Thursday, November 19, 2015

A lot of profit generated by family-owned SMEs gets used up in fixed assets such as machines

This thought is related to this other thought about family-owned SMEs in India. The point here is that a large portion of the profits generated by a business don't turn into disposable/spendable income for the business owner, as these are put back into the business and become "locked" forever in the form fixed assets like machines, pillars, walls, other equipment, etc.

The portion of profits that's used to buy these fixed assets never comes back to the business owner, and hence practically gets "lost" for the owner [his future generation might get to enjoy it]. Now, numbers need to be run in order to find out if the additional income that results [in the future] from this money put back into the business outweighs the temporary loss of disposable/spendable income. Only then can it be ascertained whether a business owner really gets to enjoy all/most of the profit that his business generates, especially compared to a purely trading-based business in which profits don't get locked in fixed assets.

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