Most companies benchmark their business on revenue earned. Which is stupid, eh? I mean revenue means nothing if you don't benchmark the actual profit.
But is it stupid to benchmark profit as well?
Yes, it is. Because gross revenues and profit are a nice-to-have but not critical indicator. The most critical indicator in a business is always the concept called ‘reserves.' Reserves simply mean: How long will you last if you stopped working today?
Would you last three months?
Six months?
A year?
Five years?
I once knew of a person who earned a whopping $800,000 a year.
You think that's a nice amount to earn? Well, he sat down and checked his reserves. And if he didn't keep earning at a phenomenal rate, well he'd be in big trouble in three months.
So this brings up a very pertinent question
Do you know how long you can last without earning an income?
Do you even know how much you need to earn in the first instance?
Most people don't.
They pursue profits and revenues like dolts.
They earn. They spend.
And there's never any talk of reserves.
And then a splendid year like 2009 rolls along.
A year filled with uncertainty and falling markets.
Work slows down. And then comes to a grinding halt.
It's time to dip into the reserves.
It's time to buy new software.
Get yourself trained and ready for 2010. But you have no reserves. You're wondering how to pay the mortgage. You're cutting back on everything in sight.
The real reason you got into business was to create more control over your life.
Not to earn endless amounts of money, and blow it all up.
Understand the concept of reserves, and you'll understand the real benchmark of profit in business.
It sure ain't a fancy balance sheet with fancy gross revenue and handsome profits!
I like the way you put it “Not to earn endless amounts of money, and blow it all up.” That made me laugh.
Reserves, sounds like it would be a wonderful thing to have someday.
Well, I’ve seen it many times before. Earnings are fine, but without reserves, you can’t last long.
The entire economy is in the state it’s in today, because of the lack of understanding of this simple concept. If you don’t have reserves, you borrow too much, spend too much and end up broke.