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> You really need to understand the depreciation costs Huh? He's already paid for the gear. Depreciation isn't further payment due, it's an asset write-off whi

by enko 15y ago

> You really need to understand the depreciation costs Huh? He's already paid for the gear. Depreciation isn't further payment due, it's an asset write-off which is actually welcome since it slowly turns the initial capital outlay into a tax deduction.

sudhirc 15y ago
This is not about depreciation cost alone. Normally vendor tie support cycle to depreciation cycle so you cannot get new parts or support unless you pay them heavily.
- enko 15y ago
  Sorry dude I don't know what you are talking about. The post talks about buying your own gear; the parent to my reply seems to misunderstand what depreciation is and goes on about some non existent recurring cost. Are you talking about renting gear from vendors? This seems again to be a misunderstanding, no-one is renting anything. Support contracts are normally separate, certainly they are still available at normal cost within 5 years, the normal depreciation timescale. It seems this is a really misunderstood topic. Maybe someone can do an "understanding depreciation for startup founders" post or something.
  - ChuckMcM 15y ago
    See my response to your response :-)
ChuckMcM 15y ago
It sounds like you share a common mis-perception about what exactly depreciation means. Your statement "Depreciation isn't further payment due,..." is correct but this part "...it's an asset write-off" misses the point. Assets have "lifetimes", which is to say that if you are using something in your business venture, it will eventually be "used up." In the case of computers they don't generally break but historically they get faster and can do more for the same amount of power approximately, historically doubling in performance every 18 months or so but now more like every 30 months or so. When an asset is "used up" you are going to have to replace it to keep your business running. So you're going to 'buy it again'. Consider an alternate strategy, lets say there was a company that had a credit card that charged no interest and had a 60 month (5yr) payment plan (kind of like some car deals I guess). If the payment is 1/60th of the price of the gear each month, then that is clearly a bill that we pay every month. Now at the end of 5 years we "own" our equipment outright, except its 5 years old. Do you remember what was 'hot' in the PC business in 2006? Sure you do, go to blekko.com and type 'site:pcworld.com /date=2006' and one of the results is "Hot technology in 2006" [1]. Looks like 750G drives, and "the fastest desktop chips we've ever tested, the Intel Core 2 Duo." So if you had bought gear in 2006 you would probably have machines based on the Core 2 Duo architecture which is pig dog slow compared to a decent i5 or i7 motherboard today. Guess what? You need to buy new machines to stay competitive. (or as this is a web enterprise at least 'add' machines to stay competitive). Depreciation is a way of capturing a "future" expense in today's revenues. If you are profitable, even after including your depreciation costs, then you should be 'banking' those costs so that in five years when your gear needs to be replaced or added too, you've got the capital you need to do that. If on the other hand you aren't profitable when you include depreciation (a state known as being 'under capitalized') when the time comes to replace your gear you won't have the money (capital) to do that, and you will either have to raise money, go into debt, or fade into obscurity with increasingly out of date gear. The bottom line is that rather than being "an accounting trick," including depreciation in your cost structure helps you understand the total cost of owning, and operating, a bunch of gear which is powering your business. [1] http://www.pcworld.com/article/128176/the_20_most_innovative_products_of_the_year.html http://www.pcworld.com/article/128176/the_20_most_innovative...

by enko 15y ago

sudhirc 15y ago

This is not about depreciation cost alone. Normally vendor tie support cycle to depreciation cycle so you cannot get new parts or support unless you pay them heavily.

enko 15y ago
Sorry dude I don't know what you are talking about. The post talks about buying your own gear; the parent to my reply seems to misunderstand what depreciation is and goes on about some non existent recurring cost. Are you talking about renting gear from vendors? This seems again to be a misunderstanding, no-one is renting anything. Support contracts are normally separate, certainly they are still available at normal cost within 5 years, the normal depreciation timescale. It seems this is a really misunderstood topic. Maybe someone can do an "understanding depreciation for startup founders" post or something.
- ChuckMcM 15y ago
  See my response to your response :-)

ChuckMcM 15y ago

It sounds like you share a common mis-perception about what exactly depreciation means. Your statement "Depreciation isn't further payment due,..." is correct but this part "...it's an asset write-off" misses the point. Assets have "lifetimes", which is to say that if you are using something in your business venture, it will eventually be "used up." In the case of computers they don't generally break but historically they get faster and can do more for the same amount of power approximately, historically doubling in performance every 18 months or so but now more like every 30 months or so. When an asset is "used up" you are going to have to replace it to keep your business running. So you're going to 'buy it again'. Consider an alternate strategy, lets say there was a company that had a credit card that charged no interest and had a 60 month (5yr) payment plan (kind of like some car deals I guess). If the payment is 1/60th of the price of the gear each month, then that is clearly a bill that we pay every month. Now at the end of 5 years we "own" our equipment outright, except its 5 years old. Do you remember what was 'hot' in the PC business in 2006? Sure you do, go to blekko.com and type 'site:pcworld.com /date=2006' and one of the results is "Hot technology in 2006" [1]. Looks like 750G drives, and "the fastest desktop chips we've ever tested, the Intel Core 2 Duo." So if you had bought gear in 2006 you would probably have machines based on the Core 2 Duo architecture which is pig dog slow compared to a decent i5 or i7 motherboard today. Guess what? You need to buy new machines to stay competitive. (or as this is a web enterprise at least 'add' machines to stay competitive). Depreciation is a way of capturing a "future" expense in today's revenues. If you are profitable, even after including your depreciation costs, then you should be 'banking' those costs so that in five years when your gear needs to be replaced or added too, you've got the capital you need to do that. If on the other hand you aren't profitable when you include depreciation (a state known as being 'under capitalized') when the time comes to replace your gear you won't have the money (capital) to do that, and you will either have to raise money, go into debt, or fade into obscurity with increasingly out of date gear. The bottom line is that rather than being "an accounting trick," including depreciation in your cost structure helps you understand the total cost of owning, and operating, a bunch of gear which is powering your business. [1] http://www.pcworld.com/article/128176/the_20_most_innovative_products_of_the_year.html http://www.pcworld.com/article/128176/the_20_most_innovative...