What is the Expectation Treadmill?

Video Transcript 

My name is Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.

A lot of our clients come from companies that have failed or something went wrong and they retain us in order to do forensic accounting or determine damages. And in the interview process, I often ask them, "Why did you invest, you know, 50 million in this business or $100 million in this business that turned out not to do so well?" And they always say the same thing, maybe in different terms, they always say, "Expectation. I had an expectation." I just love that term: expectation. We call it expectation treadmill. It's like working out. But what it is, is expectation treadmill is what you expect is gonna happen.

And these expectations are not based on performance, they're based on expectation. So they'll hire us to go in and look at the company. We'll do our cash flow analysis and all that kind of stuff and shown 'em what we expect for a return on invested capital and all that good stuff. And then what they'll say is, "Well, our expectation is we're gonna get this client or we're gonna grow this much. We'll do other number...we'll plug those numbers in." Of course, things look great at that point. But a lot of times you don't hit those expectations. But sometimes you do, but sometimes you don't.

I mean, the example I always use is Amazon. Amazon is a company that's probably worth 80 billion, 100...it's worth a lot of money. And in the early years, I think in 2000s, they never had positive cash flow. They always had losses or negative cash flow, year after year after year because they were building out. They had these expectations they were gonna do great. They were putting all these offices and warehouses all over, and that takes a lot of money. Right now, they're building cloud storage facilities. That takes a lot of money.

They're spending money to gain market share because they expect, in the future, all that cash is gonna come back to 'em at a larger amount. That's the expectation. For Amazon right now, it's working out because those expectations they've had for the last 10 years are starting to show positive cash flow. So it's something that we look at as expectation for the company and what's the probability that they're actually gonna meet that expectation. If you have any questions on expectations in companies, feel free to give me a call.