finance
Payback Period
How long it takes for an investment to pay back its initial cost from the cash it generates.
Definition
Payback period is the time required to recover an investment from the cash flow it generates. A $30K investment that returns $1K/month has a 30-month payback. The shorter the payback, the lower the risk - even if the long-term return is identical, faster payback means less exposure to the unknown. For CAC, payback under 12 months is healthy. For equipment, depends on industry. Payback is simple but ignores time value of money and post-payback returns - useful as a risk filter, not as a sole investment criterion.
In your business
- →Set a maximum payback threshold per investment type (e.g., 12 months for CAC, 24 months for equipment)
- →Use payback as a risk filter, then evaluate longer-term return separately
- →Faster payback wins in uncertain times - even at lower total return