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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 | Why you should read Warren Buffett’s Letter

A Weekly Business Finance series for Non-Finance Executives!

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Read Warren Buffett’s Letter to Berkshire Hathaway Shareholders

So, why not jump into the deep end right now by reading Business Finance is about much more than finance

I’ve said before that leaders don’t have the luxury of confining their interests to just a few things

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Does Leadership = Communication? | Use this Communication Matrix

You need Leadership Skills to ascend to the C-Suite

A young friend of mine called me recently and said he was being considered for the CEO position of his young but growing company

He was elated, so excited, so thrilled to be considered until the “be careful what you wish for” axiom popped into his head and he realized he was pretty inexperienced in leading an organization of any size

We went on to talk about his concerns and as he began to think about his candidacy, it dawned on him that he had a very limited finance background … he didn’t think much about communication … and could be a better team player. (more…)

Leadership Styles: The Smartest Guys in the Room can kill you!

“When a fellow says it hain’t the money but the principle o’ the thing, it’s th’ money.” — Frank McKinney

‘Always ask why. Dig deeper. Get the facts.’ Avoid the crowd mentality

“Ask Why” was their motto.

“Wheel Out,” “Fat Boy” “Death Star” and “Get Shorty” were some of the nicknames applied to their strategies.

Confirmation letters of successful trades were addressed to names like “Mr. M. Yass and “Mr. M. Smart” … and I think you can parse the underlying contempt.

“Rank & Yank” described their people performance system, “Pump and Dump” their trading strategy.

About $70 billion of market value was destroyed, more than 20,000 employees lost their jobs and pension funds worth $3.2 billion were destroyed, more than two thirds of which belonged to retirees with little chance to rebuild.

I had always intended to watch “The Smartest Guys in the Room,” the 2005 movie based on a book by the same name from co-authors Peter Elking and Bethany McLean, but it got lost in the shuffle until last week.

It chronicles the Enron cataclysm, whose meteoric ascent was violently terminated with its bankruptcy on Dec. 3, 2001.

“Be like Enron” is still an ignominious curse

It’s hard to believe this happened almost 10 years ago since to be “like Enron” still reverberates as an ignominious curse. It’s really more like a viral infection, though, because so many of the forces that drove its destruction have cleaved similar fissures in scandals from (more…)

Can you put a lifetime on a 3×5 card?

Do you think you could distill a lifetime of experiences into a handful of sentences … so that when your grown children read them, they would hold them as dearly as they once held their teddy bears?

I’ve recently published several lists of “life lessons”, for lack of a better term, that keep coming my way from a variety of sources. These lists, scratched on the back of an envelope found in a plane crash, or tucked in a wallet for 50 years, are treasures because they’re personal … and each person believed he or she had captured the unique nature of their humanity.

[pullquote]Can you capture your life lessons on a 3×5 card?[/pullquote]

So, now come the Guideposts of business philosophy taken from the book, Marriott — The J. Willard Marriott Story by Robert O’Brien. It’s longer than most … not a note card but still a single sheet of paper … maybe Willard did more than most? Some may seem old-fashioned, others a little harsh for the more indulgent company cultures of the 21st century … but most of them are rooted in sound business practices. Work your way past some of the pedestrian entries to uncover a few nuggets and valid reminders that you can add to your own list.

Keep physically fit, mentally and spiritually strong.
Guard your habits – bad ones will destroy you.
Pray about every problem.
Study and follow professional management principles. Apply them logically and practically to your organization. (more…)

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…)

Let the public floggings continue ….

The flood of public embarrassments and public floggings never seems to end. Two of my most recent columns, Get it Right the First Time and The Keys to an Apology, summarize BPs woeful public gaffes, the transcendence of umpire Jim Joyce 'actions following an almost perfect baseball game ... and…

Vol. 68: The Keys to an Apology

Integrity, vulnerability and humility: keys to an apology

“Pride is concerned with who is right. Humility is concerned with what is right.” — Ezra Taft Benson

I was ready to return to our series on strategic finance after my last column about the integrity of umpire Jim Joyce and the accountability of BP… until I read a comment in the Washington Post by Jeffrey Pfeffer, a professor of organizational behavior at Stanford University.

Citing Henry Ford’s infamous quote, “Never complain, never explain,” as the preferred way for business leaders to deal with disasters like the Gulf oil spill took me by surprise.

BP is the poster child for a failed apology

In appearing to criticize BP’s CEO Tony Hayward for apologizing for BP’s actions, Mr. Pfeffer extols the value of being on the “winning side,” that people respect strength and diffidence does not convey winning or power. Research in social psychology, he continues, “shows that acting embarrassed or remorseful conveys less power and results in less favorable impressions than acting angry.”

In the context of BP’s PR debacle, those comments seem wildly misplaced. Does Mr. Pfeffer think BP would have won our hearts and minds by taking no responsibility, “never explaining,” and that he should have acted like he was angry that people blamed BP for this unexpected accident? I can’t imagine worse advice than if I recommended that you chase down every meal with a quart of engine oil.

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Do we need a Federal Escrow Fund?

I’m sure this will be a popular post … but set aside your emotions for a moment about the BP disaster… and consider the insistence by the federal government that an independent agency take over the claims resulting from the oil spill, purportedly overriding BP’s authority, and that of the other 12 entities on board the oil platform, in those matters. The suggested prototype is the independent examiner appointed to handle claims resulting from the events of 9/11 … but recognize that those events were NOT directly caused by a legal entity with rights and responsibilities and shareholders, or that was subject to a myriad of legitimate national and international governing bodies.
Who should decide how much to pay whom for oil spill claims?
What I wonder is whether BP … in most cases, any corporation … shouldn’t have some rights and control over the claims paid from funds ultimately belonging to their shareholders? Take special note that in BPs case, a powerful example of the global economy in which we live, 18 million British citizens own stock in BP, many of them retirees.
Emotions are running high and many people would prefer to see BP hanging from the nearest rafter. At the same time, shouldn’t a company be allowed to settle claims in a fair and reasonable manner? There are plenty of ways in which individuals and organizations can seek redress if they disagree on the results, either through appeal or in claims or civil courts if a reasonable settlement cannot be made.
What paperwork? (more…)