Warren Buffett's Berkshire Hathaway Inc. employs more than 260,000 people. But instead of running the company from the top down, Mr. Buffett sees it as a collection of 76 unique businesses, and employs just 20 head-office staff to hold it all together.
Although some of his companies, such as NetJets and Burlington Northern Santa Fe Railway, are large, others, including the likes of Nebraska Furniture Mart, See's Candies, The Pampered Chef, The Buffalo News, and Justin Brands Inc., are relatively small.
Considering the diversity of his holdings and his success across many different industries and company sizes, you may want to ask yourself, "What would Warren Buffett do?" when making key decisions in your own company.
The answer can often be found in Mr. Buffett's annual letter to Berkshire Hathaway shareholders. This year's letter, published on Feb. 26, includes many lessons for all of us. This week, I'm highlighting three of my favourite insights for business owners. Here's the first.
Keep a reserve fund
In the section of his letter titled "Life and Debt," Mr. Buffett describes his financially conservative approach to management.
"The fundamental principle of auto racing is that, to finish first, you must first finish. That dictum is equally applicable to business and guides our every action at Berkshire."
Mr. Buffett prefers to avoid leverage – and the opportunity to gain a slightly higher return in good times – in favour of keeping cash on hand. He usually maintains a rainy-day fund of about $20-billion (U.S.) – almost seven times the $3-billion hit Berkshire took over Hurricane Katrina, the largest and most expensive catastrophe to ever hit the insurance business (a major part of Mr. Buffett's holdings).
In his annual letter, Mr. Buffett reveals that the idea for a reserve fund came from his grandfather, Ernest Buffett, who owned a small grocery business. In 1939, his grandfather sent a letter to each of his kids describing the importance of keeping some cash on hand to deal with unforeseen problems.
Warren Buffett got a copy of the letter sent to his uncle, Fred, and included it in his annual letter to shareholders this year.
His grandfather's advice to his son was this: "For a number of years I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business. There have been a couple of occasions when I found it very convenient to go to this fund."
Not only does Warren Buffett's cash cushion let him sleep well at night; it also allows him to zig while others zag.
"During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offence while others scramble for survival. That's what allowed us to invest $15.6-billion in 25 days of panic following the Lehman bankruptcy in 2008." writes Mr. Buffett, the chairman and chief executive officer of Berkshire Hathaway.
Now that Goldman Sachs is trading around $160 a share, Mr. Buffett's September, 2008, investment at $115 a share looks pretty good.
So how much of a reserve fund should you keep socked away for a rainy day?
Mr. Buffett's $20-billion amounts to a little less than two months' of revenue (Berkshire Hathaway's 2010 annual revenue was $136-billion).
Not wanting to bet against Mr. Buffett, I'd start there.
Tomorrow: Why one of the world's richest men wants to sell you an ice cream
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.