Learn to invest with Buffett

Chapter 34

Chapter 5 Section 6 Cost of Sales: Less is better for Buffett
It is equally difficult to increase circulation in journalism. Although the amount of advertisements has increased slightly, it mainly comes from the clipping section, while the number of advertisements on newspaper pages has decreased.The profit of the former is much lower than that of the latter, and the competition is more intense. Fortunately, the cost control last year resulted in a good number of home user subscriptions.

--Warren Buffett
Buffett believes that in order to become an excellent enterprise, the first thing that needs to be done is to save costs, especially the cost of sales.Because each enterprise sells products all the time, the cost of sales accounts for a very large proportion in the entire enterprise.

The so-called cost of sales refers to the production cost of the sold products or the labor cost of the rendered labor services and other business costs of sales.The cost of sales includes two parts: main business cost and other business expenses. Among them, the main business cost is the cost formed by the enterprise's sales of commodity products, semi-finished products and the provision of industrial labor services; other business expenses are the enterprise's sales of materials, rental packaging , leasing of fixed assets and other business costs.

Company S is one of the largest enterprises in my country's lead-acid battery industry. S company has a registered capital of 1.3 million yuan, total assets of about 13 billion yuan, and an annual turnover of nearly 20 billion yuan.However, with the rapid growth of S company's sales, the sales model and business process it has been using have kept the sales cost high. funds.In addition, the company stipulates that salespersons have the right to reimburse sales expenses such as travel expenses and phone calls. Many salespersons are extravagant and wasteful without saving at all.As a result, although the company's turnover has grown rapidly, the growth rate of net profit is very low, and even when the industry is fierce, there have been sales growth but no profit growth.The main reason for this situation is that the company's sales cost is too high.

As the third largest automobile company in the United States, Chrysler LLC was founded in 1925 by Walter Chrysler.It once surpassed Ford to become the second largest automobile company in the United States. On April 2009, 4, Chrysler Corporation declared bankruptcy.Chrysler became the first auto industry giant to fall suddenly. The culprit was not the financial crisis, but the high cost of sales.The sales network of automobiles in the United States began to be established 30 years ago. At that time, the road network was not as developed as it is now. A road of 50 kilometers is a long distance for many people. Car companies have to build a road in a very short distance. Franchised dealerships to meet the needs of automotive consumers.But now, the roads have been built to extend in all directions, the distribution network established in the past is too dense, and the management cost is too high. In 30, there were 2006 Chrysler dealers in the United States, with a total sales volume of 3749 million vehicles, an average of 214 vehicles each; while Toyota had only 570 dealerships in the United States, with a total sales volume of 1224 million vehicles, an average of 205 vehicles. Each sold 1675 cars, nearly three times that of Chrysler.Overly dense sales outlets have greatly increased the sales cost of Chrysler products, which has directly resulted in two consequences: on the one hand, it is difficult to form a strong competition in the market for product prices; on the other hand, it also makes the company spend less on research and development Japanese rivals such as Toyota.In the end, high sales costs drove Chrysler into bankruptcy.

Through the above two stories, it is not difficult to see that the cost of sales is really very important to a company.Only by minimizing sales costs can sales profits be maximized.

Investment motto:

Investors should stay away from companies with high sales costs and choose companies with relatively low sales costs.Only in this way can we share the investment income brought by corporate profits.

(End of this chapter)