As of early 2011, MSFT generates 27% of revenue from Windows and 27% from Office. Over 50% of total revenue still comes from its two key product families.

The company has been trying desperately to diversify its revenue stream for years. It’s had both failures (eg: MS Network) and successes (eg: xBox).

What this shows is that (1) non- OS/Office parts of MSFT can’t compete with the company’s own monopoly (2) MSFT has reached maturity in its markets where it generates most of its revenue.

MSFT needed a strategy suitable for a mature tech company in its situation.

It’s generally acknowledged in the computer industry that IBM has been very successful at entering new markets late, then using its cash and various alliances to buy into predominant market share. MSFT appears to be copying IBM’s strategy for success as a mature tech company.

can u explain me or mail me regarding this.

As Dividend Tree pointed out, it is true, things like your house doesn’t have an income producing, but it still has expenses related to it. However, I think Dividend Tree is erroring in that he is thinking from the cash basis of accounting point of view, not from the accrual basis of accounting point of view.

Okay, so you are asking, what is the difference?

Cash basis doesn’t take into account any of the so called paper transactions such as interest earned/incurred, but yet not yet paid in/out, or depreciation on long-term assets. Accrual basis on the other hand does take these things into account so as to give you a more true picture of where you stand.

Now, don’t get me wrong, we all need a safe haven, so as not to end up building a house out of cards, thus we have to factor that into our personal finances. However, a lot of people look at depreciation as it’s bogus and rediculous to take into account. I’m about to explain why it’s NOT bogus and why it needs to be taken into account, but for reasons different from what’s given out there in the business world.

First, let’s get into the meaning of depreciation. As you use such long-term assets like a car or a house (yeah yeah, I know all about the argument a car depreciates the moment you take it off the lot, but I’m also going to dispel that myth too under the assumption you were truly planning the real purpose of purchasing such long-term assets), the value of it is going to decrease as time progress as a result it’s man made and like anything else that’s man made, it has a limited useful life time period (rather if it’s via years or units of usage) Some long-term assets (those items lasting longer than a year) will depreciate at a faster rate in the beginning (such as a car) as a result of needing more repairs down the road than other assets will (such as a house). If you want to continue to use these long-term items over time, you will either have to repair them or replace them, thus there’s a cost to that. That’s where depreciation initially came from. Note, the moment you purchase the long-term asset, you didn’t use very much of it if any right at that point, so why would it lose 50% of it’s value from a usage stand point of view? Yes, true, you can’t sell it back to the dealer for the price you bought it from the dealer, but that price difference is more of a function of finances (note, we also hitting up on economics with such things like sunk funds), not a function of usage.

Of all TANGIBLE items you will ever purchase (Note, things like stocks and bonds are not tangible items in the realm of Accounting), all of them will have some form of depreciation on them. The ONLY EXCEPTION to this rule is the land you purpose. Note, even when you purchase a house, the house and all “LAND IMPROVEMENTS” are depreciable, but the land itself IS NOT depreciable.

Why then do we have so much issue figuring out the real networth value of such businesses? To be quite frank, if you are realistic, it isn’t that hard to do and pretty easy to figure out. However, like most other people, business managers will fudge the real numbers to get the numbers to read what they want them to read, and that’s where the problem lies at.

Okay, so now people are telling me they don’t use depreciation for any such purpose when it comes to repair/replacement of such items. People generally think of 3 main reasons why depreciation is used according to most people:

Business (cause it’s required. However, this requirement came about from the fiasco that took place in the roaring 1920 when business managers lied to the banks and thus the banks failed when the banks couldn’t get their money from the businesses that lied to them.)

Taxation (yes, from a business point of view, we also have taxation, which depreciation of long-term assets lowers our tax bills)

Charity (Even on a personal matter, we have to at times depreciate our long-term assets in order to come up to a remaining cost basis donated to report on our Schedule A.)

Fine and dandy, but none of these 3 reasons apply to me with regards to our household’s personal finances. I however have 3 other reasons for it.

First, what does that long-term asset really cost you over time (TCO or Total Cost of Ownership)? In order to determine this, you have to figure out the depreciation rate on such long-term assets, preferably using US GAAP rules. This means you have to go back to the initial time period you purchased the long-term asset assuming you went through the appropriate steps such as determing it’s total cost to put the item into usage, how long it’s expected to last, and which depreciation method fits the item best relative to what’s expected over the useful life time period in regards to repair/maintenance expenses.

Second, you should use this depreciation schedule to put off to the side of that same amount of money as what the depreciation schedule show, so as you can repair/replace such long term assets.

Third, if you do the things in the first 2 steps, you have just went on your way to avoiding having to take out a long-term debt.

Now there’s my 3 reasons for using a depreciation schedule. This depreciation schedule also impacts our Networth values. If done properly (note, if you lie about this, you are only lying to yourself and only hurting yourself, so be smart about this), you can still base some of your goals off of the networth value. Don’t get me wrong, there are some limitations to it, but it’s not 100% bogus as a lot of people make it out to be. As for which Accounting method to use, I personally will NEVER use the cash basis of accounting. I will ONLY use the accrual basis of accounting. Cash basis doesn’t give you a true picture of where you stand financially.

Note, when you are having to take a debt out on such long-term assets, that cuts into your ability to put money into investments where it really counts. Not only that, but that interest charge is a negative to your daily residual income while the earnings on your investments (assuming it’s a profit, not a loss) is a positive on your daily residual income.

As for financial goals I use:

1 goal set against Short-Term Networth Value (note, all assets except retirement funds minus all liabilities except expected taxation on retirement funds). This goal is for the purpose of looking at the big picture of the here and now as we are not fully to the spot we need to be at. For right now, it’s set at increasing ST Networth Value by a minimal of $12,000 per year.

1 goal against daily residual income improvement (this year, I made an exception to this goal given another major goal I been working on which basically made this goal next to impossible to meet), which is set at $3.65. May seem easy, but that is how much residual income you increase it by for a single day with the money you put into investments or how much do you reduce your daily residual expense by paying down debt.

25% of “ACTUAL GROSS INCOME” must go to countable savings (Net contributions into retirement funds, Net debt reduction, net contributions into emergency fund). Note, amounts taken out of either of the 2 funds counts against this goal and an increase to debt counts against this goal. However, cause there are those bad years, one need to shoot for 40% in the good years.