Post by Rob Minton
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A month or two ago, I read an interesting article in Forbes Magazine. Unfortunately I haven't been able to find this article online or I would include a link for you. The article was an interview with author Jim Collins, known for his best selling book "Good to Great."
In the interview, he said that he learned a great deal from studying Bill Gates. One of the biggest lessons he learned was that it was important to have "Shock Absorbers" in your business. Here are two definitions of shock absorbers:
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
2. A device or a part that absorbs and cushions the impact of a wheel
going over an obstacle, which makes for a smoother ride. No different
from a shock absorber used on a car or motorcycle.
The first definition hints at "protection" and the second definition highlights the "smoother ride" concept. These definitions could be interpreted to the following for your business:
Business Shock Absorber: The ability to protect a business from loss of revenue or from unexpected expenses.
Take a look at the balance sheet of Microsoft and you'll 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 explained that Bill Gates wanted to have several years worth of expenses for his business saved in cash. This would allow Microsoft to weather almost any negative business threat including: competition, loss of revenue, recession and changes in market demand. More importantly, the stockpile of cash would allow Microsoft to stay focused on their long-term business plan. Without this shock absorber, they would be forced to defer their long-term business plan to generate short-term revenue.
Side Note: Microsoft is in the process of borrowing around $6 billion as I write this article. They plan to use these funds for general corporate purposes, including possible acquisitions and stock buybacks. It appears that they do not want to spend any of their "shock absorber" for normal business expenses. They want to keep this safety net in the business going forward.
Most financial planners recommend we create an emergency savings account holding 3 to 6 months of living expenses. This "emergency savings account" is then only to be used to cover unexpected large expenses or the loss of income. It is not to be used for frivolous purchases. The emergency savings account is a shock absorber for your personal finances.
Most would agree that an emergency savings account is critically important to protect our personal finances. The problem is that as real estate agents, we don't have an emergency savings account for our businesses. We need two shock absorbers or two emergency savings accounts. One for our personal living expenses and another for our real estate sales businesses.
I'm sure this makes a lot of sense to you after the last two years. It's important that we learn this lesson now and work to add this shock absorber into our business going forward. Bill Gates is one of the richest men in the world. He has topped this list for many years. This isn't a fluke. He is in this position because he thinks long-term and has engineered back up plans within his business. He plans for problems in advance.
What are your businesses average monthly expenses. Set a goal to save 6 to 9 months of your business's average expenses. As the market finally rebounds, make a commitment to save a portion of every commission check you receive as your businesses shock absorber. This shock absorber will protect your business and help you stay focused on your long-term goals.
Oh and one more thing, follow Microsoft's lead and do not use your shock absorber for anything, until absolutely necessary.