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Games people play with cash flow

commoncog.com

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Re: Games people play with cash flow

#31

Post by rossdavidh »

dissidents wrote: post #13

I am unconvinced that "first-principles thinking" is the problem here. Surely one can refute the original argument without having to debunk axiomatic logic itself. For example, one could argue something like this: Even though increased access to other people's money can cause founders to make irresponsible decisions, raising money has other advantages that tend to offset this.

I think the idea is, when you argue from first principles, you are implicitly assuming that you know all of the relevant first principles. Since you're human and imperfect, there is always a chance that you don't. How to know?

Well, empirically, check whether the conclusions you get, seem to hold up to reality. The author's experience was that taking investment $$ was necessary (or at least often useful) in a startup, so this put him on the lookout for what missing first principle would explain this.

It doesn't mean axiomatic logic isn't useful, it means that just because the logic seems sound, doesn't mean the conclusion is reliable, because there could be missing axioms (in this case, that profitability is the objective of a company, when cash flow is a more fundamental fact and profit is often either present or not depending on how you do the accounting).

Re: Games people play with cash flow

#32

Post by syntaxing »

Wow what a great read. The other article about where first principles fails [1] is absolutely amazing as well. The debate about experience vs first principle is a heavily recurring theme in the tech industry. I couldn’t structure my thoughts about it in words and the article perfectly sums it up in a succinct manner.

[1] https://commoncog.com/blog/how-first-principles-thinking-fai...

Re: Games people play with cash flow

#33

Post by sna1l »

This article is great and actually comes to one of the core tenets from the book "The Outsiders."

If you had to choose a single core task for the CEO of a company, it is to create free cash flow and decide best how to spend it, aka capital allocation.

Book Source: https://smile.amazon.com/Outsiders-Unconventional-Radically-...

Re: Games people play with cash flow

#34

Post by [deleted] »

ihatethissite wrote: post #18

The author creates a false dichotomy when they write that business is either about making profit or managing cash flow. Making a profit requires cash flow management, but managing cash flow does not require making a profit. This article does talk about managing cash flows in a way that involves never making a profit. First, and tangentially, it's interesting that real estate developers do this all the time. Second, i…

[deleted]

Re: Games people play with cash flow

#35

Post by syntaxing »

dade_ wrote: post #6

Don't raise money with equity is the message in the blog post he referred to. Equity is expensive and these days, debt is cheap. Know your WACC. https://www.investopedia.com/terms/w/wacc.asp

Debt is not only cheap but almost “free” nowadays. It’s so interesting how the people I work with take advantage of this on a personal level as well. They leave the interests on their debt and leave and extra income on other avenues (stock market, real estate, etc). Another interesting idea is that tax is (relatively) low. So it’s smarter to invest in a Roth IRA rather than a 401K to take advantage of the tax rate.

Re: Games people play with cash flow

#36

Post by coldcode »

valuearb wrote: post #15
thaumasiotes wrote: post #12

Earlier quoted context omitted.

This sort of thing is one reason you might want to tax revenues over profits. Compare https://en.wikipedia.org/wiki/Hollywood_accounting , in which all movies show a formal loss and the concept of "profit" as opposed to revenue exists only to scam parties who agree to be paid out of profits.

Or you might prefer not to tax corporations at all, only distributions to shareholders. “Profits” or “cash flow” kept in the corporation is reinvested capital. It’s creating jobs and growing businesses, even if it’s kept in an interest bearing bank account.

Until the business just uses the cash flow to buy back their stock, making everything look great until the day a pandemic hits and they need government bailouts.

Re: Games people play with cash flow

#37

Post by PKop »

dissidents wrote: post #13

I am unconvinced that "first-principles thinking" is the problem here. Surely one can refute the original argument without having to debunk axiomatic logic itself. For example, one could argue something like this: Even though increased access to other people's money can cause founders to make irresponsible decisions, raising money has other advantages that tend to offset this.

Isn't it sort of like Gödel's incompleteness theorem, there's no way to prove your first-principle was a correct axiom to start from. Experience will guide this.

>debunk axiomatic logic itself

He's not though. Your assumptions can be wrong, even if your incremental logic is correct according to the first principle. He's saying the correctness of axiomatic logic will lead you down the wrong path.

Re: Games people play with cash flow

#38

Post by dissidents »

rossdavidh wrote: post #31
dissidents wrote: post #13

I am unconvinced that "first-principles thinking" is the problem here. Surely one can refute the original argument without having to debunk axiomatic logic itself. For example, one could argue something like this: Even though increased access to other people's money can cause founders to make irresponsible decisions, raising money has other advantages that tend to offset this.

I think the idea is, when you argue from first principles, you are implicitly assuming that you know all of the relevant first principles. Since you're human and imperfect, there is always a chance that you don't. How to know? Well, empirically, check whether the conclusions you get, seem to hold up to reality. The author's experience was that taking investment $$ was necessary (or at least often useful) in a startup…

Thanks Ross for the reply. I believe that this is a misunderstanding of how propositional logic works. If the propositions or axioms that you start with are sound, and if you correctly apply all inference rules, then the propositions that you derive will also be sound. "Missing axioms" that you did not use do no matter, regardless of their soundness.

Re: Games people play with cash flow

#39

Post by bigbubba »

kgwgk wrote: post #24
bob33212 wrote: post #20

Great Article. A lot of people don't understand how important cash flow is. Even Elon pointed out that having factories close to customer is very important for a fast growing company like TSLA because if you grow too fast you'll be putting so many cars on boats before they are paid for that you will have no cash. I disagree with the framing of both articles somewhat. The question should be "What is limiting your grow…

Musk definitely understands the importance of (incoming) cash flows. Being paid upfront for functionality that may or may not be ever available is genius. Edit: /s

Genius, like selling a bridge you don't own.

Re: Games people play with cash flow

#40

Post by dissidents »

PKop wrote: post #37
dissidents wrote: post #13

I am unconvinced that "first-principles thinking" is the problem here. Surely one can refute the original argument without having to debunk axiomatic logic itself. For example, one could argue something like this: Even though increased access to other people's money can cause founders to make irresponsible decisions, raising money has other advantages that tend to offset this.

Isn't it sort of like Gödel's incompleteness theorem, there's no way to prove your first-principle was a correct axiom to start from. Experience will guide this. >debunk axiomatic logic itself He's not though. Your assumptions can be wrong, even if your incremental logic is correct according to the first principle. He's saying the correctness of axiomatic logic will lead you down the wrong path.

No, he is saying that he agrees with the assumptions and the way they are used to construct other propositions, but disagrees with the outcome, and therefore there must be something wrong on a higher level with the logical system itself that is being used here. I think what's actually happening here is much more banal.

>Isn't it sort of like Gödel's incompleteness theorem

Forgive me for being curt, but no, this is absolutely nothing like either of Gödel's incompleteness theorems.

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