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This article is just describing/ confusing the difference between accounting profits and economic profits. "That's a wonderful thing, but from an accounting pe
by adamtmca 15y ago
This article is just describing/ confusing the difference between accounting profits and economic profits.
"That's a wonderful thing, but from an accounting perspective, just because you're not properly calculating expenses, doesn't mean it's profit. To be fair and more accurate, founders should look at their fair market value to determine actual profitability."
No. From an accounting perspective you "calculate" things based on what you actually paid or were paid.
"If you weren't charging yourself any rent for that space, nor paying yourself anything, and the business made $100/day, would you really consider that profitable? You could have rented the space out at fair market value for much more money than that. I'd argue you're losing money -- and I'd be right."
No, you'd be wrong. They are making $100.00 a day. This is a very poor return on equity but it is still a profitable endeavour.
Accounting profits = Revenues - expenses. Economic profits (what he is unknowingly talking about) = Accounting profits - opportunity cost.
- johnrob 15y agoI doubt every ramen profitable startup founder is aware of this distinction, so it's still probably a point worth making.
- dignan 15y agoA valid point, but I think you're getting stuck on the semantics of what he's saying and missing the point he's trying to make: you shouldn't stay stuck on one idea once it's clear it won't go anywhere, even if you're "ramen sustainable". Of course, everyone has a different idea of when an endeavor should be abandoned, don't they?
- dshah 15y agoYou're right, that was the point I was trying to make. One of the hardest decisions an entrepreneur faces is deciding when it's no longer optimal to keep pursuing an idea that just doesn't look like it's going to take off. If the founder is super-passionate about the idea, fine. But, there are likely founders that get to ramen sustainability, and find it even harder to "let go" because there's no external impetus to do so.