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. 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 implies a degree of protection, while the second describes a “smoother ride.” In business, the definitions could be interpreted as:
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 in its history, Microsoft recently issued long-term debt. They plan to use these funds for general corporate purposes, including possible acquisitions and stock buybacks. It appears the corporation does not want to spend any of its “shock absorber” cash for normal business expenses. Gates wants to keep this safety net in the business 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 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.
This probably makes a lot of sense to you after the past two years. It’s important that we learn this lesson now and work to add this kind of business shock absorber going forward. Gates is one of the world’s richest men, as you know, and it’s no fluke. He’s in that position because of his long-term thinking and the backup plans he has for his business. Gates 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.
Oh and one more thing, follow Microsoft’s lead and do not use your shock absorber for anything, until absolutely necessary.