A little while ago, I read an intriguing article in Forbes Magazine. I haven’t been able to find a link to it online anywhere, or I would include the URL for you. The article was an interview with Jim Collins, author of the best-selling “Good to Great.”
Collins said that he learned a great deal from studying Microsoft’s Bill Gates. One of the most important lessons he learned is that it’s important to have “shock absorbers” in your business. “Shock absorber” can be defined as:
1. Resilient bearing which, in a watch, is intended to take up the shocks received by the balance staff and thus protects its delicate pivots from damage.
2. Device or part that absorbs and cushions the impact of a wheel going over an obstacle, which makes for a smoother ride.
That first definition hints at a sort of protection, and the second highlights the concept of a “smoother ride.” The two different definitions could be interpreted as the following in business.
Business Shock Absorber: What protects a business from loss of revenue or from unexpected expenses.
Look over balance sheet of Microsoft. You should be able to quickly spot the shock absorber in their business. To save you the time, I’ll point it out for you – $25 billion in cash. The Fortune Magazine article explains Bill Gates wants to have several years worth of expenses for his business saved in cash. This allows Microsoft to weather almost any negative business threat, including competition, loss of revenue, recession and changes in market demand. More significantly perhaps, the stockpile of cash allows Microsoft to stay focused on its long-term business plan. Without this shock absorber, even large successful companies are likely to defer their long-term business plan to generate short-term revenue when times are tough.
Side note: For the first time ever, Microsoft just issued long-term debt, raising capital through bonds for business expenses that might potentially include stock buybacks and possible acquisitions. Even though it has enough cash for these things, Microsoft and Gates appear unwilling to let go of the cash “shock absorber” in place. This safety net stays going forward.
Financial planners generally recommend we create an emergency savings account, holding three to six months of living expenses. This “emergency” savings account would then only to be used to cover large, unexpected expenses or a loss of income. It is not to be used for frivolous purchases. This emergency savings account is a “shock absorber” for your personal finances.
You’d probably agree that such an account is important for your personal finances. But what about your business? We real estate agents don’t really have the same kind of regard for our business finances. We should have the same kind of shock absorber in place. We really need two emergency savings accounts — one for our personal finances and one for our business.
In hindsight of the past two years, this probably makes a lot of sense to you now. Hopefully, you had cash set aside for leaner times before the leaner times hit. Regardless, this is a lesson we all need to learn now. Gates is not one of the world’s richest men by accident; he’s in that position because of long-term thinking and contingency planning. Gates has backup plans. He plans for problems in advance.
What are your business’s average monthly expenses? Arrive at this number, then set a goal to save six to nine month’s of your business’s average expenses. As the market finally rebounds, make a true commitment to set aside a percentage of every commission check to put toward your shock absorber. This shock absorber will both protect your business and let you stay focused on long-term goals.
One final note: When you have this shock absorber in place, follow Microsoft’s example and don’t use that cash until you have to.