In business of making money, what looks like loss is actually gain

Mir Saqib

mirsaqibali@gmail.com

Business is primarily money. We are in business for making money that is precisely the sole reason or motive for doing business. Over the past century, the way of making money through a business has changed. It has made the orthodox accounting methodology as primitive and obsolete. Some businesses give instant money and some make a platform for the next stage which will lead to money. In some cases, cash flow is considered a profit.

There are a lot of facts and figures showing the 21st-century business model as dynamic and unpredictable to normal accounting systems and business logic. Most of fortune 100 companies in the 21st century have made asset appreciation or valuation of the company as major sources of making money irrespective of whether the business gives profits or not.

Amazon doesn’t make profits, but has ample cash flow and reserves to make the company run for centuries, and is regarded as a most valuable company of our times in the world. Again, remember they don’t make profits according to accounting methodology. Apple makes most of the money by conversion of goods and service and branding them as high-end products. Making huge money from is reflected and acknowledged by accounting methodologies. Coca Cola India didn’t show any profit till the end of the last decade but would spend a fortune of money on marketing and advertising. If the marketing budget would have not been there, the company would have surely been in profits but they intentionally did so and kept a huge marketing budget. If not spending so much for marketing, they could have shown profits which normal accounting would have suggesting but they didn’t prefer that.

Now, Coca Cola is the most valuable brand in India and is in making huge profits as on date.

All of the new-age companies are making huge money but all in different ways. As we said earlier we are in business for making money and these companies make it no matter it does sound valid and sane to accounting methodology hardly matters.

In the new way of looking at businesses, “what may look as the loss may actually be a gain’.

The horizon of business has changed, earlier trading was part of business, now trading is considered as a vague term, and has been sub categorised in infinite subsets. A few decades earlier, buying a product at Rs10 and selling at Rs11 was considered as a good business practice but nowadays buying at Rs 10 and selling at Rs 9 isn’t considered bad practice either. Imagine two competitors B1 and B2 selling same product, both having cost to the product at Rs 10 while B1 is selling at Rs11 and B2 selling at Rs 9. Over the period, suppose B1 makes a profit of Rs1000 and B2 books loss of Rs 2000 (B2 is selling at a low price so sales will be high compared to B1). As B1 will try to compete with a close competitor in terms of sale and will drop his prices for next period to Rs 10.5 and as B2 is already selling lower than the rival competitor, will increase to Rs 9.5 and this will lead to B1 making a profit of Rs1250 and B2 loss of Rs1500. Over the next period as competition goes higher and it’s difficult for B1 to remain in business so furthers drop price to Rs 10 and B2 also increasing price to Rs 10.

So from here, we shift in the balance sheet of both the business. B1 making a shift from profit to no profit and loss while B2 goes from loss to break even. B2 managing to cut losses and going to profit-making the company to go on while B1 who is technically in losses and has no option but to shut down before it starts bleeding the profits made for years.

So B1 made a total profit of 2250 while B2 stands with loss of 3500.

As now B1 is already out of business with anticipation of loss for next period, B2 raises the price up to Rs 11. Now B2 is a major player and taking sales of B1 and makes the profit of 3500 compensating the losses incurred before. Now with B2 market leader and revenues doubled from the last period (revenues will include B1 share also).

Now B2 has an open field, even outrightly selling the business will surely fetch many more than Rs 2250 (as last periods profits were 3500) which B1 made during the full business period. One selling at below the cost of production looked so naive and stupid. But, in reality in present-day competitive marketing, it is not really so. The way of doing business has changed and it has changed for good.

In recent times, most of the business is about acquisition and valuation. In the old business communities like ours we have so much emotionally invested in business we tend to forget we are primarily in business for making money. In modern economies, lending from a bank for business has taken a back seat and investment from various private entities has found the way. The main reason for that is fewer legalities and ease to raises good funds from private or personal investors.

The private investors have huge potential in the valley, providing about billions of rupees in form of fixed deposits are sitting in banks with return merely at 4%.

Investor and businessperson should be made aware that investing in any business is purely for making money, emotional side to it, should be realised, won’t be of any importance to business nor to the promoter or as we used to call him, owner. That’s the reason in modern economies, the one who starts an enterprise is called promoter of the business and not an owner of the business. The term owner has become very feudal.

Both investors and promoters need to educated about what the business is meant to do. And long term and short-term investors can be used to raise funds for the growth of the business without a huge cost to the business as would have the same investment raised from a bank.

Expats and non-residents should be made aware of business in the valley and effectively made aware of investment option available.

There is huge scope for venture funds which will facilitate the business and investors.

Cutting to chase, the business is eventually about making money. But sometimes the entity you sell is a product, sometimes the promoter is a product and sometimes the business itself is the product. Whatever it should eventually lead to making money. As we are in the business of making money.