Business Financial Information Secrets

CHAPTER 14Net Profits and Cash Flow – Real or Imaginary?

LET'S START WITH THE OBVIOUS

Introductory courses in business or economics 101 generally start by introducing principles or concepts that are universal in nature, simple to understand, and extremely important. In economics 101, the concept is supply and demand; that is, higher supply combined with lower demand results in falling prices and vice versa when supply is constrained and demand is high. For business 101, the simple concept is that all companies must generate a profit to remain in business – translation, annual sales revenue is greater than annual expenses, equating to being able to generate an annual profit.

Seems simple enough but in today's economic environment, the public equity markets continue to provide opportunities for companies like Uber Technologies, Inc. (aka Uber) to remain in business even though they consume hefty amounts of cash and generate large losses. Can this go on forever? Probably not (unless of course you are the United States government, which racks up huge deficits and debt that will most likely never be repaid), but when public equity markets are operating in an optimistic mindset, companies like Uber can continue to raise capital (i.e., cash) in hopes of eventually being profitable. Unfortunately, most companies cannot operate like Uber and absorb years of losses that are covered by round after round of financing. Yes, they exist, but no, that is not the real world.

In Chapter 13