Comments on: Revenue – cost = profit http://www.vinaysethmohta.com/blog/2007/12/14/revenue-cost-profit/ Mon, 16 Feb 2009 05:25:31 +0000 hourly 1 http://wordpress.org/?v=3.0 By: tom summit http://www.vinaysethmohta.com/blog/2007/12/14/revenue-cost-profit/comment-page-1/#comment-16 tom summit Fri, 08 Feb 2008 20:28:14 +0000 http://www.vinaysethmohta.com/blog/?p=12#comment-16 I like it. it is relevant to a blog post of mine http://jobhacks.wordpress.com/2007/08/01/career-equity/ I like it. it is relevant to a blog post of mine
http://jobhacks.wordpress.com/2007/08/01/career-equity/

]]> By: Brad http://www.vinaysethmohta.com/blog/2007/12/14/revenue-cost-profit/comment-page-1/#comment-13 Brad Mon, 28 Jan 2008 23:21:26 +0000 http://www.vinaysethmohta.com/blog/?p=12#comment-13 I'll also comment that there is an argument that free cash flow is more important than profit margin. Clearly, you need to be profitable, especially over a predictable amount of time, but the theory is that if you can sustain growth in free cash flow, then you have the available resources to be reactive to your customers and the market. Every industry is going to go through cycles and every profit margin is going to get whittled away as the processes of capitalist innovation and creative destruction force business change. In fact, arguably any business that shows higher profit margins than baseline economic growth is demonstrably a market inefficiency that at some point needs to resolve down to baseline long-term economic growth (2-3%). If you have sufficient free cash flow, you can adapt to those market changes. The advantage of focusing on free cash flow is that you're less wedded to a particular line of business because of its margin delta. You won't react to margin contraction by trying to preserve a business where clearly revenues are already declining. Instead you constantly optimize for how to preserve and deploy the free cash flow that you have to keep the business healthy. At least, that's one theory. But it all assumes you're making more money than you're spending over a given time period. I’ll also comment that there is an argument that free cash flow is more important than profit margin.

Clearly, you need to be profitable, especially over a predictable amount of time, but the theory is that if you can sustain growth in free cash flow, then you have the available resources to be reactive to your customers and the market.

Every industry is going to go through cycles and every profit margin is going to get whittled away as the processes of capitalist innovation and creative destruction force business change. In fact, arguably any business that shows higher profit margins than baseline economic growth is demonstrably a market inefficiency that at some point needs to resolve down to baseline long-term economic growth (2-3%). If you have sufficient free cash flow, you can adapt to those market changes.

The advantage of focusing on free cash flow is that you’re less wedded to a particular line of business because of its margin delta. You won’t react to margin contraction by trying to preserve a business where clearly revenues are already declining. Instead you constantly optimize for how to preserve and deploy the free cash flow that you have to keep the business healthy.

At least, that’s one theory. But it all assumes you’re making more money than you’re spending over a given time period.

]]> By: Brad http://www.vinaysethmohta.com/blog/2007/12/14/revenue-cost-profit/comment-page-1/#comment-12 Brad Mon, 28 Jan 2008 23:13:25 +0000 http://www.vinaysethmohta.com/blog/?p=12#comment-12 It is a fair point that it isn't a given that a great product and lots of people using it automatically makes money. Netscape is a terrific example of this. The search engines are great examples too. Yahoo, Excite, Altavista, Infoseek, Microsoft, Ask.com all failed to turn web search into a huge business. Google's game-changing idea was not PageRank. When PageRank came out it was similar or perhaps marginally better than Altavista or Excite and those other players had more users. Google's game-changing innovation was in their business model. Auction-based text-ads throw off gobs of money at almost no cost. That allowed them to continue to invest in their search engines at a time when everyone else had stopped investing in search and focused on other things. This is where I separate making money from creating value. A great product with many users is valuable, but doesn't inherently make money. Dry cleaners make money, but aren't inherently very valuable. Monetizing your value is indeed a third leg of the stool that can't be ignored. However, if you want to make lots of money, you first need to build something valuable. It is a fair point that it isn’t a given that a great product and lots of people using it automatically makes money. Netscape is a terrific example of this.

The search engines are great examples too. Yahoo, Excite, Altavista, Infoseek, Microsoft, Ask.com all failed to turn web search into a huge business. Google’s game-changing idea was not PageRank. When PageRank came out it was similar or perhaps marginally better than Altavista or Excite and those other players had more users.

Google’s game-changing innovation was in their business model. Auction-based text-ads throw off gobs of money at almost no cost. That allowed them to continue to invest in their search engines at a time when everyone else had stopped investing in search and focused on other things.

This is where I separate making money from creating value. A great product with many users is valuable, but doesn’t inherently make money. Dry cleaners make money, but aren’t inherently very valuable.

Monetizing your value is indeed a third leg of the stool that can’t be ignored. However, if you want to make lots of money, you first need to build something valuable.

]]> By: Nivi http://www.vinaysethmohta.com/blog/2007/12/14/revenue-cost-profit/comment-page-1/#comment-3 Nivi Sat, 22 Dec 2007 22:02:35 +0000 http://www.vinaysethmohta.com/blog/?p=12#comment-3 Re "My general take is that if you build something people want and you have a bunch of people using it, you’ll find a way to make money from it." I've heard it before and said it myself but I have never seen data to support it. =) Re “My general take is that if you build something people want and you have a bunch of people using it, you’ll find a way to make money from it.”

I’ve heard it before and said it myself but I have never seen data to support it. =)

]]> By: Vivek Mohta http://www.vinaysethmohta.com/blog/2007/12/14/revenue-cost-profit/comment-page-1/#comment-2 Vivek Mohta Sat, 15 Dec 2007 22:06:31 +0000 http://www.vinaysethmohta.com/blog/?p=12#comment-2 Great insight. It's important to get back to basics like this. Your observation seems to be a specific instance of something Peter Drucker stated more generally: "the business enterprise has two--and only these two--basic functions: marketing and innovation" ("The Purpose and Objectives of a Business" in The Essential Drucker). Great insight. It’s important to get back to basics like this. Your observation seems to be a specific instance of something Peter Drucker stated more generally:
“the business enterprise has two–and only these two–basic functions: marketing and innovation” (“The Purpose and Objectives of a Business” in The Essential Drucker).

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