A couple of months ago, I read a great article in Forbes Magazine (which I haven’t been able to find online, so I can’t share a link with you). The article was an interview with Jim Collins, best-selling author of “Good to Great.”
In the article, he said he learned a lot by studying Bill Gates. One of the biggest lessons Collins learned from the Microsoft man was the importance of having “shock absorbers” in your business. Here are a couple different definitions of “shock absorber”:
1. A 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. 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 thing that 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.
The majority of financial planners recommend clients create emergency savings accounts, which hold three to six months of living expenses. This “emergency savings account” is then only to be tapped into to cover unexpected big expenses or a loss of income. It is not for frivolous purchases. This emergency savings account is a shock absorber for your personal finances.
Most would agree that such an account is critical protection for personal finances. The issue is that we real estate agents don’t have the same kind of regard for our businesses. We need to have the same kind of shock absorbers in place. We really need to have two emergency savings accounts — one for our personal living expenses and another for our 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 business’s 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.
One more thing: Once you have the shock absorber, follow Gates’ lead and don’t spend it until absolutely necessary.