3 ms·
In year one, you’re generating $1100 of income with $1000 of capital invested (that will last 5 years). By year five, you’re generating $1100 of income with $5
by amscanne 7y ago
In year one, you’re generating $1100 of income with $1000 of capital invested (that will last 5 years).
By year five, you’re generating $1100 of income with $5000 of capital invested (that will require $1000 each year to keep up).
You’re _way_ better off in year one here, so it seems the GAAP approach is actually showing the decline accurately. This isn’t a growing startup, it’s a startup needing more equipment to make the same money each year.
- kaetemi 7y agoYou're right, growing capital but not growing income... I made a poor example. (Imagining a bottom pricing scenario, while keeping a positive cashflow.) Good point. At year 6 this logic breaks down. (Then again, no longer a 'startup' at that point.) Better hope the replacement equipment is double worth it's money. :) Should make some spreadsheets with more scenarios.
- kaetemi 7y agoAmusingly, assuming the example company's pricing remained the same throughout rather than cutting prices each year, the client base ends up fixed, the clients get 5x better service by the 5th year, while accounting shows a decline in performance. External perception of business health (5x better service!) unintuitively is masking the the accounting reality here (worsening returns). (Now look at all these cloud services giving better services and pricing every year, seemingly very healthy...) :)