Warren Buffett’s first rule of business and why it’s so important

It can be argued that Warren Buffett is one of the greatest entrepreneurs of all time and in todays video I discuss his first rule which has been so instrumental in the success of businesses across the world.

I don’t usually do videos about investing and I’m not going to this time either, but the rule number one of investing is, in my opinion, also one of best rules for business in general. If you don’t know who Warren Buffet is, I believe he’s world’s third richest man at the moment. He essentially buys stocks in profitable companies, and he’s been picking out the best companies to invest in his whole life and as a result, he’s become very, very rich doing it. Warren Buffet, he has his first rule of investing, but I think it definitely applies to business. And that rule is never lose money.

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I’ve done videos in the past about profit first, which is Mike Michalowicz’s strategy, and this is very similar to that. The rule number one about business, and never losing money is an incredibly important one in my opinion. I often see business owners sacrificing profits to just grow. But what often gets confused is when they do create a loss to create that growth, is it a loss in terms of the underlying profits of that business, or is it a loss in terms of, is it being caused by just the business being run poorly or is it being caused by the investment activities to grow?

Think of that two ways. You’ve got your day-to-day activities through a business. Could be selling stuff. It could be providing a particular service. And if you remove all of the marketing costs, anything growth-related, if you’ve got member of staff that is purely there to support the growth because there’s a period of time where you’ve got the member of staff in before you get really busy, then that’s a growth cost as well.

What you’ve really got to do is look at your day-to-day running profit, and then look at the impact your growth costs have had. If your day-to-day activities and business are making a loss, then that is a huge problem for your business, because growing is not really going to fix that loss. All it’s going to do is compound that loss. What I always do with clients and ourselves is, we’re always trying to understand what is the underlying profit of a business? We do remove things like the growth cost. We do remove things like marketing costs when we’re trying to understand that. As long as that underlying profit is healthy, then that’s okay, because then you can then reinvest some of those profits into growing and that could push your business into a loss if you invest too much money into growing. But then at least you know that the loss you’re making at that point is purely being created by growth activities and not an underlying issue in your business.

Rule number one, never lose money. I think it always applies. But there are times where you do need to lose money to grow, but you’ve got to have crystal clarity that when you are losing money, it is because of your investment in growth and not because of an underlying issue with your margins and your business model.

 

 

 

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How to Create an Exit Strategy...

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  • The ONE thing you MUST do if you’re serious about exiting on a high
  • The tried and tested model you must implement NOW to lock down a high-value business sale later

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