In his 1987 Berkshire Hathaway Annual Letter, Warren Buffett discusses his management philosophy regarding flexible budgets and cost-cutting. He emphasizes the importance of maintaining the quality of a business, regardless of short-term fluctuations in profit.
Using examples from The Buffalo News and See’s Candies, Buffett rejects the notion of reducing essential services or adding unnecessary expenses based on financial performance. He argues against a “yo-yo” approach to budgeting, stating that decisions should prioritize long-term value for customers and employees, rather than short-term profit margins. His guiding principle is to always do what makes sense for Berkshire Hathaway’s operations, no matter the circumstances.
Here’s an excerpt from the letter:
Buffett: It’s vital, of course, for a newspaper to cover national and international news well and in depth. But it is also vital for it to do what only a local newspaper can: promptly and extensively chronicle the personally-important, otherwise-unreported details of community life. Doing this job well requires a very broad range of news—and that means lots of space, intelligently used.
Our news hole was about 50% in 1987, just as it has been year after year. If we were to cut it to a more typical 40%, we would save approximately $4 million annually in newsprint costs. That interests us not at all—and it won’t interest us even if, for one reason or another, our profit margins should significantly shrink.
Charlie and I do not believe in flexible operating budgets, as in “Non-direct expenses can be X if revenues are Y, but must be reduced if revenues are Y—5%.”
Should we really cut our news hole at the Buffalo News, or the quality of product and service at See’s, simply because profits are down during a given year or quarter?
Or, conversely, should we add a staff economist, a corporate strategist, an institutional advertising campaign or something else that does Berkshire no good simply because the money currently is rolling in?
That makes no sense to us. We neither understand the adding of unneeded people or activities because profits are booming, nor the cutting of essential people or activities because profitability is shrinking.
That kind of yo-yo approach is neither business-like nor humane. Our goal is to do what makes sense for Berkshire’s customers and employees at all times, and never to add the unneeded. (“But what about the corporate jet?” you rudely ask. Well, occasionally a man must rise above principle.)
You can find a copy of the letter here:
1987 Berkshire Hathaway Annual Letter
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