First we had this -
I like to think of it as an operating expense, after all you aren't tied into long contracts so can cancel at any time and you'd owe nothing.
and then we got -
Most SaaS applications really are month-to-month though, and the only "debt", if any, is the operational cost of moving all your stuff back out if you decide to change vendors. Other than that it really is just opex - akin to a phone bill.
both of which sadly show a lack of understanding of what debt really is.
(My apologies for bluntness, but it is important for each and every business person to understand the true nature of debt and the true goals of a commercial enterprise.)
Signing up for one year of Adobe CS, or signing up for some telephone service are both liabilities and that is in end effect the same as debt. Unfortunately, in the UK and the US, both private enterprise and the various branches of government draw a distinction between liabilities and debt and class them separately. That is how and why 'public private partnerships' and pensions allow government to hide the true size of public debt. They push liabilities off the red side of the balance sheet and onto continuous expenses.
Companies such as Tesco and indeed nearly all UK chain stores, rent their shops and, instead of viewing a 15 year lease as a debt, it gets classed as a continuous expense. It is my view that this is a VERY dangerous misrepresentation of what is in reality a debt.
This is all fine and dandy, if the one and only goal of a company is profit and profit alone. All companies have another goal - equity.
Even movie production companies (that are usually by their founding articles forbidden from owning anything other than the rights to just one movie) are seeking to create intellectual and reputational equity for those involved. The producers, directors, studios, FX team, actors and all the others hope that when the movie company is sold to the distributors, it will be a hit, so that they may enhance their reputations and be able to charge a little bit more the next time around. That is their equity!
We have just received the news that HMV that rents all its shops and only sells on sale-or-return is about to go under. Others playing that dangerous game will follow. By being based on debt but calling debt 'operational expenses', they have increased the level of risk and one small downturn in trade and they find their nostrils below the high-water-mark and they drown. They drown in debt!
Companies like mine that seek to develop equity can last longer when the going gets difficult.
If you are running a business that needs buildings, machines and IP to function, it pays great dividends to own these assets. Compare Tesco and all the other publicly listed home-grown chains with the fortunes of Aldi and Lidl who pay for their goods in a timely manner, they own their shops and are both private companies owned outright by single families. Not only can Aldi and Lidl sell at lower prices, but they also make more profit!
Profit that they both turn into more shops and more equity.
