Margin Of Safety
Categories: Financial Theory, Company Management
You have this when you roast marshmallows. If you're good. Right? Not fully in the flame. But close. Close enough to feel the heat, but not so close that you set the marsh on fire. That's the plan, anyway, when you have a decent margin of safety.
Same holds true with the process of running a business. You have revenues of a million bucks, and expenses of 800 grand. Your margin of safety, at least as far as profits go, is 200 grand. Should revenues go down 25 percent and you have no cash cushion in the bank, you're bankrupt.
A margin of safety is either higher margins then, or more cash in the bank to burn as you build your biz.
And don't burn any marshes along the way.