You might wonder, how are the biggest businesses in the world able to run without making a single profit?
Before we delve into the reasons, you should know that absence of profits doesn’t equate to absence of revenue ─ these companies make a lot of revenue, but at the end of the day, they lose money because their revenue isn’t enough to cover all their expenses.
Allow me to paint the picture clearer
Revenue is the total amount of sales your business makes in a fiscal year
Profit, otherwise known as net income is your business’ revenue minus its expenses.
Hence, if your balance sheet shows a negative figure in the profit’s column, it means you lack profitability and you’re losing money.
What kind of companies don’t make a profit?
Snap Inc., Uber, and Jumia are all examples of major businesses that have been running for at least 8 years without making a single profit.
Before we start lets looks at some reasons why big businesses don’t ever make a profit.
Some reasons why big businesses don’t ever make a profit.
1. Marketing costs
All companies engage in marketing; this enables them acquire customers for their products and services. Marketing costs can be exorbitantly high especially for startups whom still haven’t had a strong presence and startups who are chasing growth and expansion at a rapid space. Pouring a lot of money into marketing in order to chase rapid growth can have its advantage by making such company acquire a considerable market share but at the same time it can make a business run for long periods of time without making a single profit.
2. Salaries of employees
This might no doubt be the biggest expense businesses have to face. Companies like Walmart have a very low profit margin primarily due to its numerous 2.7 million employees which it has to pay. That’s why you see that most companies often lay off a huge chunk of their workforce when they want to cut off on costs… the same way a new business with a very huge workforce can run for a considerable period of time without making a single profit.
3. Cost of operations
General operational costs such as utility bills, purchase of equipment etcetera also eats up a company’s revenue and at the end of the day the company might have no profit from its revenue.
Now, lets take a look at some of the ways these businesses are able to run without making a single profit!
Ways businesses are able to run without making a profit!
1. Sales of Shares to investors
These companies receive huge sums of investments from investors whom buy their shares because of their value, revenue growth and promising potentials… these investors buy shares from these companies with the hope that someday these companies would be profitable which would indirectly increase their share price/valuation and that they would be able to sell those shares they bought at a later date and make huge returns on their investments. The investments these investors make are what these companies use to keep themselves afloat throughout their period of unprofitability.
Just like individuals, companies borrow a lot of money to finance their operations. Netflix for example has borrowed over $24 billion to finance production of its original movies. Credit is debt and companies borrow debt by taking loans from banks, issuing corporate debt instruments such as bonds and debentures. These debts incurred by companies is also part of what keeps them afloat while they lack profits.
Liquidation is simply the process of a company selling off its assets in order to raise cash. Assets range from company buildings to patents, vehicles, machinery etcetera. Most businesses that are run without making profits usually sell off assets which they no longer deem necessary in order to raise cash.
Every company has its unique goals, for some it may be to make profits, for others it may to be grow and expand.
The bottomline is; it doesn’t really matter, a business can be very healthy even if it makes no profits. Hence, if a business is willing to chase growth and expansion at a rapid pace, it might need to incur more expenses which in turn would cut its profits.
On the other hand, a business looking to be profitable from the get-go might not be as big or might not acquire a market size as huge as that of a business looking to chase growth.
Question: which do you think a business should prioritize, profits or growth?
I’m the cofounder of WealthOnPoint, and business is akin to me just as blood is to humans. Being an advocate of business literacy, I’m the go-to guy for matters concerning business, marketing & investments. My mission: I wanna take your business to higher heights, the question is; are you willing to let me?