Warren Buffett and Secrets of Management - 23
Those close to Warren Buffett have said that there are two things in revenue growth that he looks for: earnings per share growth, and that the company is able to keep ahead of inflation. He looks especially for consistency as the key measurement of a quality company that is managed in a healthy way. What this does is offer the investor the ability to project future earnings and cash flow in a predictable way.
On the other hand, when you have a company that has earnings that are always changing and going up and down, the ability to project future cash flow almost becomes impossible. There can be a number of reasons for fluctuation including poor management, bad products, or the company may rely on too many products that are easily targeted for price wars. Eventually the only certainty a company has is that it is unpredictable.
Most managers and business leaders understand poor management and poor products - if they care at all these things - can be handled. It's the third reason that many companies struggle with. What type of product or service is susceptible to pricing wars? A commodity.
What's a commodity? It's basically anything that can easily be reproduced. It is usually an everyday item that people don't think of in a branded way. Services are the same way. A service that's easily reproduced can be overcome by a competitor simply charging less for it. This is why we talk so much about differentiation in the mind of consumers about what you offer. Whatever that is, will be the difference between predictable cash flow, and not knowing what will happen tomorrow.
The secret to predictable cash flow is in making sure what is being offered isn't able to be commoditized; at least the great majority of things you offer. Predictability and differentiation walk together. This is one of the reasons why so many businesses - big and small - struggle so hard to make ends meet: most of what they offer is a commodity.
Other Buffett Resources:
MSU students have special visit with billionaire Warren Buffett
Sponsored link: The outsourcing every manager requires - Tampa Locksmith
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