“UBER AND TESLA – DEEP DAMAGES BUT CONTINUE SUCCESSFULLY WORK »
Why loss does not mean bankruptcy
Everyone knows that companies like Uber and Tesla are deeply unprofitable. But at the same time they do not close, but continue to work successfully.
The loss of the American coworking network WeWork is more than $ 2 billion. But soon the company goes on an IPO with the expectation that investors will invest in it.
A person who is not familiar with the world of technology startups will have a question: “How is that – a company is unprofitable, but are its shares being bought?”
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It’s simple: the bankruptcy of the company arises not because of profit or loss, but because of a lack of cash flow. A company can grow as much as it has enough money to acquire resources, create a product and serve customers.
When a company does not have the resources to continue its business, it declares itself bankrupt. Technically, bankruptcy occurs if the company’s inability to pay its obligations to creditors or to attract additional financing has been proven.
Therefore, Uber, Tesla and WeWork can work calmly while investors are willing to lend or invest in them. The main thing is to constantly improve our products and strive for profitable operations in the future.
The importance of profit in the long run
Consider more mundane companies – small and medium-sized businesses. They do not attract external financing. The main source of future cash flow is profit. If there is no profit, over time there will be no cash flow. Consequently, the business will close.
Look at the expectations of investors who invest in loss-making companies. They say they expect to make a profit in 3-10 years. Moreover, they plan to earn so much to recoup the losses of previous periods.
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Conclusion. In the medium term, large companies can incur losses if there is the necessary funding. Moreover, the more popular the business, the more chances it has to attract investor funds and work despite losses.
But in the long run, being profitable (or being sold) is a must.
About typical financial problems
In Ukraine and Europe, a different understanding of finance.
In the West, “finance” means raising funds and investing. There, finances are large sums of money that are invested somewhere.
In Ukrainian companies, accounting and reporting are added to finance. This is another topic, but they don’t think so. Everything that I say today about finances is adapted to Ukrainian realities.
What problems most often arise in a business with finances?
In fact, there are two of them:
Lack of quality accounting. The root problem of most Ukrainian non-public companies is that there is no high-quality transparent reporting. Therefore, it is difficult to analyze effectiveness or attract financing.
Lack of tax legal structure. Not many businesses in Ukraine can be called transparent.
What to look first in reporting
The main short-term indicators that interest us are sales. They can be seen even without a good record: what they were, what they became, growth rate, and for which groups.
The reporting also gives indicators of cash flow – is there a resource to continue to work, develop and make new projects. Entrepreneurs analyze this by asking the question “Do we have money for the next month?”
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In short-term indicators, it is important to look at profit. Do we work efficiently, do we sell our product at a price higher than the market, or create added value. If there is profit today, it is highly likely that there will be cash flow tomorrow.
In long-term indicators, the effectiveness of investment projects is important. When we talk about the future, we mean the launch of a new or expansion of an existing business. It is important to understand whether it is realistic to get a good payback.
How is the financial department
Everything is aimed at minimizing human labor, reducing costs and speeding up the reporting process. Therefore, today financial departments are becoming half IT departments.
An important role is given to data acquisition systems and tuning the algorithm for combining them into a database. This means that more work is needed on the processes.
What data is needed at the input and output, how to automate the collection, processing and issuance of information, how to divide powers so as to reduce the likelihood of errors.
The structure of the financial department depends on the business. For example, in international companies, the chief accountant often does not report to the chief financial officer.
The chief accountant is like a chronicler who should be independent and submit only to the CEO. And the CFO is working to increase the value and effectiveness of the company.