Who's heard of "Rich Dad, Poor Dad"? How about the name "Robert Kiyosaki"? If you are an investor of any sorts, especially in property, you will probably have by now read one of Mr Kiyosaki's books. He has a way of simplifying, in an elegant way, an important financial concept - how to create income. I found it very interesting and it has certainly helped me educate friends and family on wealth creation and achieving financial independence - an important goal for many people.
The diagram here is his "Cashflow Quadrant". Most people create income in one or more of these 4 ways.
The top left represents most people. They learn a trade or professional and then get hired as an employee, earning an income. Their income depends on their value to their employer, their seniority and the hours they work. Their income is effectively capped, but so is their financial risk. At most, they can lose their job and have to search for another suitable role. Their wealth is effectively limited by the time they spend working on the job. And, it is not so easy for them to take a break whenever they want. They also tend to pay the most in tax, another wealth limiter!
The bottom left represents those people who effectively end up employing themselves because of their trade or profession. They don't have the risk of losing their job, but they too are limited by the number of hours they can work. They can create more effective tax structures to improve their earnings, but they cannot easily scale and grow their business. They also find it hard to take a break whenever they want. Unless they can make the jump to the next type of income structure they also may find it hard to exit their business and extract even more value from their talent.
The quadrants on the right both represent income structures where your time is no longer the key to income creation. This means you work "on" a business rather than "in" a business and you can choose to spend your time in finding more opportunities or at leisure. Both these structures use leverage to scale your wealth creation effectively creating no boundaries to your income creation efforts. They are also easier to reduce your tax! The big challenge with both income structures on the right is that they represent the most risk. They require the right mental attitude and the right assessment of risk. Otherwise they become wealth destruction opportunities!
For business people looking to profitably grow their business the top right quadrant is the key objective - where you own and leverage a system of some type. The system you own should be protected from competitors - by using legal or technology barriers to entry or choosing a system that is hard to copy. Is the reason your customers buy from you sustainable and hard to copy? Do you have good people and good processes? Do you solve a problem or address a need better than anyone else? "Better" may be due to price or it may be service or quality - it depends on what your customers value most.
Financial literacy is very important in creating, buying and running a business. I encourage business owners to think like an investor when looking at their P&L and balance sheet. What are your key drivers of profit? How do you drive them in the right direction? Is it people? Is it marketing? Is it technology? What are the questions an investor would ask you? When was the last time you asked questions like: What really sets me apart from my competitors? Why don't I increase prices? Why don't I reduce these costs? Do I really need that? Is there another way to do this?
Most wealthy people are either business owners or investors. This give them the maximum opportunity to create wealth and to spend their time on other activities. If every business person spent a little more time thinking like a potential investor in their business rather than just as the current business owner, I suspect improvement opportunities would come a bit easier.
Finally, if you do nothing else this week, start teaching your children to think like investors. Maybe encourage them to read some of Mr Kiyosaki's books. Let me know below if you have been influenced by the cashflow quadrant thinking in your business.