Free cash flow and GAAP profit are not the same thing. Jeff Bezos explained Amazon's commitment to this idea 20 (and 27) years ago when many were saying that Amazon could never turn a profit, yet they were already generating enough cash to initiate big bets like AWS and Kindle... https://www.sec.gov/Archives/edgar/data/1018724/000119312505...

It's an accounting trick.

1) Make tons of cash.

2) Invest the cash back in the business.

3) Record this investment on the financials as an expense.

4) The expenses inflated by investment spending means you declare no profit and probably pay no tax on that profit you just hid.

The alternative is:

1) declare profit

2) Pay tax on it

3) Reinvest what's left after the taxman took a cut.

Which would you choose if you were raking in loads more money than it was costing you to run the business and you had growth opportunities?

Should this be a choice?

If not, how would you "fix" it?

I mean, it's not even profit hiding is it? Corporation tax is pretty openly an incentive for companies to invest in growth and people, rather than either sitting on cash or paying out to their owners.

It's entirely normal and above board. Desirable even.

The accountants can’t be bothered because your comment isn’t even using basic terms correctly.

Your comment suggests that reinvested cash is being "hidden" as expenses, but in reality, these reinvestments are usually recorded as capital expenditures (CapEx) rather than operating expenses (OpEx), depending on the nature of the investment. While CapEx can be depreciated over time, it is not typically expensed immediately in the way operating costs are.

The implication that companies can completely avoid taxes by reinvesting is misleading. Even though reinvestments may reduce taxable income through depreciation or other deductions, this is a legal and common accounting practice, not necessarily an attempt to "hide" profits. There are also tax laws in many jurisdictions which limit the extent to which such deductions can offset income.

Your understanding also conflates profit with cash flow. Profit is an accounting concept that reflects the net income after all expenses (including taxes). Cash flow, on the other hand, reflects the actual cash generated by the business. Reinvesting profits does not "hide" cash flow but rather allocates it to future growth.

Companies don't simply choose between declaring profit and reinvesting to avoid taxes. The decision to reinvest is often driven by strategic goals, such as expanding operations, developing new products, or acquiring other businesses.

Reinvestment reduces the company's taxable income and thus the taxes owed, but it does not eliminate taxes or "hide" the profits. The company benefits from reinvesting by potentially generating more revenue in the future from the new product, which should generate more tax revenue down the road instead of restricting growth now.

Here is an approximation of your comment translated from accounting into software development, minus the part where you misunderstand essential terms:

> It’s ridiculous that software developers waste so much time writing tests for their code. If the code is written correctly in the first place, you wouldn’t need tests at all. Instead of wasting time on tests, developers should focus on just writing perfect code from the start. It’s clear that the whole idea of ‘unit testing’ is just a way for developers to justify their jobs and take longer to finish projects. Shouldn’t we just hire better developers who don’t need to write tests?

This is the whole point:

When you’re expanding rapidly and want to grow market share above all. Growing that market share with customer acquisition is economically an investment in the future revenue of the business. Advertising is one example of how this might be done.

You can classify investing in your business through advertising spend as an operating expenditure for accounting purposes. And potentially for tax purposes as well.

Now your large positive cashflow does not generate an accounting profit. Because you spent it on something that won’t be capitalised on the balance sheet.

There it is, the answer to OP’s question.

Note you can’t do that buying property plant and equipment (but some structured finance and leasing people might like a word - airlines don’t own their aircraft.)

Perhaps you can think of some examples where you’ve seen huge, massively cash-flow positive businesses in our field that weren’t generating accounting profit. Facebook, Amazon, ..?

The only other way you could sustain repeated loss ina new, growing business is capital raising.

Someone else on the thread mentioned Aswarth Damodoran’s “Free cash flow to equity” IMHO it’s worthwhile avoiding jargon when explaining things simply and concisely.

I’m really not sure of your point.

If I have a huge market opportunity and I can grow the business by spending the cash flow, I should do that instead of distributing that cash flow as profits. That opportunity will most likely not persist.

What you are proposing is that businesses should pay taxes on their income irrespective of expenses which is just a good way to break a lot of perfectly good businesses, and reduce the ability for businesses to capture new markets.

There are a number of ways where tax law could better capture the participation of large businesses, but this tack you’re on is not one of them.

One cannot avoid using technically correct terms (“jargon”) when discussing this as the categories of capital are critical to both the essential function of a business and the point you’re trying to make.

Limit yourself to interpreting what has actually been said and discussion will probably go better.

Q Where does the money come from if there's no profit?

A There would be profit, but they spent it investing in their business. Answering the implicit question "how can you spend profit investing to make it so there is no profit?" Which is the obvious follow up.

That's it. I did follow it up with "what would you do given this choice in your own business?", "should this choice be possible?", and "how would you change things if you don't think so?" Because once you've understood what is going on these are the next obvious discussion points that come up. I expressed no opinion on any of them.

What I have done is been really, really clear about what is actually going on in the face of some pretty poor responses for the benefit of anyone who hasn't seen this before even though it's a very common situation. What I avoided was a credentials size war and still haven't stated any, letting the argument run on merit. Maybe caring at all about it has been a waste of time. But yeah, that's another way of saying do we just give up on HN as being a community decayed too far to still be interesting and useful - especially to the startup-curious. I kinda hope not but YMMV and I could well be prone to wishful thinking.

You don’t understand the terms you’re using in the context you’re using them in, and you don’t seem interested in learning to use them in the same way as everyone else. This steadfast refusal is preventing your understanding from progressing.

Maybe, but I strongly doubt it. Best.

Advertising, to grow sales can be expensed, for example. Buying new plant, not so much.

Shame you couldn't manage an explanation and just went with abuse.

I came in to say exactly the same thing. What OP is saying is literally a lie, accounting is much more sophisticated than that.

Everything on this earth is more sophisticated than a 4 point thumbnail sketch of a general principle.

You also have not managed any explanation at all, which is a shame. Could be interesting.

Care to explain what’s wrong/inaccurate with it?