Payback period is a term that you’ll seen on business cases and in other project selection documentation. It’s a criteria that helps organisations decide if they want to go ahead with a project or not.
But what is it? And how can we use it to our advantage?
Payback period refers to the amount of time required for your investment to pay back. In other words, it’s the time taken to ‘earn’ the amount of the original investment.
Let’s say you own a hotel. You build a penthouse room on the top. It costs £100,000 to build (you get the materials very cheaply! Go with me, this amount makes the maths easier).
The price for one night’s accommodation in the penthouse is £100.
Therefore, you need to sell 1,000 nights of accommodation to break even.
100,000 / 100 = 1,000.
The payback period for this room is 1,000 nights.
That example is SO simplistic but hopefully you get the idea. Payback period measures how long something takes to pay for itself.
What kind of payback period is best?
The best kind of payback period is the shortest!
The faster something can pay back, and start bringing in profit, the better in business terms. Once you have broken even, payback period has been completed and any money earned after that is extra – the benefits you were hoping to see.
I love using payback period because it’s easy to understand and easy to work out. If you are comparing projects, when everything else is equal, the project with the shortest payback period should be the one you do first.
Of course, in real life projects aren’t equal in all other respects. You will be juggling a range of other selection criteria, of which, payback period is only one. However, it is a useful measure to look at first, to give you an idea of the effort involved in earning anything from this project. Something that has a payback period of over 10 years might not be worth doing at all and can be eliminated from project selection.
Depending on your industry, payback periods could be short or long. Any type of large-scale construction project will necessarily have a longer payback period than launching a fast-to-market consumer app. Some projects may not pay back for years, and still be worth doing. You know your industry and projects better than I ever will, so apply your professional judgement and consider what the ‘appropriate’ kind of payback period is for your organisation.
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When your project is making a tangible financial contribution to the company’s profit or revenue, then putting your business case together is pretty easy. If the financial case stands up, many execs will put a tick in the box. But when you can’t demonstrate that there are financial reasons to do your project, should you put the business case in the bin?
No, of course not. There are lots of non-financial reasons to invest money in a project. And some of them might even pay back in cash! It’s just that measuring them and attributing the benefit specifically to your project could be difficult to do.
Here are 5 common non-financial benefits that you could consider adding into your business case, even if there are plenty of cash benefits too.
There’s more information about the concepts of non-financial benefits in this article.
You’ve got a new project… and new sponsor asking for input into the business case. This video gives you a quick refresher on the top 7 things that you should include in the business case. Include these elements to help you business case sail through the approval process!
One of the things I get asked the most is, “Can you help me with my business case?” It wasn’t always like that, but I think these days project managers are getting more and more involved with writing business cases. We’re taking in part in the project from an earlier point, which often means before the project is even really a project.
I’ve written quite a lot about business cases over the years so here’s a round up of resources that can help you put together a fantastic business case.
Business Case Basics
To get started on a business case you need to know the purpose of a business case, who is going to read it and the 7 essential elements that go into a standard business case. If you’re starting from scratch, these two articles have got you covered:
As with all things in project management, understanding the ‘why’ is a huge benefit for understanding the ‘how’. The 3 reasons why business cases are essential are:
These reasons apply whether or not your company cares much about paperwork and bureaucracy. As a project manager it’s still important to understand why your project has value to the business. If you’re struggling to get your management team to even the shortest business case, keep pushing! It will massively help your project management maturity levels.
And you can watch a short video all about those in more detail below.
Business Cases for Program Management
Programs need a slightly different approach to justifying a project through a business case, although there are many common elements, and the reasons why you would do a business case (to specify the problem, justify the work and explain the solution) are still relevant.
There’s a whole stack of information on preparing a program-level business case in this summary I put together from Program Management (Gower, 2010), by Michel Thiry: What goes into a preliminary program business case?
You’ll see that there is still a great deal of detail required from a benefits realisation plan to resource requirements, and a statement of achievability. It’s a significant amount of work even to get to this position of having a preliminary business case.
Once you’ve got approval in principle to continue with your program, you’ll be able to put together a more detailed program business case. You could argue that this document (again, I’ve pulled together a high level view of some of the ideas outlined in the Program Management book) borders on being a Project Charter, because by this point you’ve had approval for the concepts and solution so you aren’t spending too much effort thinking about options appraisal any longer.
However, there’s also an argument for saying that options appraisals are more suited for solutioning at project level, and at program level you’re really approving the transformative change.
I wrote a recipe for a program business case as well.
More Resources for Business Case Preparation
If you are writing a business case you’ll find this book interesting: Business Case Essentials.
Finally, here are some tips for preparing a business case when your project is all about implementing online collaboration tools. There are some specific things to consider that will help make your proposal more appealing, and it’s especially worth thinking about non-financial elements and how to justify those.
I hope these resources are helpful for you!
It has been a long time since I did AS Level Law aged 17, and I remember contract law being the less interesting part of the course. However, some of it is still relevant to my job today. For a contract to be legal, certain conditions have to be met. There are 5 conditions to fulfil before you can say that your contract can be legally entered into.
1. There must be an offer
There must be an offer and an acceptance. If I don’t offer you something, there is no contract. If you don’t accept it, there is no contract.
I can’t contract you to do something that you don’t want to do because you haven’t accepted my offer. You’re within your rights not to sign a contract with a supplier if the deal isn’t right for you. Just like you would stand your ground with those door-to-door sales people, you can stand your ground with a supplier on your project too.
There’s often back and forth at this point (as there should be) as you refine the offer into something that you can both live with.
2. There must be consideration
This means that something has to be exchanged. Your project suppliers offer you goods or services and you pay them money in exchange.
It doesn’t have to be money. You could give them goods or services back, or exposure to your client base or something else that you both agree to. But there has to be some give and take.
Again, there’s negotiation to be done here. Once you’ve agreed on the offer you might go back and forth on the consideration (the fee) that you are willing to pay, and how this will be structured: all in one go, payment phased over the life of the project and so on.
3. There must be legal capacity
I expect this varies from country to country, but the people entering into the contract must be legally able to enter into an agreement. I remember reading about a case where a toddler had accidentally purchased some expensive stuff online through random button pressing on a parent’s device (it happens) and the case concluded that the family didn’t have to pay as the toddler didn’t have the legal capacity to enter into a contract. I think they had to return the goods though – getting your child to purchase all your supplies is not a legal method of getting resources for your project for free! I’ve looked but I can’t find a citation for that case – if you know of one, let me know and I’ll update this article to reference it. I did find this one where a 3 year old bought a car on ebay, but the case didn’t go to court for contract law to be tested.
You may have capacity in law, but you may not have capacity in terms of your company’s due process. For example, perhaps only Directors can sign contracts above a certain value, or you can only enter into a contract in certain circumstances or with certain providers. While I’m not sure that would hold up in court, it would definitely get you into hot water at work, so make sure you check your company’s contract signing policy and get advice from your Legal team. That will avoid you entering into any deals and contracting the company in ways that they would prefer you didn’t.
4. There must be legal purpose
This simply means that the subject of the contract needs to comply with the law.
In other words, you can’t contract someone to steal for you. Or do anything else illegal. But you wouldn’t do that anyway, would you?
5. There must be intention
There must be the understanding on both sides that this agreement could be enforced by a court if it came to it. You must go into the contract understanding that it is legally binding and that you intend for it to be so. You aren’t signing up to something on a best endeavours basis, or without realising that it’s a legal document.
This is all broadly common sense, but it’s there to protect businesses and individuals.
I don’t know if these are the same conditions enshrined by your local laws, but for UK and US laws these seem to hold true. What’s the situation where you are? Drop a note in the comments to let us know!