Four things you just saw
- Scenario 1
Profitable in the end ≠ sure to make it through
This shop is profitable in the books from month 3, but the money is not all back until month 19; at its deepest, it is ¥362,400 in the hole.
- Scenario 2
Expanding faster ≠ lower cash risk
Opening two at once, the cash box bottoms out at just ¥36,080, and a ramp-up twice as slow empties it; one at a time is slower, with a thicker buffer.
- Scenario 3
Money already spent ≠ a reason to keep investing today
Add that ¥180,000 to both sides and the gap does not move at all. Nor is it a reason to stop.
- Scenario 4
Fastest payback ≠ greatest long-term value
A pays back in month 12, B in month 31; B overtakes in month 52, and over 5 years it is ¥240,000 against ¥348,000.
Their names
Cash runway
Why?
Until a new shop makes money steadily, the company has to keep covering it. The money it has to put up in the meantime is the "runway": ¥362,400 in scenario 1. It is about whether you can hold out, not whether the shop is profitable. (Runway originally means how long the cash in hand lasts at the current rate of spending; here we borrow the intuition.)
Sunk cost
Why?
Money already spent that no choice made today can change. It sits on both sides of the comparison and leaves the gap unchanged, so it should not be a reason to carry on. That does not mean the past does not matter: what you have learned since (such as the new foot-traffic data) still counts.
Payback period
Why?
The month in which the cash earned back, added up, covers the money first put in. Simple and intuitive, and it shows risk; it does not show how much more comes in after payback.
Two more terms this episode only touched on
Contribution margin
Sell one more cup and the extra money, minus the extra ingredients for that cup, leaves ¥12 (the optional part of scenario 1). That is not profit: it first has to cover the costs you pay however much you sell, such as rent and staff. At 98 cups a day it only just covers them (that point is the break-even point); take off depreciation too, and what is left is profit.
The intuition behind NPV
Converting money that only arrives later into "roughly what it is worth today" is called discounting, and how fast it is converted is the discount rate (the optional part of scenario 4). Converting every cash flow to today and adding them up to compare is net present value (NPV). The answer depends on the discount rate you assume: in scenario 4 the two plans come out equal at about 11%. The formula can wait.
Finance 03 · Episode summary
Profit in the books, cash payback and long-term value are three different questions. Next episode: which companies are worth a closer look.
Next · Finance 04 · The first M&A screening →What this episode cannot establish
- No tax, borrowing or interest: how a cash gap gets filled is another topic.
- New shops never fail and two shops never take each other’s customers; the difficulty of running two new shops and the accounting for leases are left out.
- Working capital is treated as small (in-shop sales are paid on the spot and stock is small, as Finance 02 showed).
Concepts on this page
Open a concept for Chinese, Japanese and English terms and an explanation.
CashView details
- 中文
- 现金
- 日本語
- 現金
- English
- Cash
Money available at a point in time, distinct from cash flow over a period.
ProfitView details
- 中文
- 利润
- 日本語
- 利益
- English
- Profit
Revenue less the corresponding expenses over a period. These simplified lessons omit interest and income tax; profit is not always equivalent to EBIT.
Capital expenditure CapExView details
- 中文
- 资本性支出
- 日本語
- 資本的支出
- English
- Capital expenditure (CapEx)
Spending to acquire or improve long-lived assets. Payment affects cash, while cost is generally allocated over use through depreciation or amortization.
In this lesson：The investment paid for fitting out the second shop and buying its equipment.
DepreciationView details
- 中文
- 折旧
- 日本語
- 減価償却
- English
- Depreciation
Allocating the depreciable cost of a tangible asset over its useful life. Recording depreciation does not itself require another cash payment.
Earnings before interest, taxes, depreciation and amortization EBITDAView details
- 中文
- 息税折旧摊销前利润
- 日本語
- 利払前・税引前・減価償却前利益
- English
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
EBIT with depreciation and amortization added back. It is not cash flow: collection timing, inventory and capital spending still affect cash.
Cash runwayView details
- 中文
- 现金跑道
- 日本語
- 資金ランウェイ
- English
- Cash runway
Usually the time cash can sustain current spending. Finance 03 borrows the intuition for launch funding; an amount of funding is not a duration.
Sunk costView details
- 中文
- 沉没成本
- 日本語
- 埋没費用
- English
- Sunk cost
Costs already incurred that future choices cannot change. Compare alternatives using their differences from now on.
Payback periodView details
- 中文
- 回本期
- 日本語
- 投資回収期間
- English
- Payback period
Time for cumulative cash flows to recover the initial investment. It does not capture value after payback.
In this lesson：Scenario 1: the cash invested is back in month 19.
Contribution marginView details
- 中文
- 边际贡献
- 日本語
- 限界利益
- English
- Contribution margin
Revenue less variable costs, available to cover fixed costs. Distinguish an amount from a percentage of revenue.
Break-even pointView details
- 中文
- 盈亏平衡点
- 日本語
- 損益分岐点
- English
- Break-even point
Sales that exactly cover the specified costs. Covering cash operating costs differs from covering all costs including depreciation.
DiscountingView details
- 中文
- 折现
- 日本語
- 割引計算
- English
- Discounting
Converting future cash into present value using its timing and a discount rate.
Net present value NPVView details
- 中文
- 净现值
- 日本語
- 正味現在価値
- English
- Net present value (NPV)
The sum of discounted net cash flows, including the initial investment.