In Honor of Warren Buffett's 80th Birthday Today ... -

In Honor of Warren Buffett’s 80th Birthday Today …

Today is Warren Buffett's birthday. He turns 80 years old! Congratulations! To celebrate, I saved money ...

In honor of Warren Buffett’s 80th birthday today, I decided to personally sit down and examine all of the receipts at one of our operating businesses and look for any additional costs that could be cut. We work hard to make sure expenses don’t get out of control and everything is justified but it is always good to take some time to specifically examine everything you pay for and ask whether or not is central to the company’s mission.

We run such a lean ship that I didn’t find a lot. But … I finally identified about $420 in monthly costs we could end immediately that weren’t directly contributing to our primary mission of generating earnings for owners or a better experience for customers. That is more than $5,000 per year in cash savings!

The average American business earns 12% on book value (we earn more but I’m going to use this rate for conservatism sake), meaning that over the next 20 years, that $5,000 in annual savings will result in an extra $360,262 in net worth to our shareholders. Over the next 50 years, it is an extra $12,000,000.

That is how powerful compounding is! Small amounts end up being very, very large over time.

The moment I performed the calculation, this is what happened inside … (press the Play button) …

Frat Man

Joshua, as a general rule, is it wiser to opt in favor of cutting costs or keeping costs the same if it marginally affects customer satisfaction? For instance, let’s say both Restaurant A and B offer free refills to customers. Restaurant A, in order to minimize costs, makes the customers address a waitress or bartender to get a refill. Restaurant B prefers a looser environment and allows the customers to refill the drinks themselves, thus creating higher costs for Restaurant B than Restaurant A because we are more likely to refill our glass on our own four or five times, but we might only be willing to ask a waitress for a refill twice. But on the other hand, Restaurant B’s loose atmosphere might create higher satisfaction, so I’d be more inclined to be a repeat customer. Sorry, that’s the best example I could come up with- any thoughts?
http://www.joshuakennon.com Joshua Kennon

That is where the *art* of management, rather than the science of business, comes into the equation. The answer: It depends.

In the case of the specific example you gave, it would be a function of the clientele you were attempting to attract. I’m not going to pay above average prices if a restaurant makes me get my own drink. That is appropriate only for mid-tier pizza parlors and all-you-can-eat buffets. If it is an upscale restaurant, the moment your drink reaches the 1/3 mark in your glass, a fresh one should replace the one on the table. (Besides, drinks are the highest profit margin item in the food service industry so it doesn’t matter how much people consume – you’re talking about pennies per serving on everything except alcohol).

So, as a very general rule, I’d say it comes down to customer expectations. I don’t expect nice finishings or staff in every aisle at Sam’s Club; I expect low prices. If I notice a chipped shelf at Nordstrom, though, it’s going to make me hesitate. My expectations for the two businesses are different and, in the latter, I’m willing to drop far more money per item.