Warren Buffett and Secrets of Management - 22
When Buffett looks at growth, he doesn't look at, nor is impressed with large figures or gross amounts. Anybody can do more business. The thing he looked for was whether that extra business that was being done was at a profit.
I know that sounds like an understatement, but when you look at the reports that businesses give out over the years in reference to growth, many of them only grew in gross sales; not in profits. But they would take the gross sales figures to make it look good for the company.
That's even being done today in the movie industry. They point out the gross sales that they have for movies, and report them as having some type of meaning. In reality, those figures are meaningless. Then when you dig a little deeper, you'll find the costs of production. An important figure, but only one part of the financing puzzle. From there you go into marketing costs, distribution of profits from extremely complicated deals among numerous parties. It's almost impossible to tell what the real story is from movie to movie.
Another example that Buffett uses is the airline industry which year-after-year makes no money. Yet people keep on investing in them like they've performed great over long periods of time.
The point is that you can't lie to yourself about gross sales. They don't mean a thing. Like I say all the time, "anybody can spend money and make a certain amount of sales." How hard can that be?
Or as Buffett said years ago: "Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5 % increase in earnings per share."
How do you measure healthy growth? For a public company, its regular and consistent growth in earning per share over a period of time that reveals it.
For a private company, it's looking at every dollar you've used to finance the growth, and knowing that it's creating more than a dollar in market value over the long term.
Buffett's expectation for his managers was not simply growing for the sake of growth, but rather growing the returns of the company. Many business leaders have a hard time understanding this principle; and their results show it.
Other Buffett Resources:
Investment Whiz Kid: Buffett Amasses a Fortune
Management Styles - The Buffett Way: Learn from the maestro himself
Sponsored link: The outsourcing every manager requires - Tampa Locksmith
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