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Bottom line truths

By Mandy de Waal

What’s the bottom line? The short answer is that it’s all about profits.

Perhaps the most watched digits in business the profits, or obvious lack thereof, is in fact the bottom line figure that appears on a company’s income statement. But then you knew that.

What’s the real bottom line in business? Well that depends whom you are asking, and when you are asking the question. Turn back the clock a couple of years and the bottom line would have been the relentless pursuit of growth. But that has changed. In today’s battered economy the bottom line for business is all about careful growth, containing cost and realising value for shareholders and the environments business operates in.

Perhaps the most meaningful and enduring definition of what the bottom line means to business comes from the ‘Oracle of Omaha’, Warren Buffett. Arguably the world’s greatest stock market investor, Buffett’s approach to investing has been successfully built around the concept of value. I am, of course, using the word ‘successfully’ fairly euphamistically. Warren Buffett runs a company located in Omaha called Berkshire Hathaway, which holds his various investments. With a compound annual return of around 22.3% over the last 36 years, if you’d invested $10,000 in Berkshire Hathaway in 1965, you’d be sitting on more than $50 million today.

“I need to remind you about the definition of ‘investing’, which though simple, is often forgotten,” Warren Buffett said recently at a Sun Valley bash for corporate executives in the US. “Investing is laying out money today to receive more money tomorrow.”

Buffett’s style of investing has made him the second richest man in the world with a net worth of some $32 Billion, according to the Forbes rating of 2001.

What is his bottom line when deciding whether or not to invest in a business? The key tenets include carefully looking at whether the company has performed well consistently, seeing whether the company has avoided excess debt, in tandem with ensuring that profit margins are high and that they are increasing. Buffett never typically invests in newly listed companies, preferring companies that have been around for at least ten years.

Buffett has come under fire for far to conservative. Critics predicted the end to his success during the technology boom. This was because his conservative investing style meant missing the dot-com bull market. Of course, he had the last laugh after the dot-com crash when his time- tested strategy once again proved successful. For Buffett the bottom line in business is all about value.

Value is a key theme that comes up repeatedly when speaking to local analysts and businessmen about the bottom line. “The bottom line, for want of a definition, is the value that a company delivers to its shareholders,” says Dr Chris Visser, Head of Macro Research for Metropolitan Asset Managers who adds that globalisation has witnessed a shift from a pure focus on the bottom line. “The emphasis has shifted to longer term sustainability and the competitiveness of a company. In the ’90s global competitiveness was a strong theme and because of this there were a lot of mergers and acquisitions as companies rushed to become global players. Now the emphasis has shifted away from being bigger to becoming more competitive and making more efficient use of capital,” says Visser. He explains that today analysts are not just looking at profits, but analysing the bottom line to see how the profits are obtained and how sustainable business is.

Sustainability is a theme that resonates with a venture capitalist view of the bottom line.

“I would make an investment decision based on the sustainable cash flow that a business could generate,” says Leor Atie, a director at Protocol Business Development Fund, formed by Dimension Data in February 2000. “When we invest now, the underlying factor is physical cash. This view has changed dramatically in terms of how people made investment decisions previously, when the value proposition of the business wasn’t challenged as much. We have just emerged from the age of the idea economy where loads of ridiculous companies that had amazing ideas got invested in.”

Atie argues that this is why a lot of companies went belly up – they simply didn’t have sound business models to support the bottom line. “People got excited by the technology and not the real economic value. Let’s face it, hype doesn’t put food on the table,” says Atie.

Analysts believe that a different view is required of the bottom line in traditional companies, versus the bottom line in technology companies. Alida Jordaan, head of Equity Research for METAM, outlines the difference between traditional industrial companies and technology companies with regard to the bottom line:

“When traditional industrial companies acquire new assets they would typically go through the income statement as depreciation. With technology companies you find that a lot of expenses go through the income statement much quicker and that is why you see large losses in technology companies. One also needs to understand that losses are occurred because when companies are acquired the goodwill is amortised.”

According to Jordaan it is dangerous for management to only be incentivised on the bottom line. “At a company like Profurn it was difficult to understand why with a bright managing director in place they pursued such a high growth strategy. The managing director was incentivised on earnings per share and was using growth to drive the share price up,” says Jordaan. She advocates that business should not be focussed purely on earnings and that cash flow is king. It’s business school basics really – a business needs cash to grow. Growing too fast leads to borrowing money, which of course means exposure to financial risk, which if not controlled could overtake a company and lead to its ruin.

It is interesting to see that while investors are looking more keenly at the numbers, the bottom line is not top of mind when it comes to management attention. It appears that when looking at business analysts, investors and business leadership have a differing view.

So where are the Chief Financial Officers (CFOs) in all of this? With business emerging from merger and acquisition frenzy, it appears that the CFO’s gaze isn’t that firmly fixed on the bottom line after all, but has been distracted by acquisitions, mergers and managing relations with investors. In the old days the CFO was the guardian and leader of both fiscal discipline and performance management. What is evident is that there’s a strong call from the investor and analyst community for this focus to return to the bottom line. Analysts appear to be calling for CFOs to take their view back to the books and to reinvigorate their role in ensuring sound financial practices and healthy business growth.

Mandy de Waal is founding partners of Idea Engineers, a strategic marketing company that develops brands and businesses, working with clients from strategy to execution. Visit their web site at

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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