Advance Renewal

  

Magazines are known for encouraging you to renew in advance of the expiration date, and sometimes it seems like it’s about six months ahead of time. Advance renewal refers to any type of agreement that has an expiration date, indicating you want to continue a subscription.

In addition to magazines, software licenses, internet domain names or hosting services, apartment and office building leases, or even mining claims could involve advance renewals. Many times incentives are offered if you renew early, such as discounted prices, but the main reason customers and companies agree to renew in advance is to avoid any disruption in services.

What would happen if the license for the software that everyone uses in an international company suddenly expired? It would be chaos, even if the downtime was for only an hour. The vendor benefits by claiming the revenue from the renewal early, and they will have a more reliable cash flow. They also won’t have to spend as much time and money going out to look for new customers.

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Finance: What is cash flow v earnings?17 Views

00:00

Finance allah shmoop what is cash flow versus earnings Okay

00:08

you think profits or profits right Well not unless you

00:11

spell it P r o p h e t s

00:14

Ask a gandhi or jeff bezos about that All right

00:17

Well in the land of accounting there are aptly named

00:20

accounting profits and there are also cash profits and the

00:25

two of them are often very different Accounting laws skew

00:29

things when it comes to assessing riel cash profits Here's

00:33

out the ceo and founder of give a dog a

00:35

drone A company that specializes in engineering remote control toys

00:40

for your pets built a drone stamping factory for one

00:43

hundred million dollars knowing that it will be worth twenty

00:46

million dollars in scrap value in just four years Well

00:49

he'll sell at that point and possibly upgrade if demand

00:52

for puppy and kitty tech is still high will drone

00:56

sales or steady producing cash profits of fifty million bucks

00:59

a year each year into the foreseeable future but stated

01:03

earnings and cash flows here are very different In the

01:07

first year when the factory was built the company lost

01:10

big cash money because it had to write one hundred

01:13

Million dollar check to the builder of the factory Yes

01:16

it made fifty million in profits but that year it

01:20

lost fifty million dollars in cash Luckily it had no

01:24

debt and it had one hundred twenty five million dollars

01:27

in the bank Well that bank account went down to

01:29

just twenty five million when they wrote one hundred million

01:32

dollar check But it gradually filled back up to seventy

01:35

five million by the time that year was done fifty

01:38

million of profits and that fifty million in cash Yeah

01:41

that that helps that floated right back in there Okay

01:44

so the cash that year was volatile It was a

01:46

hundred twenty five million to start But then i went

01:48

down to twenty five million after the factory purchase than

01:50

end up a year later with fifty million added to

01:52

their coffers and gas profits from operation leaving them with

01:57

seventy five million bucks in the bank got all that

01:59

All right So here's where the difference hits between accounting

02:02

profits perspective and a cash flow perspective on the notion

02:06

of profit Simply put it isn't fair for the company

02:09

Tohave a view that the one hundred million dollars factory

02:13

as an expense should all hit the profits line all

02:17

in one year as if they bore the burden of

02:19

all that factory cost in one year and then showing

02:22

it is being worthless in years Two three four and

02:26

maybe beyond In fact the company doing proper accounting depreciates

02:31

that factory in value to the tune of twenty million

02:34

dollars a year for for four years until it will

02:37

then sell it for scrap for twenty million bucks So

02:40

that hit to the company in the first year should

02:42

be twenty million dollars in value not one hundred million

02:46

in cash That's an accounting change of assessing twenty million

02:50

in expenses not one hundred million how's that work well

02:53

the decline in value of that hundred million dollars takes

02:56

five years And it looks like this But in your

02:58

won the company loses one hundred million dollars in cash

03:01

but gains a factory Confused Good Okay well let's zoom

03:04

forward to your floor The company again made fifty million

03:08

dollars in cash profits but it will show earnings of

03:10

only thirty million Why Well because proper accounting using straight

03:14

lined appreciation of that hundred million dollar factory properly shows

03:18

the company depreciating it's value another twenty million dollars against

03:22

its cash profitability So what A thirty percent tax rate

03:25

company pays taxes on thirty million of profits or a

03:28

tax bill of nine million bucks It's accounting earnings are

03:31

actually twenty one million dollars but it will have produced

03:34

cash or cash flow of fifty million dollars minus the

03:38

nine million in taxes or forty one million in cash

03:42

profits I either Cash flow is almost double the reported

03:47

accounting profits Now with all that profit our company can

03:50

finally start mass producing kitty copters Yeah yeah we're naming 00:03:55.308 --> [endTime] this cat todd

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