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Without business, there is no profit, and without profit, there is no business
During a financial due diligence, in addition to look at the revenue (we spent a lot of time on this), is cost. Some said, cost is the “enemy”. Not all people can explain away very well about the company’s cost and it always intrigued me.
Cost, whatever it is, should be kept simple, even in its ‘account name’. As simple as it is. When I saw the company uses so many accounts to book its costs and using so many approaches to allocate its costs, I guess they want to confuse, instead of making it clearer, the readers of that financial statements.
Talking with persons with different backgrounds in the company, especially the company with specialized industry and products, in many times, a bit confusing to me. The technical language will be very different. Take a sample of airline industry. Costs could be related to many different types of plane models, but at the end of the day, towards the end of the discussion, I could say, as an outsider (and somebody from finance background), I don’t know much the difference between one type of commercial airplane from the others (for example, Boeing commercial models, 707, 717, 727, 737, 747, 757, 767, 777, 787, and more to come). Yet, one thing I am pretty sure, they are all marginal costs, they are same like other costs, the difference is just, they put “wings” on that cost.
Sometimes, as I joke, I will say to them, even I don’t know, what the difference between “bolts” and “nut”. To me, they are called “cost” and I prefer knowing them lesser than more.
Not all costs are the same, similar to not all revenues and cash flows are the same. The certainty of costs in many cases are higher than the certainty of revenues and cash flows that the company will be able to make, generate and sustain in the future.
Though per textbook in the university, costs are mostly segregated into fixed cost, variable costs and semi-variable costs, and discretionary costs. Yet, I guess, we need to see ‘more costs” for “keep the company having a competitive advantage” and lesser costs for “just being in the market”. Competitive advantage is like a virginity, much easier to protect it than to get it back once lost.
The company should focus on activities, that instead of whether they are “value added” or not (as many MBA textbook teaching us), but I believe, it is easier, instead of arguing “value-added” or not”, whether it is destroyer of company’s profit. Some people will argue that reducing cost could hit the company in the long run, yet I believe, with now, the world becomes so “flat”, long run could only mean as short as 1 year from now.