I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
For most companies Profit, Net Profit or EBITDA is an important measure, but for start up companies, Net Profit is actually something else.
Net Profit is the gap between Income and Expenses. For established companies you want as large a (positive) gap as possible.
In a start up company, you actually want to invest as much as you can. Ideally as money comes in you invest it (in another developer, more testing, marketing), so ideally your net profit is zero.
In fact if you have a Net Profit at all you are under-investing.
But before you can spend you need the cash. In software startup’s the gap between receiving a Purchase Order (which in accrual accounting is immediately Income) and receiving the cash is significant. Normally it is the later of [Implementation Time + Payment Terms] or [the following 20th of the month after Acceptance].
Start up companies soon find that they not only need cash to fund investment, but they need cash to fund working capital. A big part of the working capital is the 2+ months of debtors they may need to carry because of the payment delay.
This cash-flow requirement therefore delays investment. Therefore Net Profit for startup’s is this necessary investment delay while they’re waiting for the cash to arrive.
A large Net Profit in a startup is therefore more cause for concern then glee. Ideally a start up should show strong revenue growth and minimal profit as they maximise investment in the early days.
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