[This is part of the series: 7 Tips To Make You Better At Business]
Most everyone preaches the virtue of savings.
The popular radio host Dave Ramsey encourages a no debt, saving oriented lifestyle in his “7 Baby Steps” to financial freedom:
7 – And finally, build wealth and give.
But why stop at the individual level? If saving is good for the individual, why is savings not good for a business?
The answer is: It is.
A strict savings plan can be an enormous asset for businesses.
For example, I heard of a small business once that was paying approximately $30,000 per month in debt service. This went on for about 5 years before solvency became an issue. The irony of it is that if that $30,000 per month had been devoted to savings – rather that unnecessary debt – the company would have about doubled it’s Owner’s Equity over that same time period.
In my opinion, savings does not necessarily have to be done in cash either. You want something liquid, but it does not have to be a checking account.
If the company above had salted away it’s savings in buying liquid equity in another company, say British Petroleum, the 5% dividend of BP would also have increased the firm’s Gross Revenue by about 15-20%.
You see, the debt the company was saddled with not only had the real cost of $30,000 per month. It also had the opportunity cost (income they gave up) of about $7,500 per month!
As of May 2015, the cash piles of the top 3 companies in the world are as follows:
– Apple, $137 billion
– Microsoft, $68 billion
– Google, $48 billion
Can you imagine the flexibility and safety-net those amounts of cash allow these companies? The ability to take risks? The ability to buy out competitors or upstream/downstream firms?
Want a good place to start? Try putting away 15% – 20% of your net income.
What kinds of opportunities would an aggressive saving plan for your business offer?
How good would it feel to be sitting on a pile of money when your largest competitor is struggling through the next recession?
In business, savings is defiantly an asset – in a number of ways.