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This is the whole point: When you’re expanding rapidly and want to grow market share above all. Growing that market share with customer acquisition is economic
by harry8 2y ago
This is the whole point:
When you’re expanding rapidly and want to grow market share above all. Growing that market share with customer acquisition is economically an investment in the future revenue of the business. Advertising is one example of how this might be done.
You can classify investing in your business through advertising spend as an operating expenditure for accounting purposes. And potentially for tax purposes as well.
Now your large positive cashflow does not generate an accounting profit. Because you spent it on something that won’t be capitalised on the balance sheet.
There it is, the answer to OP’s question.
Note you can’t do that buying property plant and equipment (but some structured finance and leasing people might like a word - airlines don’t own their aircraft.)
Perhaps you can think of some examples where you’ve seen huge, massively cash-flow positive businesses in our field that weren’t generating accounting profit. Facebook, Amazon, ..?
The only other way you could sustain repeated loss ina new, growing business is capital raising.
Someone else on the thread mentioned Aswarth Damodoran’s “Free cash flow to equity” IMHO it’s worthwhile avoiding jargon when explaining things simply and concisely.
- svnt 2y agoI’m really not sure of your point. If I have a huge market opportunity and I can grow the business by spending the cash flow, I should do that instead of distributing that cash flow as profits. That opportunity will most likely not persist. What you are proposing is that businesses should pay taxes on their income irrespective of expenses which is just a good way to break a lot of perfectly good businesses, and reduce the ability for businesses to capture new markets. There are a number of ways where tax law could better capture the participation of large businesses, but this tack you’re on is not one of them. One cannot avoid using technically correct terms (“jargon”) when discussing this as the categories of capital are critical to both the essential function of a business and the point you’re trying to make.
- harry8 2y agoLimit yourself to interpreting what has actually been said and discussion will probably go better. Q Where does the money come from if there's no profit? A There would be profit, but they spent it investing in their business. Answering the implicit question "how can you spend profit investing to make it so there is no profit?" Which is the obvious follow up. That's it. I did follow it up with "what would you do given this choice in your own business?", "should this choice be possible?", and "how would you change things if you don't think so?" Because once you've understood what is going on these are the next obvious discussion points that come up. I expressed no opinion on any of them. What I have done is been really, really clear about what is actually going on in the face of some pretty poor responses for the benefit of anyone who hasn't seen this before even though it's a very common situation. What I avoided was a credentials size war and still haven't stated any, letting the argument run on merit. Maybe caring at all about it has been a waste of time. But yeah, that's another way of saying do we just give up on HN as being a community decayed too far to still be interesting and useful - especially to the startup-curious. I kinda hope not but YMMV and I could well be prone to wishful thinking.
- svnt 2y agoYou don’t understand the terms you’re using in the context you’re using them in, and you don’t seem interested in learning to use them in the same way as everyone else. This steadfast refusal is preventing your understanding from progressing.
- harry8 2y agoMaybe, but I strongly doubt it. Best.