Well, it’s still a liability on the balance sheet. But it’s great for cash flow and general accounting flexibility.
This is a similar to how airlines are more like banks than airlines these days. They issue credit cards and collect transaction fees, but instead of giving cardholders cash back they give them miles…gift cards for future travel, essentially. If something bad happens financially it’s a great buffer for them. They can always manipulate the value of miles within some level of reason until customers get mad (see: Delta). It’s also great to be a bank when you’re in a capital-intense business.
This concept is also how how fast-growing businesses can have cash flow problems.
Let’s say I pay my vendors right away, but when I sell my widgets I get paid 30 days later.
If I sell 10 widgets the first month, and suddenly sell 1000 widgets the second month, I might look like I’m an incredibly profitable company. But I probably ran out of cash to pay my vendors for the raw materials to build my widgets.
This is a similar to how airlines are more like banks than airlines these days. They issue credit cards and collect transaction fees, but instead of giving cardholders cash back they give them miles…gift cards for future travel, essentially. If something bad happens financially it’s a great buffer for them. They can always manipulate the value of miles within some level of reason until customers get mad (see: Delta). It’s also great to be a bank when you’re in a capital-intense business.
This concept is also how how fast-growing businesses can have cash flow problems.
Let’s say I pay my vendors right away, but when I sell my widgets I get paid 30 days later.
If I sell 10 widgets the first month, and suddenly sell 1000 widgets the second month, I might look like I’m an incredibly profitable company. But I probably ran out of cash to pay my vendors for the raw materials to build my widgets.