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Business Finance | Warren Buffett | Should We Depreciate Our People?

A Weekly Business Finance series for Non-Finance Executives!

“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. As a further extension of our Financial Adrenaline program, we’re going to share a new Business Finance Tidbit every Wednesday specifically for those business executives who don’t have a finance background.

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Depreciation = Cash? Why do we care?

We’ve kinda been on a Warren Buffett tear lately, and last week I encouraged you to read his recent 2010 Annual Report to Berkshire Hathaway shareholders.

I want to plant another seed this week about an often misunderstood concept: [kastooltip msg=”DEPRECIATION” tooltip=”In accounting, an expense recorded to allocate a tangible asset’s cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earning. It is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming straight-line depreciation), which will be matched with the money that the equipment helps to make each year.”]. (You can see the definition by placing your cursor over the term.)

How is Depreciation Relevant to EBITDA?

Today, let’s just think about it in terms of EBITDA. In Does EBITDA Bury Its Own Dead?, I wrote about the perils of treating EBITDA as a placeholder for cash flow, and Buffett couldn’t agree more.

In his Annual Letter to Shareholders, 2002, Buffet describes (more…)

Business Finance | Are You Ready for an Injection of Financial Adrenaline?

If you’ve ever exercised by lifting weights, you know that the amount of the weight on the bar is only one variable that needs to be considered for a particular exercise
If you’re doing a bench press, you can add more weight because your chest and shoulder muscles help your arms to lift the weight
But if you put 50% of that total weight on each of two dumbbells, you can’t lift either one
You’ve probably also learned that you can’t use the same weight for curls as you do for bench presses

How much weight can you really lift?

[pullquote]“Make everything as simple as possible, but not simpler
” ~ Albert Einstein[/pullquote]
Likewise, if you’re going to do only one repetition, you can handle more weight than if you’re going to lift it ten times
If you are lying flat, (more…)

The 12 Days of Christmas – Prices UP!

We knew that 2010 was a pretty "fowl" year didn't we ... but did you think that the price of a French hen would increase by 233%? Or that two turtle doves would now cost 78.6% more? That a lone partridge would go up 20%?Not that there's anything wrong with…

Warning: Speed may not be good for our health!

“Speed, for lack of a better term, is good”.

That’s not quite what Gordon Gekko said in the original Wall Street movie, but it’s close enough for our purposes.

So, who’s complaining about the super-fastest fiber-cable ever? Nobody that I know of, but here’s what caught my attention. It isn’t just the extraordinary speed extolled in Forbes’s recent article, Wall Street’s Speed War. Sure, it cost about $300 million to bury a one-inch underground cable over the 825 mile distance between New York and Chicago. Yes, it’s been done in stealth mode so no one would find out and build one even faster, and yes, it’s about to go live.

Big deal? Apparently so … but here’s the thing. The only reason this cable got built was … grab your abacus … to save 3 MILLISECONDS off the previous route for such cable traffic. That’s equal to THREE 1/1000 OF A SECOND!

What for? Here’s a few of the effusive remarks that Forbes quoted: ‘That’s close to an eternity in automated trading” … or “Anybody pinging both markets has to be on this line, or they’re dead.” (more…)

Small Business Finance Bill passes – So What?

Do you often wonder how this country gets along with the Pollyanna views inside the Beltway, mostly comprised of those who have never had to meet a payroll? The Senate passed the Small Business finance bill last week as a few Republicans crossed the aisle to provide the needed votes. The House is expected to quickly pass this version. More later … but ….

So What? It’s a $30B bill so it sounds like a lot of money … but so did the TARP $750B number when it was announced … and it’s still a long way from fully invested. The NYT claims it will help “credit-starved businesses” … says who? Read Uncertainty is killing business – NOT credit in which I review why credit availability is NOT what’s killing small business. If you’re uncertain about what uncertainty we’re certain about … read the WSJ verbatim quote to be reminded of the painful litany of the economic and regulatory quicksand on the road to recovery.

[pullquote]Are you uncertain about what uncertainty we’re certain about?[/pullquote]

Sure, there may be qualified businesses struggling to get credit. It is tougher out there, the underwriting standards are less flexible … but will the economy recover when credit is extended to small and middle-market businesses? No, (more…)

Uncertainty is killing business – NOT credit!

[pullquote] Double V - the deadly duo of Big Volatility and Little Visibility.[/pullquote] A recent WSJ opinion piece nicely summarizes the quagmire of uncertainty that plagues American business. I'm pretty tired of all of the "credit-starved businesses" stories presented like medieval alchemy ... fix this and you've found gold ...…

Business Finance: Vol. 2 – How Do We Do It?

Volume 2 of our Financial Adrenaline series, entitled How Do We Do it?, explains how we begin the process of introducing the powerful principles of Strategic Finance into your business. We expand upon our conversation about the current state of financial reporting and describe our commitment to you that Finance should NOT be the Reason for Business Failure. We offer a series of questions that are crucial to successful businesses but that we don't think you can answer by looking at your traditional financial statements. We also explain why traditional financial statements are historical renderings of financial transactions but don't lead to the action plans necessary to drive improved business performance.

Business Finance workshop at the Wine Industry Financial Symposium

For at least 18 years, the Wine Industry Symposium Group, an organization of California wine industry professionals, has held the Wine Industry Financial Symposium to “develop a communications bridge to the financial community.”

This year, I will be conducting a 90 minute workshop to help companies in the wine industry revitalize their free cash flow. Here’s the exact title of the workshop scheduled for Monday, September 20, 2010 at 3:30 p.m. You can find the program and registration details here.

PRACTICAL STRATEGIES TO IMPROVE CASH FLOW

Cash Flow has never been more critical as we face a clouded andunpredictable business landscape. Learn about the power of Strategic Finance and how you can extract cash from your operations and pour the juice into your bank account.

For the wine industry, this event is the kickoff for our Financial Adrenaline series, (more…)

Business Finance: Vol. 1 – What do we believe?

In Volume 1, we quantify the gap in financial literacy that can destroy a business. We show you the difference between traditional financial statements, spreadsheets and ratios ... and the powerful visual and interactive tools that are available to help executives drive improved business performance. We know that you believe passionately in your business, and that you want to manage the risks and protect your family.We know that you want to understand the most important aspects of Strategic Finance because you know it plays a critical role on many fronts. Our introductory video will help you understand the power of Strategic Finance and and why your intense focus on Free Cash Flow is more important than any other measure of business performance.