The Margin of Safety in Your Business

by Victor Cheng

 

Today’s guest article is on the concept of “margin of safety” as it applies to your business. I’m not talking about profit margin, but “safety” margin– a concept that is used everyday amongst airplane pilots. It’s a thought provoking piece written by friend and colleague Dave Dickson a pilot and former CEO of a chain of 21 auto repair shops.

 

The Margin of Safety in Your Business

I want to talk about your “Margin of Safety” in your business.  No, I don’t mean all of your physical safety equipment.  I mean your financial safety equipment.

I’m a pilot and when I fly, each flight has a “margin of safety”.  It’s like a bank account.  I can withdraw a certain amount before I’m in serious danger.  Conversely I can make deposits and give myself a bigger margin.

For instance, I can do a thorough walk around inspection before I get in the plane.  That increases my margin of safety because I can find any problems while I’m on the ground when they’re easy to deal with.  Or, I could just hop in and go.  That decreases my margin of safety.

I can get a weather briefing from an expert.  That increases my margin of safety because he’ll give me information and analysis that I don’t have.  Or, I can just look up at the sky and go without a briefing.  That decreases my margin of safety.

I can take off with a full tank of gas.  Nothing increases your margin of safety in an airplane like having more gas.  It gives you extra time to solve problems and make decisions.  Or, I could take off with less than a full tank.  That decreases my margin of safety.

None of these decisions on their own are good or bad.  I’ve flown without doing a walk around (usually the second leg of a long flight).  I’ve flown without a weather brief (bright sunny Florida morning), and I’ve flown with less than full tanks (rarely).

The point is that in each case I carefully and consciously made a decision about my margin of safety.

So, what does your margin of safety look like in your business?

What are some things you can do to increase or decrease it?

Ways to Increase Margin of Safety in Your Business

  • Stockpile cash in the bank
  • Pay down/off credit lines
  • Pay off mortgages
  • Hire better employees
  • Controlled growth
  • Source parts and suppliers from cheaper vendors
  • Have a strategic plan and follow it or change it
  • Constantly educate yourself
  • Practice good self-care

These are just a few things.  Take a few minutes and see how many of your own you can come up with.

Ways to Decrease Margin of Safety in Your Business

  • Max out all credit lines
  • Use up all cash reserves
  • Rapid expansion
  • Keep underperforming employees
  • “Wing it”-No strategic plan
  • Try new unproven products/services
  • Get worn out and tired

Again, these are just a few.  As with the increases, take a few minutes and see how many more you can come up with.

The important thing to notice is that not everything you do that decreases your margin of safety is bad, and not everything you do that increases your margin of safety is good.

Sometimes you’ll absolutely want to do things that decrease your margin of safety, like expanding, just make sure you do it consciously.

Same for increasing your margin of safety; be aware of the effect of your actions.  If you increase your cash in the bank that increases your margin of safety, but it also means that your money is not out there working as hard as it can for you.

There is no right or wrong answer here, my point is to give you a tool (margin of safety) to use to evaluate the risks you choose to take and their effect on your business.

So, what’s the margin of safety in your business?

 

About Dave Dickson

Dave Dickson is the author of Slingshot: The Fast Track to Financial Freedom in Auto Repair, and the CEO of a chain of auto repair shops that he grew from 1 location to 21 locations in under 5 years before selling it. Today he serves as an expert in auto repair marketing to other auto repair shop owners and can be reached at www.autorepairmarketing.org or 727-565-1806

 

Comments

{ 1 comment… read it below or add one }

repairAcar February 11, 2011 at 11:20 AM

I think health and safety for the employees should come before any financial safety in all honesty

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