When is it completely okay for your business to be in losses?


When is it completely okay for your business to be in losses?

Gone are the days when you could only raise fund for your business when you had positive profits. The matured startups have understood the benefit of a first mover advantage and therefore have shifted their priority from profits to revenue growth. This is because becoming a dominant player in any industry helps the company to get a larger share of the market and in return reap immensely high future rewards after break-even point.

One can also notice that a large number of companies also get listed on the stock exchange with negative profits and still manage to get better valuations than those with positive profits. This makes it easier for investors to exit even when the company may be running in losses.

This scenario predominantly prevails in the tech industry where organizations like OYO, Spotify, Swiggy or Uber have consistently had increased losses but their valuations have increased.

Visible Growth: The valuation therefore can be said to be more about the inherent value of the business. The focus is on future earning potential and operating leverage(how operating revenue contributes to growth in operating income). Till the time investors can see there is growth, they don't mind the cash burning used for customer acquisition and expansion.

For eg. BigBasket suffered a loss of Rs.179.23 crores in 2017-18 with a revenue of Rs.1409.61crores. However in the next year the losses widened to 348.27 crores but to surprise the revenue increased to Rs.2380.95 crores. One can clearly see that though the losses increased by 48.5%, the revenue grew by an even greater percentage i.e. 68.9%. This shows that it is one step closer to the future break-even point.

Investment phase: Another scenario where it is okay to bear losses in the beginning is when the company is in the investment phase i.e. it is purchasing huge machineries and equipments to establish the business to fulfil the huge customer base demands.

For eg. Jio started off with huge capital investments in the beginning and also offered their service for free to millions of people. Why do you think they did that? Well, they made the internet become accessible to the masses and inculcated within the customer base a habit of high internet usage and once they were successful in it, they started charging for their service. This strategy though was very expensive and company was in huge losses in the beginning but gradually they reaped benefits. Jio now has around 1/3rd of the telecom market share and it generated a whopping Rs.1350 crores  profit in December 2019 quarter.

Huge Gestation period: Gestation period refers to the time between the initial investment and generation of profit for your business. Some industries have a huge gestation period and in this case they have to wait for a longer time to reap ROI( return on investment ) and that is just because of the highly capital intensive projects these industries get themselves into.

For eg. A mining company might have to buy huge pieces of land, invest in huge machineries for digging, speculate whether they would find something, higher lots of labour and go all in with their money. In this case the company might not be able to generate any profit in the first year/years or so but as soon as they find some minerals or metals they are going to generate huge money. A huge cost for these companies is the impairment cost when they can't find any resource on the land they purchased or leased.

Geographical expansion: Some companies are partially profitable in the sense that they may be profitable in one geographical area and may still have to reach the break-even in some other geographical areas that they operate in. The reason can be that it's presence in the profitable area may be for a longer period of time which has allowed the company to scale its operations and the vice versa in case of loss making area.

For eg. Grab which is a multinational ride-hailing company based in Singapore, tells that it already has profits in certain regions but is going to wait for its entire business to be profitable to ultimately launch an IPO.

Fact: Amazon ,which made Jeff Bezos the richest man on earth, suffered losses for nearly a decade and it was in the last quarter of 2003 that they witnessed a profit.

Follow @rdhmfinance on instagram for latest updates.

Thanks for reading!
Please comment on any financial query you had like me to address. I will try to post something worthwhile.

Coming up Next: Is it worth investing small amounts in mutual funds like Rs. 5000 per month?

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