Earning a Positive Net Income is Not Good Enough
From Seed World Magazine - Sure, your accountant asserts that you have earned a profit, but you could still be losing money! For example in Table 1, a privately-held seed company had revenues last year of $2.5 million on $2.4 millionin expenses, giving it an accounting profit of $100,000. However, the owner has $1.5 million of equity invested and could earn 10 percent in other investment opportunities. Thus, the equity could have generated a return of $150,000. The economic profit associated with the firm is actually the Generally Accepted Accounting Procedures (GAAP) profit minus the value of the opportunity given up, which is negative $50,000. By choosing to invest in the seed company instead of the other investment opportunities, $50,000 of value was destroyed.