What accountants have in common with science-fiction writers

Uber owes its success to accountants. How else could it be so huge without returning a single dollar of profit all these years?

Uber and several ‘non-profitable’ startups are wildly successful because of how their net worth is evaluated. To value a company, you count not just the profit that a company makes today, but also the profit it would return in the future.

How would you value a firm that makes $1 million in profit every year, and is likely to stay in business for at least 5 years? Writing down its value as merely $1 million based on the current returns would short-sighted. That is why, accountants put its value down as $5 million (provided inflation is negligible). Given its size and success, Uber is likely to stay in business for decades, with millions of dollars in profit each year.

Accounting for future cash flows helps us take a long-term view on our investments. They have more in common with science-fiction writers other than merely making stuff up.

This principle, like many others, is broadly applicable.

In the present moment, it feels good to be popular at parties and have a large list of friends and acquaintances. In the long-run, a handful of deep relationships are worth more than a laundry list of fleeting friends.

While recruiting somebody or evaluating their performance, it helps to consider both their present as well as their future output.

Eating a muffin for breakfast felt good today? How would eating one daily make you feel in 30 years? Exercising felt crummy today? How will exercising everyday make you feel in 30 years?

Wisdom is the ability to realize the long-term effect of your decisions. In other words, wisdom is to deeply understand future cash flows.

2 thoughts on “What accountants have in common with science-fiction writers

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s