Float-Based Business Framework
Leverage 'free' money
The Float-Based Business Framework is a strategy that leverages 'free' money, or low-cost liabilities, to boost a company's performance. This framework is based on the idea that a company's level of profitability is determined by three items: what its assets earn, what its liabilities cost, and its utilization of leverage. By obtaining float on very advantageous terms, a company can reduce its cost of funds and increase its returns on assets.
- A company's level of profitability is determined by what its assets earn, what its liabilities cost, and its utilization of leverage.
- Obtaining float on very advantageous terms can reduce a company's cost of funds and increase its returns on assets.
- A company's financial strength and ability to pay losses are critical in attracting and retaining customers.
- Assess Your Assets and LiabilitiesEvaluate your company's assets and liabilities to determine their earning potential and cost. Identify areas where you can reduce costs and increase returns.Pro tipConsider using a ratio analysis to assess your company's asset and liability structure.WarningBe cautious of taking on too much leverage, as it can increase the risk of default.
- Optimize Your LeverageDetermine the optimal level of leverage for your company based on its asset and liability structure. Consider using float to reduce your cost of funds and increase your returns on assets.Pro tipMonitor your company's aggregate exposure to ensure that your worst-case scenario is manageable.WarningBe aware of the risks associated with taking on too much leverage, such as increased volatility and potential default.
- Monitor and AdjustContinuously monitor your company's performance and adjust your strategy as needed. Stay vigilant and be prepared to respond to changes in the market or economy.Pro tipRegularly review your company's financial statements and adjust your strategy to ensure that you are on track to meet your goals.WarningBe cautious of complacency and stay alert to potential risks and opportunities.
Berkshire Hathaway's insurance operations have used the Float-Based Business Framework to great success, producing high returns on assets and low costs of funds.
Warren Buffett has used this framework to great success at Berkshire Hathaway, where the company's float has grown at an annual compounded rate of 20.7% since 1967. The framework has allowed Berkshire to produce high returns on its assets while keeping its cost of funds very low.