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This isn't true; reporting profits is to a large extent a choice that a stable self-sufficient for-profit business can make every year. If you have some reliabi

This isn't true; reporting profits is to a large extent a choice that a stable self-sufficient for-profit business can make every year. If you have some reliability in predicting your revenues, you can time investments or expenditures to offset them and run a for-profit company in a stable way without ever (or rarely) reporting profits. And of course there are a number of stable self-sufficient businesses who never report profits; in fact they are called nonprofits. The Sierra Club was founded in 1892, for example.

toomuchtodo 7y ago
Profitability is having revenues you can predict and time expenses around. Non-profits are out of scope. Call it what you want, revenue, profits, whatever, you are not sustainable if you don't bring in more than you spend.
- nostrademons 7y ago
  That's not GAAP profitability. R&D and sales appear as operating expenses and get deducted from revenue before net income. This matters a lot for software businesses with recurring revenue (i.e. most SaaS businesses). With software, you build the software once and then you have an asset that you can sell a potentially infinite number of times, for many years into the future. The engineering salaries for building the software count as R&D, and get deducted from the current year's income statement. Then you sell the software, which may take an expensive consultative sales process but signs up a customer who will continue paying monthly for several years. The sales expense is recorded in the current year, but the revenue is booked over several years. The metric you're looking for is unit economic profitability, and specifically for B2B software businesses, LTV - CAC. If this is positive, then you are making more for each customer you sign up than it cost to sign them up, and you have a sustainable business (at least until the competitive landscape changes, which is a risk every business faces). This is not the same thing as GAAP profitability: if you know that you have a product that makes $5 in revenue for every $1 in sales you put in, it makes sense to raise as much capital as possible, hire as many salespeople as possible, and get every possible user using the software before a competitor comes out. That will look like a money-losing business under GAAP, because for every dollar that comes in this year you might be spending $2 in sales. But the part that's missing from the GAAP statement is that next year you have 4x as many customers who will continue paying you money at no additional cost to you. At some point, when the growth curve flattens, you just lay off the salespeople and milk the existing customers for everything they're worth. This is the story of Oracle, Microsoft, Cisco, and now Facebook and Google. VCs know to look for these metrics (along with growth rate, net promoter score, engagement, and churn, which are proxies for CAC and LTV). The general public does not, and they're not required in SEC disclosures or normal accounting statements (which generally predate the SaaS business model).
  - manigandham 7y ago
    The thread seems to be about actual profitability, not accounting metrics. A business is either fundamentally profitable and sustainable, or it isn't.
- bklyn11201 7y ago
  If you have high fixed costs, say to produce high-quality films, and you can grow your audience 40% per year with reasonable marketing expenditures, you have little chance to "bring in more than you spend" for several years until your subscriber base is large enough to cover the high fixed costs. If you spend more on marketing than the customer lifetime value, or if you have high churn, then yes, you have a failed business. But if you have reasonable marketing, high growth, low churn, then you will have a fairly incredible money printing machine in the future. And there are many people willing to give you $10 now if you promise a portion of this future profit machine!
perl4ever 7y ago
If you run a nonprofit, what do you do if you have money left over at the end of the year? Why, you call it a surplus! (I was once told)

toomuchtodo 7y ago

Profitability is having revenues you can predict and time expenses around. Non-profits are out of scope. Call it what you want, revenue, profits, whatever, you are not sustainable if you don't bring in more than you spend.

nostrademons 7y ago
That's not GAAP profitability. R&D and sales appear as operating expenses and get deducted from revenue before net income. This matters a lot for software businesses with recurring revenue (i.e. most SaaS businesses). With software, you build the software once and then you have an asset that you can sell a potentially infinite number of times, for many years into the future. The engineering salaries for building the software count as R&D, and get deducted from the current year's income statement. Then you sell the software, which may take an expensive consultative sales process but signs up a customer who will continue paying monthly for several years. The sales expense is recorded in the current year, but the revenue is booked over several years. The metric you're looking for is unit economic profitability, and specifically for B2B software businesses, LTV - CAC. If this is positive, then you are making more for each customer you sign up than it cost to sign them up, and you have a sustainable business (at least until the competitive landscape changes, which is a risk every business faces). This is not the same thing as GAAP profitability: if you know that you have a product that makes $5 in revenue for every $1 in sales you put in, it makes sense to raise as much capital as possible, hire as many salespeople as possible, and get every possible user using the software before a competitor comes out. That will look like a money-losing business under GAAP, because for every dollar that comes in this year you might be spending $2 in sales. But the part that's missing from the GAAP statement is that next year you have 4x as many customers who will continue paying you money at no additional cost to you. At some point, when the growth curve flattens, you just lay off the salespeople and milk the existing customers for everything they're worth. This is the story of Oracle, Microsoft, Cisco, and now Facebook and Google. VCs know to look for these metrics (along with growth rate, net promoter score, engagement, and churn, which are proxies for CAC and LTV). The general public does not, and they're not required in SEC disclosures or normal accounting statements (which generally predate the SaaS business model).
- manigandham 7y ago
  The thread seems to be about actual profitability, not accounting metrics. A business is either fundamentally profitable and sustainable, or it isn't.
bklyn11201 7y ago
If you have high fixed costs, say to produce high-quality films, and you can grow your audience 40% per year with reasonable marketing expenditures, you have little chance to "bring in more than you spend" for several years until your subscriber base is large enough to cover the high fixed costs. If you spend more on marketing than the customer lifetime value, or if you have high churn, then yes, you have a failed business. But if you have reasonable marketing, high growth, low churn, then you will have a fairly incredible money printing machine in the future. And there are many people willing to give you $10 now if you promise a portion of this future profit machine!

perl4ever 7y ago

If you run a nonprofit, what do you do if you have money left over at the end of the year? Why, you call it a surplus! (I was once told)