Whether it is a small business owner, a new or existing CEO, or someone who works in the finance department of a company, the chances are that they have been involved in some sort of financial forecasting. This may include trying to determine the payback period for a product before you choose to invest in it. The payback period is essentially how long it takes the business to recoup its initial investment spent on a product.
Below are 11 tips and tricks to reduce your payback period so you can avoid holding onto products that just aren’t cutting it financially.
1) Understand What Your Initial Investment Means
First and foremost, understanding what exactly your initial investment means can help decrease the time needed for payback by increasing operational efficiency. There are a few ways to calculate your initial investment: number of units, dollar amount per unit, and the time it takes for a product to pay for itself.
If you determine that you have invested an X amount of money into a product that will take Y years to break, then it is best not to look at just any old payback period calculator. You need one that explicitly calculates cash flow by looking at the initial investment, depreciation over time, return on investment (ROI), and compound interest rate. Doing this can help you develop an effective payback period, which is useful when trying to understand how long it will take before seeing returns on an item.
2) Choose Products Wisely
This goes hand in hand with understanding what your initial investment means. If you are tired of waiting to see results on a product, consider whether or not it is worth the money. This can be determined by comparing the payback period vs. the actual return on the product. A good rule of thumb is to look for products with a 60 percent minimum ROI.
3) Review Your Estimates Now and Then
If you find that during this process, certain products just don’t seem worth it financially, then start searching for new ones immediately rather than waiting six months down the line when they will cause even more problems. That said, don’t use estimates as an excuse to not buy anything at all simply because there may be better options out there – just be cautious that you are not entirely ignoring certain products just because they don’t have a decent payback period.
4) Consider the Future
When it comes to long-term success, tons of different factors need to be considered rather than focusing solely on financial aspects. Consider customer happiness, what will happen after expansion or investment, and whether or not there’s room for using automated equipment in the future. This is particularly important if you already have an operational product with a short payback period but plan to use it in conjunction with something else down the line. The best option would be to choose additional products that complement each other instead of competing against one another for sales.
5) Invest Properly
While this tip for reducing the payback period may seem like it goes without saying, many companies still make the mistake of investing too much money in products that could fail. This can be because they do not trust their initial research or feel they have already invested so much time and effort into the said product to back out now. Whatever the reason may be, it is essential to invest smartly by ensuring that you are correctly funding projects that seem promising but always leave yourself room to adjust if things go wrong.
6) Ensure That You Have Appropriate Pricing
Another critical factor for quickly receiving a return on your investment is to ensure that you have set up appropriate pricing for your products. While there are different ways to determine how much customers should be paying for your products, one way to help speed up the payback period is to ensure that you are charging enough. In some cases, this may mean choosing a higher price point instead of competing against competitors who charge less for the same product since it can increase sales volume.
7) Check Productivity Frequently
To ensure that your employees are producing as much as possible, it’s essential to check their products regularly and adjust accordingly. This will enable you to realize if there is a problem with a particular employee or if they would be better used elsewhere within the company. Also, consider whether or not current workflows need updating using technology that can ease operations instead of trying to do things by hand simply because “that’s how it’s always been done.”
8) Keep Your Employees Happy
Frequently employees are what make or break your company. If you treat them well, they will be more inclined to want to stay with the company long term and work harder for you, which can shorten the payback period and customer retention rates. This is important because even if one of your products has a high return on investment, it probably won’t be beneficial if nobody wants to buy anything from you since your employees have either left or aren’t working to the best of their ability due to being miserable in their jobs. Additionally, invest in a good benefits plan so that potential hires see how much you value them as people – this may help decrease turnover rates and make them less likely to leave the company.
9) Keep Long Term Goals in Mind
When you are constantly looking at short-term returns, it can be challenging to think about your company’s future. This is why setting long-term goals for yourself and keeping ahead of other companies will enable you to stay competitive while also staying focused on where you want to take your business in the future. In some cases, this isn’t always possible year by year or month by month, but it should at least be kept in mind via a strategic timeline that outlines the steps needed to reach these milestones every few months, every year, etc. So even if a particular product cannot turn a profit within a specific time frame, it might still be necessary for growing your business and reaching previously set milestones.
10) Create a Balanced Checklist of Tasks for Your Business
As we mentioned above, many pieces of a successful company go into making it functional and achieving results as quickly as possible. Each department plays an essential role in your business model and the tasks that need completing throughout the day. So before checking off another item on your to-do list, think about whether or not you’re giving yourself enough time to complete everything thoroughly and make sure that each task is checked off quickly enough so that you can move on to the next one without becoming overwhelmed and wasting too much time. Repeating this process will help reduce the payback period since it ensures timely delivery of all items on your to-do list while also reducing the chance of spending too much time on one thing and missing other essential tasks.
11) Set Short Term Goals for Your Business
In addition to long-term goals, it can be helpful to set short-term milestones that will enable you to keep track of how your company is doing month by month or year by year. This way, if there are any issues with a specific product or department, it’ll be easier to assess and determine an action plan going forward. It might even help speed up the payback period since employees will better know what needs to be accomplished in a specific timeframe. Departments may work together more efficiently knowing that they only need to meet particular targets instead of general ones. The key is to keep these goals realistic so that there are no disappointments when they are reached or not reached.
There are many ways to speed up the payback period for your business. In fact, with a bit of creativity and determination, you might find that you have several products which have already been bringing in a steady stream of revenue from their first few months on the market.
This is due to being flexible with your company’s goals and applying realistic deadlines to specific tasks. When you’re focusing on projects that don’t promise immediate results, try to look at them from a different perspective and figure out how they might benefit you in the future to help reduce the payback period for your business.