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I went to business school. The management textbooks used to tell you that steady profits were the most important thing. When I think about the things I was ta

I went to business school. The management textbooks used to tell you that steady profits were the most important thing. When I think about the things I was taught, particularly this incredible reverence for GE, I laugh.

pyuser583 4y ago
Interesting. The introductory business courses I took said revenue was far more important than profit. Is that not true?
- cdf 4y ago
  I suppose the business courses you took are tech startup oriented. For tech companies until recently, the business is valued at roughly 10x revenue, so revenue is the all important metric. Profit is not important. This is why the barely profitable Salesforce and the non profit enterprise named Uber is worth so much in the stock market. For traditional businesses, the metrics are profit and in particular profit margin (profit/revenue), so more revenue at same profit is bad. And other metrics like ROCE (Return on Capital Employed) and FCF (Free Cash Flow)... which incentivise lots of debt if you can borrow cheap but discourage capital investment. This is obviously antithesis of tech startups.
- georgeecollins 4y ago
  I guess the point is that you can make both cases. They would argue that a company with dominant sales and no profits could be bought by bought by a smaller competitor with profits. But they had never seen VCs like today and could never conceive companies that could go for years with no profits and maintain high stock valuation. The world changes. So there's your answer: sometimes!
Throwawayaerlei 4y ago
"The management textbooks [at my business school] used to tell you that steady profits were the most important thing." That's stark raving mad. It is for example one of the clearest signs someone is running a Ponzi scheme. Which would seem to transfer over to this not quite as dishonest domain. Reverence for GE, a company doing technical things that started stack ranking and firing their employees.... Plus eventually got first their fingers and then last time I checked their whole body burned by going into financial businesses, very much not a core competence.
- michaelt 4y ago
  > That's stark raving mad. It is for example one of the clearest signs someone is running a Ponzi scheme. Not really - I mean, if I run Toyota should I not be producing cars I can sell at a profit? And if my sales are falling, isn't that a bad thing? Rising sales are good, of course - but not oscillating sales. If the rise is going to be followed by a sales slump in a few months time, do I want to take on extra staff who I'll then have to lay off, causing them untold strife and inconvenience? Do I want to build a new factory full of expensive machines, then have them stand idle while costing me interest and rent? Industries like Software and IP licensing are, of course, often a different matter!
  - Throwawayaerlei 4y ago
    "Not really - I mean, if I run Toyota should I not be producing cars I can sell at a profit? And if my sales are falling, isn't that a bad thing?" Yes to both. Maybe I'm misinterpreting the concept. "Steady" to me in this context means the same, thus financial shenanigans to make sure you don't report "excess" earnings in one period so you can have them in reserve for a future one where you have a slump. "Regular" profits are ideal, but Toyota today is not a good example, it's a mature company in a country with a mature automobile industry. As a counter example, see the story sold to the investing community about Amazon, not that they would make a steady profit, but that they would become huge and then do something like that. Which they've delivered on (and I wouldn't judge them on anything in the COVID disruptive period 2020 to now).

pyuser583 4y ago

Interesting. The introductory business courses I took said revenue was far more important than profit. Is that not true?

cdf 4y ago
I suppose the business courses you took are tech startup oriented. For tech companies until recently, the business is valued at roughly 10x revenue, so revenue is the all important metric. Profit is not important. This is why the barely profitable Salesforce and the non profit enterprise named Uber is worth so much in the stock market. For traditional businesses, the metrics are profit and in particular profit margin (profit/revenue), so more revenue at same profit is bad. And other metrics like ROCE (Return on Capital Employed) and FCF (Free Cash Flow)... which incentivise lots of debt if you can borrow cheap but discourage capital investment. This is obviously antithesis of tech startups.
georgeecollins 4y ago
I guess the point is that you can make both cases. They would argue that a company with dominant sales and no profits could be bought by bought by a smaller competitor with profits. But they had never seen VCs like today and could never conceive companies that could go for years with no profits and maintain high stock valuation. The world changes. So there's your answer: sometimes!

Throwawayaerlei 4y ago

"The management textbooks [at my business school] used to tell you that steady profits were the most important thing." That's stark raving mad. It is for example one of the clearest signs someone is running a Ponzi scheme. Which would seem to transfer over to this not quite as dishonest domain. Reverence for GE, a company doing technical things that started stack ranking and firing their employees.... Plus eventually got first their fingers and then last time I checked their whole body burned by going into financial businesses, very much not a core competence.

michaelt 4y ago
> That's stark raving mad. It is for example one of the clearest signs someone is running a Ponzi scheme. Not really - I mean, if I run Toyota should I not be producing cars I can sell at a profit? And if my sales are falling, isn't that a bad thing? Rising sales are good, of course - but not oscillating sales. If the rise is going to be followed by a sales slump in a few months time, do I want to take on extra staff who I'll then have to lay off, causing them untold strife and inconvenience? Do I want to build a new factory full of expensive machines, then have them stand idle while costing me interest and rent? Industries like Software and IP licensing are, of course, often a different matter!
- Throwawayaerlei 4y ago
  "Not really - I mean, if I run Toyota should I not be producing cars I can sell at a profit? And if my sales are falling, isn't that a bad thing?" Yes to both. Maybe I'm misinterpreting the concept. "Steady" to me in this context means the same, thus financial shenanigans to make sure you don't report "excess" earnings in one period so you can have them in reserve for a future one where you have a slump. "Regular" profits are ideal, but Toyota today is not a good example, it's a mature company in a country with a mature automobile industry. As a counter example, see the story sold to the investing community about Amazon, not that they would make a steady profit, but that they would become huge and then do something like that. Which they've delivered on (and I wouldn't judge them on anything in the COVID disruptive period 2020 to now).