April 6: We’ll take the cash flows

Financial accounting decisions are too often made to optimize for the short term at the expense of long-term value creation.

Source: Fact of the Day 1 interview with Jeff Wilke
Published: January 2021

We’ll take the cash flows

During his graduate work at MIT, Jeff Wilke took an MBA course that shaped the way he thought about financial accounting. In 1991, his professor Bob Thomas taught that financial accounting decisions are too often made to optimize for the short term at the expense of long-term value creation.

Though Bob’s MBA students agreed intellectually that short-term optimization was not optimal, they then joined large corporations and did exactly what they thought was silly: making sacrifices to hit quarterly profits and optimize for non-cash earnings.

When Wilke read Amazon’s 1997 Letter to shareholders, he recognized that he and Jeff Bezos shared a mental model: “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”

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