Financial Physics – Part III
15% profitability is your breakeven
Why do businesses need a profit? To stay in business! Profits are used to expand, to invest in new ideas, to replace old equipment, and to hire new employees. Businesses that succeed reinvest and reinvent themselves because the world is always changing. If they don’t adapt, the business will fail. In the music industry, you will always find the fresh-faced 20 year old that sells a million records. But how many 50 year olds are still relevant to new audiences. You may or may not like Madonna but she has focused intently on making herself relevant. She has used her profitability from her 20s to support the changes to her career during the 30s, etc. This year she captivated an audience of all ages at the Superbowl. Her age – 53.
The trial and error of success is ugly. It requires spending (and losing) money on new ideas because old ideas don’t last forever. The great idea you had 5 years ago has a shelf life. If you are spending 100% of the income from your first great idea, the required capital to find the next great idea does not exist. As you navigate the unpredictable waters of life, you must have the cash to take advantage of opportunity. And these opportunities never happen on cue so you have to live your life in perpetual preparation. A lost opportunity is as bad as losing money on a failed idea. Both cost you money. The only way to set yourself up for take take advantage of the opportunity is to focus on your personal profitability.
Perpetual peace comes from earning $1 of fixed income whether it be from your investment portfolio or your job and spending 85 cents. The profit gives you the financial ability to take the risk to invent another source of cash flow. All of our old ideas have a shelf life and if you don’t have the capital to find new ideas, you risk not being relevant anymore. In Part IV, we move to your safety net.