R&D (Research and Development)

What is R&D?

R&D stands for Research and Development. It’s the process of creating new products, improving existing ones, or discovering new knowledge that can lead to future innovations. Think of it as the corporate crystal ball – trying to predict and shape the future of the company and sometimes even the whole industry.

R&D typically includes activities like:

• Basic research: Expanding scientific knowledge

• Applied research: Solving specific problems

• Development: Creating new products or improving existing ones

👆 By the way, an interesting fact: Some of the coolest everyday items we use came from R&D in completely different fields. The microwave oven was a byproduct of radar research, and Post-It notes resulted from a failed attempt to create super-strong adhesive. Talk about happy accidents! 🎉

Why R&D Matters

Understanding R&D is crucial because:

1. It drives innovation: R&D is the engine of new products and technologies

2. It can provide competitive advantage: Successful R&D can put a company ahead of its rivals

3. It’s a significant investment: Many companies spend billions on R&D annually

4. It impacts long-term growth: Today’s R&D could be tomorrow’s blockbuster product

R&D on Financial Statements

You’ll typically find R&D expenses on the income statement as part of operating expenses. Here’s a simplified example:

Revenue: $1,000,000

Cost of Goods Sold: $600,000

——————————

Gross Profit: $400,000

Operating Expenses:

R&D Expenses: $100,000

S&M Expenses: $150,000

G&A Expenses: $100,000

——————————

Operating Income: $50,000

In this example, R&D represents 10% of revenue. Is that a lot? Well, it depends on the industry…

R&D Intensity by Industry

R&D spending varies widely across industries:

• Pharmaceuticals: Often 15-20% of revenue

• Technology: Can range from 10-15% or more

• Automotive: Usually around 3-5%

• Consumer goods: Often less than 2%

Remember, higher isn’t always better. It’s about the return on that R&D investment.

R&D Metrics to Watch

1. R&D as % of Revenue: Benchmarked against industry standards

2. New Product Revenue: Revenue from products introduced in the last X years

3. Patent Count: Number of patents filed or granted

4. Time to Market: How quickly R&D projects turn into launched products

5. Return on Research Capital (RORC): Measure of R&D efficiency

R&D Accounting: It’s Complicated

Here’s where it gets a bit tricky. Despite R&D being an investment in the future, accounting rules generally require companies to expense R&D costs as they occur, rather than capitalizing them as assets. This can make heavily R&D-focused companies look less profitable in the short term.

R&D Strategies

Companies approach R&D in different ways:

1. In-house R&D: Building internal research capabilities

2. Outsourced R&D: Partnering with universities or research firms

3. Open Innovation: Collaborating with external partners or even competitors

4. Acquisition: Buying innovative startups to access their R&D