materials necessary for the production of products, its main potential customers. Along with accurate estimate the payback period of the proposed business, it is useful for the investor to get acquainted with the experts with the future opportunities for its sale in the coming years.

When calculating the payback, it is necessary to take into account not only the initial investment, but also the additional costs required in subsequent periods of the project.

Its profitability may be affected by changes in exchange rates, the cost of the main elements of expenses (for example, fuel, electricity, metal), changes in types, tax rates, and other economic risks.

The more accurately the calculations in the business plan are performed, the higher the likelihood that the project will pay off within the planned time frame.

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Payback period - formula, concept and calculation methods

As a rule, businessmen, before investing their financial resources, are necessarily engaged in monitoring one or another direction in order to find out how long after the investment they will begin to receive tangible profits. For this there is special concept, which may be called the financial ratio or payback period.

Formula

If it was decided to use a simple method, then the formula here will be quite simple - T \u003d I / D:

• T denotes the period of return of invested funds;
• And - the amount of invested finance;
• D - the amount of profit;

The last factor is the sum of net income and depreciation. The lower the final indicator, the more likely it is to receive a fairly significant income, which can cover not only the funds contributed, but also allow a person to take advantage of the profit.

If a person expects to make a profit within a shorter period of time that he got in the process of calculations, then it is advisable for him to refuse this investment of money.

Methodical calculation has a more complex formula, since here it is necessary to take into account a large number of additional factors.

IN general view it looks like this: T=IC/FV:

• T still stands for how long it is planned to return the funds;
• IC - the amount of money invested;
• FV - income that is planned to be received in the end;

With help this method you can calculate how much money will depreciate at the end of the billing period. It also takes into account certain risks associated with investing money.

In addition to inflation, this includes government risks and the risks of not receiving income and, as a result, direct profit. All these risks are calculated in an interest rate, after which they are summed up, which ultimately gives a probabilistic percentage of return on funds.

Investment Formula

The payback period of investments can be determined by the following formula: PP \u003d L0 / P, where PP is a direct indicator of payback, L0 represents the amount of initial investment, and P is the net annual profit from participation in this project.

For example, the company became the owner of one-time investments, the total value of which amounted to 50 million rubles with an annual income of 20 million. If we apply this formula, it will become clear that the invested funds will fully justify themselves in two and a half years, if nothing unforeseen happens.

Equipment Formula

In principle, the same formula is applied in this case, however, it has a certain practical orientation, and the risks in this case are minimal, since the equipment will sooner or later be able to pay for itself and begin to bring at least a small profit.

First, you need to calculate how much money the company can spend on the purchase of new equipment, and this includes not only its direct cost, but also delivery, setup, installation, and so on.

Cost Formula

In this case, they continue to use all the same formulas that were discussed above. However, the costs themselves, where they were invested, play a very important role.

If the project is not too risky, then it will pay off for quite a long time, but there will be practically no chance of losing funds here. With high risks, you can get a good profit, but the probability of losing money will be much higher.

For example, if an enterprise has incurred costs for the purchase of products from a third-party company in the amount of about 10 million, and in the future this product will be modernized and will go for 60 million, but it takes about three years to do this, then the payback after these 3 years will be quite fast and investments are profitable.

If it happens that there is no demand for products at all, then all the costs will be in vain.

ROI formula

The calculations here will be exactly the same as before, however, a number of important factors will need to be taken into account:

1. An integer number of periods when the profit will grow steadily, approaching the value of the initial investment.
2. We have to calculate the remainder, for which it will be necessary to subtract the amount of financial receipts from investments.
3. When there was an uncovered remnant, it will need to be divided by the total incoming mass for the project for the next period of time.

The concept of payback

Depending on the direction in which it is planned to invest money, there are several concepts of payback:

• for real estate;
• to purchase equipment;
• for investments in future profitable projects;

The payback period for investments is a specific period of time after which the invested funds will be equal to the amount of income received.

Speaking more plain language, then this coefficient will tell you after what time it will be possible to get the placed funds back and start making a profit.

Often, such a coefficient is used to determine which of the selected projects is much more profitable for investment. In other words, where it will turn out to make a profit much faster. The investor is more likely to be interested in the project with the lowest coefficient, since it will bring profit much faster.

Often, similar calculations are resorted to if it is necessary to find out how effective and expedient the investment of funds will be. If the value of this coefficient is too high, most likely it will be necessary to refuse to place funds in this enterprise.

To invest in real estate, you should carefully evaluate how effective the reconstruction, construction or modernization of the selected object will be.

Here, the main indicator will be the time period during which the additional profit and the work done to save money will be able to become larger compared to the invested funds.

The payback period of the equipment helps to calculate how long the funds spent on the purchase of this machine will be returned, and the product will begin to bring tangible profits.

Calculation methods

Depending on how long the payback period of the placed funds will be, you can choose one of two methods for calculating the coefficient in question:

A simple technique has been developed for quite some time. Thanks to him, you can relatively accurately calculate the time period that must pass from the moment of investing money to their full payback.

If the entrepreneur decides to use this particular method, then it will be effective and will give healthy food for consideration only when certain conditions are met:

1. When carrying out a comparative analysis of several, at first glance, equivalent projects, their lifespan should be approximately the same.
2. The money is invested at the start of the project.
3. The profitable part of the finance will come at approximately the same time intervals in the same parts.

To date, this technique is one of the most understandable, so it is used by most people who are going to contribute their funds to a particular project.

A simple method makes it easy to determine how risky a particular project is. The higher the resulting indicator, the greater the risk the investor takes on. If the value is minimal, then immediately after its launch, a person will begin to receive quite good means, thanks to which the liquidity of the enterprise will be maintained at the proper level.

It should be noted that this calculation method has certain disadvantages, which will also have to be taken into account:

1. Cash tends to depreciate over time.
2. After the project has fully paid for itself, the profit can either decrease to a minimum level or disappear altogether.

In this regard, it is best to use the dynamic method of calculating the return on investment. Usually it is used for fairly long-term projects. It takes into account the change in the value of money over time.

Influencing factors of the payback period

The payback period is directly affected by 2 key groups of factors - external and internal. The first investor can hardly influence. These include the rental of premises, which makes the cost of financial resources more and more.

Accordingly, the amount of net income becomes smaller. If the money invested is taken on credit, then it will be necessary to take into account the period during which it will have to be paid.

Another important factor is the various emergency situations that may require certain financial costs. The investor is able to deal with internal factors on his own. First of all, he should pay attention to the strategy for the subsequent development of the business.

Payback period: formula and calculation methods, example

To understand what the payback period is, you need to imagine for which areas of business this definition is suitable.

For investment

In this context, the payback period is the period of time after which the income from the project becomes equal to the amount of money invested. That is, the payback period coefficient when investing in a business will show how much time it will take to return the invested capital.

Often, this indicator is the selection criterion for a person who plans to invest in any enterprise. Accordingly, the lower the indicator, the more attractive the case. And in the case when the coefficient is too large, then the first thought will be in favor of choosing another case.

For capital investment

Here we are talking about the possibility of modernizing or reconstructing production processes. With capital investments, the period of time for which the savings or additional profit received from modernization will become equal to the amount of funds spent on this modernization becomes important.

Accordingly, they look at the payback period coefficient when they want to understand whether it makes sense to spend money on modernization.

For equipment

The coefficient will show for what period of time this or that device, machine, mechanism (and so on), on which money is spent, will pay for itself. Accordingly, the payback of the equipment is expressed in the income that the company receives due to this equipment.

How to calculate the payback period. Types of calculations

As a standard, there are two options for calculating the payback period. The division criterion will be taking into account the change in the value of the money spent. That is, there is accounting or it is not taken into account.

1. Simple
2. Dynamic (discounted)

Easy way to calculate

It was used initially (although it is still common today). But to get the necessary information using this method is possible only with several factors:

• If several projects are analyzed, then only projects with the same lifespan are taken.
• If the funds will be invested only once at the very beginning.
• If the profit from the investment will come in approximately the same parts.

Only in this way, using a simple calculation method, you can get an adequate result in terms of the time it takes to “return” your money.

Answer to main question- why this method does not lose popularity - in its simplicity and transparency. And if you need to superficially assess the risks of investments when comparing several projects, it will also be acceptable.

The higher the score, the riskier the investment. The lower the indicator in a simple calculation, the more profitable it is for an investor to invest, because he can count on a return on investment in obviously large parts and in a shorter time.

And this will help maintain the level of liquidity of the company.

But the simple method also has unambiguous flaws. After all, it does not take into account extremely important processes:

• The value of money that is constantly changing.
• Profit from the project, which will go to the company after passing the payback mark.
• Therefore, a more complex calculation method is often used.

Dynamic or discounted method

As the name implies, this method determines the time from investment to return of funds, taking into account discounting. We are talking about a point in time when the net present value becomes non-negative and remains so.

Due to the fact that the dynamic coefficient implies taking into account changes in the cost of finance, it will certainly be greater than the coefficient when calculating in a simple way. This is important to understand.

The convenience of this method depends partly on whether the financial income is constant. If the amounts are different in size, and the cash flow is not constant, then it is better to apply the calculation with the active use of tables and graphs.

How to calculate in a simple way

The formula that is used for calculation in a simple way to calculate the payback period coefficient looks like this:

PAYBACK TIME = INVESTMENT AMOUNT / ANNUAL NET PROFIT

PP \u003d K0 / PCsg

We take into account that RR is the payback period expressed in years.

K0 - the amount of invested funds.

HRSG - Net profit on average for the year.

Example.

You are offered to invest in the project an amount of 150 thousand rubles. And they say that the project will bring an average of 50 thousand rubles a year in net profit.

By simple calculations, we get a payback period of three years (we divided 150,000 by 50,000).

But such an example gives out information, not taking into account that the project can not only generate income during these three years but require additional investment. Therefore, it is better to use the second formula, where we need to get the value of HRsg. And you can calculate it by subtracting the average expense for the year from the average income. Let's take a look at the second example.

Example 2:

Let us add the following fact to the existing conditions. During the implementation of the project, about 20 thousand rubles will be spent every year on various costs. That is, we can already get the value of FCsg - subtracting from 50 thousand rubles (net profit for the year) 20 thousand rubles (expense for the year).

So, our formula will look like this:

PP (payback period) = 150,000 (investments) / 30 (average annual net profit). Outcome - 5 years.

The example is indicative. After all, as soon as we took into account the average annual costs, we saw that the payback period increased by as much as two years (and this is much closer to reality).

This calculation is relevant if you have the same income for all periods. But in life almost always the amount of income changes from one year to another. And to take into account this fact, you need to perform several steps:

We find the integer number of years that it will take to ensure that the final income is as close as possible to the amount of funds spent on the project (invested).

We find the amount of investments that have remained uncovered by profit (in this case, it is taken as a fact that income is received evenly throughout the year).

We find the number of months it will take to come to a full payback.

Example 3

The conditions are similar. The project needs to invest 150 thousand rubles. It is planned that during the first year the income will be 30 thousand rubles. During the second - 50 thousand. During the third - 40 thousand rubles. And in the fourth - 60 thousand.

We calculate income for three years - 30 + 50 + 40 \u003d 120 thousand rubles.

For 4 years, the amount of profit will be 180 thousand rubles.

And given that we have invested 150 thousand, it is clear that the payback period will come somewhere between the third and fourth years of the project. But we need details.

Therefore, we proceed to the second stage. We need to find that part of the invested funds that remained uncovered after the third year:

150,000 (investments) - 120,000 (income for 3 years) = 30,000 rubles.

We proceed to the third stage. We need to find the fractional part for the fourth year. 30 thousand remains to cover, and the income for this year will be 60 thousand. So we divide 30,000 by 60,000 and get 0.5 (in years).

It turns out that, taking into account the uneven inflow of money over periods (but evenly over months within the period), our invested 150 thousand rubles will pay off in three and a half years (3 + 0.5 = 3.5).

Dynamic calculation formula

As we already wrote, this method is more complicated, because it also takes into account the fact that funds change in value during the payback period.

In order for this factor to be taken into account, an additional value is introduced - the discount rate.

Let's take the conditions where:

Kd - discount factor

d - interest rate

Then kd = 1/(1+d)nd

Discounted term = AMOUNT net cash flow / (1+d) nd

To understand this formula, which is an order of magnitude more complicated than the previous ones, let's look at another example. The conditions for the example will be the same to make it clearer. And the discount rate will be 10% (in reality, it is approximately the same).

First of all, we calculate the discount factor, that is, discounted receipts for each year.

• 1 year: 30,000 / (1 + 0.1) 1 = 27,272.72 rubles.
• Year 2: 50,000 / (1 + 0.1) 2 = 41,322.31 rubles.
• Year 3: 40,000 / (1 + 0.1) 3 = 30,052.39 rubles.
• Year 4: 60,000 / (1 + 0.1) 4 = 40,980.80 rubles.

We add up the results. And it turns out that for the first three years the profit will be 139,628.22 rubles.

We see that even this amount is not enough to cover our investments. That is, taking into account the change in the value of money, we will not beat off this project even in 4 years. But let's finish the calculation. In the fifth year of the project's existence, we had no profit from the project, so let's designate it, for example, as equal to the fourth - 60,000 rubles.

• Year 5: 60,000 / (1 + 0.1) 5 \u003d 37,255.27 rubles.

If we add it to our former result, we get the sum for five years equal to 176,883.49. This amount already exceeds our investments at the start. This means that the payback period will be between the fourth and fifth years of the project's existence.

We proceed to the calculation of a specific period, find out the fractional part. From the amount invested, we subtract the amount for 4 whole years: 150,000 - 139,628.22 = 10,371.78 rubles.

The result is divided by the discounted income for the 5th year:

13 371,78 / 37 255,27 = 0,27

This means that we are missing 0.27 from the fifth year until the full payback period. And the entire payback period with the dynamic method of calculation will be 4.27 years.

As stated above, the payback period for the discounted method differs greatly from the same calculation, but in a simple way. But at the same time, it more truthfully reflects the real result that you will get under the indicated numbers and conditions.

Outcome

The payback period is one of the most important indicators for an entrepreneur who plans to invest his own funds and chooses from a number of possible projects.

At the same time, it is up to the investor to decide which way to make calculations.

In this article, we have analyzed two main solutions and looked at examples of how the numbers will change in the same situation, but with different levels of indicators.

Before starting any investment, investors must determine the period after which the investment will begin to generate income (profit). To this end, economists use the payback period as a financial ratio.

DEFINITION

Payback period is the period of time at the end of which the amount of invested funds will be equal to the amount of income received.

In other words, in this case, using the payback period formula, the period is determined, at the end of which the funds invested in the project will be returned to the investor and the project will begin to make a profit.

Often payback formula is used to select one of the alternative projects as an investment. The investor will choose the project, the value of the payback ratio of which will be less. The payback period formula will show that the company will become profitable faster.

A simple calculation method has been used for a long time and makes it possible to calculate the period that passes from the moment of investment until the time of their payback.

This payback period formula will be accurate only if the following conditions are met:

• When comparing several alternative projects, they should be with equal lifetimes;
• All investments must be made at a time at the start of the project;
• The income of the invested funds is received evenly and in equal parts.

This method of calculating the payback period is the simplest and clearest to understand.

A simple formula for the payback period is quite informative as an indicator of the riskiness of an investment. If the value of the payback period is large, then this indicates a high risk of investing and vice versa.

This method, along with its simplicity, has several disadvantages:

• The value of cash can change significantly over time;
• After the project has achieved payback, it is able to continue to generate profit, which must be calculated.

Dynamic (discounted) payback period project is an indicator of the duration of the period from the beginning of investments to the moment of its payback, taking into account the fact of discounting.

The payback period in this case occurs when the net present value becomes positive and remains so in the future. The dynamic payback period is always greater than the static payback period. This is due to the fact that when calculating a dynamic indicator, the change in the value of cash over time is taken into account.

The value of the payback period

The payback period formula is most often used to calculate capital investments. This indicator can evaluate the effectiveness of the reconstruction or modernization of production, reflecting the period during which the resulting savings and additional profits will exceed the amount that was spent on capital investments.

Often, the payback period formula is used to evaluate the effectiveness and feasibility of investments. Moreover, if the value of the coefficient is very large, then such investments, most likely, must be abandoned.

When calculating the payback period of equipment, you can find out for what period of time the funds invested in this production unit will be returned at the expense of the profit that is received when using it.

Examples of problem solving

EXAMPLE 1

Exercise

Stroymontazh is investing 150,000 rubles in the project. It is assumed that during the implementation of the project, the annual income will be 50 thousand rubles.

Solution

The formula for the payback period in this case is as follows: T=I/P Here T is the payback period (years), And - the amount of investment (rub.), P - profitability of the project (rub.) Т=150/50=3 years Conclusion. According to the results of the calculation, we see that at the end of 3 years the project will fully return its cost and begin to make a profit. This formula does not take into account the fact that additional costs may arise during the implementation of the project.