For example, Snap Inc. (Snapchat) had a net income of – $1.43 Billion in 2022.
In: Economics
They borrow.
Many companies have cash reserves too, so they may be dipping into their savings.
Also, net income being negative could be from many things, not just operating expenses (ie. Depreciation of an asset where losses haven’t been locked in yet)
You’re only “out of the game” when you don’t have enough cash to pay your suppliers, employees and taxes.
If you can borrow or have a huge cash reserves, you can have losses in the P&L. Conversely, you can have a positive P&L and huge cash flow issues at the same time
For an Eli5 comparison :
* you have a job, so you know you’ll get paid at the end of the month, and you know how much you need for rent, groceries, etc .. that’s your P&L and hopefully it’s positive
* what you have *now* on your bank account are your cash reserves
If you lose your job, your P&L will be negative, but as long as your bank account is not empty, you can survive and try to fix the situation
Opposite situation, you still have a job, but there’s a huge unexpected bill that you must pay *now* and it’s more than what’s on your account. It doesn’t matter if you could repay it later, you’re in trouble
Verizon bought AOL and Yahoo to merge with their own Go90 platform which they thought they were going to be able to compete with Netflix with. No one seriously thought this was going to work, but stupid rich investors treat investing like gambling. Yup, it failed. Theres also the understanding of a bailout. Seems like every decade theres some reason to require one… I think corporations are figuring that likeliness in their balance sheets in one form or another.
The most common way that startup companies survive losing money is by diluting the ownership of existing shareholders.
In Snapchat’s case, its sold no less than $1 billion in stock every year of its existence as a public company. In 2021, it sold ~$5 billion of its own stock. This stock does not come from existing shareholders – its new stock that the company makes up, so the cash from its sale goes directly to the company. Anyone who was a shareholder before a stock sale like this owns the same number of shares that they did before, but those shares represent a smaller ownership percentage in the company.
So lets say there are 1,000 shares of Snapchat and you own 100 of those – you own 10% of the company. Now lets say that Snapchat sells another 1,000 shares to raise money. You still own 100 shares of Snapchat, but there are now 2,000 shares total. You have now gone from owning 10% of Snapchat to owning 5% without being paid anything.
Historically, share dilution was typically done by selling the shares either to the company’s own investors, or to major institutional investors – both of whom would do their due diligence on the stock and only buy it if the company had a chance of making money.
With the craziness that is currently going on in the stock market, companies are increasingly just selling their shares on the open market. This has led to some companies, such as GameStop or Snapchat, being able to survive financial hardships that would have been likely to lead to a bankruptcy >10 years ago.
Older companies historically didn’t dilute their shareholders (though with the current state of the stock market, they are increasingly doing so). Instead, they would usually borrow money either directly from a bank or by selling a bond on the bond market.
Startups can also get loans or sell bonds, but its usually harder for them to do so due to the high risk involved for the lender. But to use Snapchat as another example, in addition to selling vast quantities of stock, it also borrowed ~$4 billion between 2019 and 2022.
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