create something that people respect/value, and people will spend their money there.

use the money to create more respect/value.

The guy that pays Kobe Bryant is Wealthy.

Living off interest from your principal is Rich.

Living off the interest off the interest from your principal is Wealthy.

Choose wealth over richness.

I encourage three deposit buckets for your personal income.

1. Living Expenses (50%)

This includes food, gas, rent/mortgage, utilities, transportation, and sub $100 expenses (light entertainment and recreation). Essentially, these are expenses that you need in order to function effectively on a day-to-day basis to keep your lifestyle going.

2. Rainy Day Fund (25%)

Inevitably, life throws us a curveball and separates the unprepared from the prepared.  Be prepared.  Create a rainy day fund for the unexpected – medical bills, traffic bills, legal bills, etc.  Insurance money can be paid out of this rainy day fund.

3. Sunny Day Fund (25%)

There should be reward for hard work.  And the reward is in the Sunny Day Fund.  This can be used for the frivialities and luxuries of life.  Vacations, gadgets, $100+ entertainment and recreation expenses,  etc.

These three accounts should be clearly separate and distinguished, so you can clearly see at a moment’s glance how much you have in each fund, and can thereby create a budget accordingly. After the money is deposited into one ‘holding’ account, it should automatically be divided out into the three accounts.  This prevents cross-bucket spending and allows you to build each bucket on a steady basis.

Now, this of course is division for personal income after you have set aside investment money.  So if you were to earn $5,000 in one month, you may decide 50% of that to be personal income and to invest the other 50% to grow your $5,000 income.  This would mean that your basic living expenses should not exceed $1,250.00 per month.

Until you are able to enjoy your desired living expense, concentrate on growing your income as much as possible.

Dying business: dy/dx ( cash in  bank ) <= 0
Growing business: dy/dx ( cash in  bank ) > 0

What does it mean for a business to be alive?

A live business does two things:

1. Has a functioning operational process.

The purpose of operations in a business is to:

Run a customer’s money through a process which:

a) returns something of value to the customer and
b) puts as much of the customer’s money as possible into the bank (the greater the operational efficiency, the greater the % of the customer’s money will end up in the bank).

If operations is not functioning, then the end results a) and b) are not achieved.  If a) is not received, the customer will demand their money bank, leading to no cash being put in the bank.  If b) is not achieved, this will also lead to no cash being put in the bank.

 2. Continually feed operations.

If sales and marketing do not provide operations with the customer’s money to turn into value and banked cash, operations will have nothing to process, and so the aforementioned a) and b) will not occur, and consequently, no cash will be placed in the bank.

What happens when there is no cash in the bank?
When there is no cash in the bank, a business will begin dying.  Death is typically not instantaneous, but a gradual process.  It may be so gradual, it can be like cancer and unbeknown to the business owner until too late.  The following steps will occur:

1.  If no cash is in the bank, then expenses (salaries, rent, etc) must be paid for on credit.

2. However, if no cash is in the bank, the creditors will not be paid back, resulting to a freeze on the credit.  A freeze in credit leads to expenses not being paid = employees not being paid (and quitting), utilities not being paid (and shutting down), and landlord not being paid (and being evicted).

A business with no employees, utilities, or place to do business has no functioning operational process, and by definition of a “live business”, is not alive.

How do I put cash in the bank?

The question may seem simple and the answer may seem obvious, but it is worthwhile to outline.  Cash enters the bank by one of three methods:

1. The Operational Process
The operational process takes the customer’s money, and puts a portion of it in the bank after returning the customer something of value (which requires a portion of the customer’s money).

Customer’s Cash => Business => Value to Customer + $x profit

2. The Investment Process
Investor’s cash is placed in the bank in exchange for a portion of the company’s equity. Eg seed capital, venture capital, acquisition capital.  This can take a considerable period of time as courting, due diligence, and legal paperwork is involed but allows room for a longer repayment-period, and no guarantee of repayment.

3. The Credit Process
Creditor’s cash is placed in the bank in exchange for an agreement to pay back the loan.  Eg bank loan, credit card loan, credit lines.  This will take far less time than the investment process and is typically easier to obtain, but the repayment timespan is much shorter, and requires a guarantee of repayment.

The purpose of #2 and #3 is to drive #1. Without #1, the business has no long-term method of putting cash in the bank.  #2 and #3 is typically used to build #1 to the point that it can provide a positive return on the initial cash input of #2 and #3.

Investment Cash + Credit Cash => Business => Investment Cash + Credit Cash + $x profit from Operational Process

If cash is not being put into the bank by one of the three methods, then the business will begin dying. The rate of death is a factor of cash in the bank and expenses per month.

cash in bank + credit limit___  =  months business life
expenses per month

As such, one of the most common dangers a small business will face is due to lack of sufficient funds in the bank when:

a) an internal business error is made, or

b) external circumstances impact the business.

All internal business gambles should therefore take into account maximum loss potential, and this maximum loss potential should not exceed cash in bank, taking into account current cash flow.

If however, an unforeseen circumstance occurs resulting in some operational or marketing decline, then one should plan ahead to have sufficient cash in the bank to weather the storm.  In the case of a downturn in the economy or recession, credit lines will tighten up and revenues may suffer.  If revenues suffer and cash in the bank is not growing, then the business will start to die.  As such, the businesses with enough cash in the bank to survive until eceonomy picks back up, will survive.  The businesses that lack sufficient cash in the bank to keep the business alive until things turnaround will die.

How much cash should I have in the bank?

This will depend on how severe the operational/marketing decline or external circumstance is.   This may be like forecasting how long a downturn in the economy will last.  There is also the challenge of keeping funds in the bank unused, when they could be utilized to further grow the company and put more cash in the bank.

A good starting point may be to hold at least one business cycle/season’s expenses in the bank.  This way, the business owner should be able to identify and remedy problematic trends before it is too late.

Now if time is a currency, it must be able to be traded, bought, and sold.  The question is, how does one buy time?  If Walmart, Ebay, or Amazon don’t sell it .. how does one acquire more time?

For a business, a first stage of financial management is to asses the situation and identify where debts or cash outflows occur.  One can never acquire more cash if one constantly has the cash being sucked out through expenses and liabilities (unless you have a very high inflow of cash, but this is a non-efficient state).  Similarly, if time is constantly being drained, one can never become ‘time-wealthy’.  Thus comes the first step of acquiring more time:

1. Identify and Eliminate Time Drainage

Time drainage is classified as anything that takes your hours away each day/week/month/year.  But of course, first the definition must be made of what is “your time” so that you know what you are losing.  “Your time” is classifed as time that you have free will and control over.  For example, using the toilet would not really be considered “your time”, because when you gotta go, you gotta go.  However, reading while you’re on the toilet after you’re done, would be considered “your time”.  Sleeping to replenish the body would not be considered “your time”, because if you don’t sleep, you will go mad and die.  However, sleeping in, long after the body has had it’s required delta sleep, would be considered “your time”.  The time spent working at a job is not considered “your time”, because during that time your free-will and control is limited by somebody else (your employer).  However, your employer is compensating you for your time, and of course, the old adage of “Time = Money” comes into play.  This adage then begs to question “How much is my time worth?”  That is for you to determine.  Let me say this – there are 27,000 average days in a human life.  You have one life to live, and you are spending your time currency every single day until you run out.

Time spent on hobbies is “your time”.  Time spent watching TV is “your time”.  The minimum time spent on eating is not “your time”, but any extra time outside of that is.  So when you consider all this, the average day of a working adult is something like this:

a) Not my time, but must/should be done and I can’t do anything about  (eg, hygiene, eating, sleeping) – minimal
b) My time that I am selling (eg work, selling 40 hours a week, 50 weeks a year for $75,000.) – majority
c) My time that I am spending/investing (eg watching TV, travelling, exercising) – secondary

[pie chart]

What most people do is they sell their time for 50 years of their life, put the cash into an account to gain interest, then buy time back again with their accumulated wealth.  What most people don’t realize, is that this comes out to almost a net zero equation, since the time you buy back with the accumulated wealth is not worth as much due to age, ailments, inflation etc.  For most people, time to cash investment only sustains their standard of living, not improve it.  So we have billions of people, trading their time for cash, using that cash to occupy time slice (C) in various ways.

The more optimal arrangement would be to spend less time in (B), and more in (C).  But as we know from financial wealth, the poor spend, and the rich invest.  So consider this, are you spending or investing your time when you: watch tv, exercise, read magazines, get drunk?  Consider eliminating “spending” time, and turn it into “time investments”.  Other areas of possible time savings:

* commute – drive during off-peak hours, or live closer to work
* showering – get in, get out.  You’ll even save water!  Although for some, showering may be a spiritual element of their lives, and as such, would be an investment.
* typing – learn to touch type.  At the end of your life, how much time would you want to have spent on pushing buttons?

2. Buying More Time

Now we come to the crux of the article.  Buying more time.  By assessing your own situation, you now realize you are selling your time for a dollar amount.  The person you are selling your time to, now owns your time and is putting your time to their uses.  Similarly, you can also buy time from other people.  This is a key switch from the “employee” to “employer” mindset.

Here is a unique thing about capitalism: each person’s time is individually valued.  There will be greater and less demands for it, depending on the current state of the society.   A key then is to sell your own time at a premium, and buy other people’s time (to add to your own time) at a lower rate.  This is a key element in outsourcing.  At this point, I recommend reading Tim Ferris’ book of the 4 Hour Work Week.  It will introduce solid concepts in outsourcing.

Some ideas and suggestions for buying time:

* Have food cooked and delivered for you.  If cooking is not a passion or hobby, then your time is probably more valuable spent on something that brings you great pleasure.
* Have somebody organize files and documents for you.  This could be considered an investment for the disorganized.

Bonus Concept: Parallel time
The more things you can do at once, the more you multiply that time-chunk.  For example, if it took me one hour to wash clothes, and one hour to read a book, if I did them in serial, it would take two hours.  If I did it in parallel, I now have a savings of one hour of time that I can spend elsewhere.  Question: “How can I create more parallel time?”  Note that buying somebody else’s time also counts as parallel time. 

“It’s not about where you are, it’s where you’re going.”

Others have said:

“It’s not where you’ve been, it’s where you are.”

In business, I like to say:

“Where you are – Where you’ve been = Where you’re going”

(in addition to the above two.)

Business is all about creation. At the end of the day, every business must create something in order to survive. It then follows, that to check the health (survival level) of a business, one must measure it’s rate of creation. The more healthy a business, the more it is creating. One measurement of creation is cash. The more healthy a business, the more cash it is creating.

This is one of the things I love about business – the fact that it creates; brings something from non-existence into existence. And hey, cash isn’t too bad a by-product to bring into existence. Why? Because cash is a common ground for most things. Of course, one should intend to use the cash for good and positive purposes. But that, is a topic for another discussion (check metaphysics category – soon to manifest).

For now, let us use cash as a measurement for level of creation. So we are now able to measure rate of creation growth by rate of cash growth. Using the introductory equation:

“Where you are – Where you’ve been = Where you’re going”

We can correspond the following:

• “Where you are” = current cash in the bank
• “Where you’ve been” = cash in the bank at time period x before now
• “Where you’re going” will be positive if your position has improved, and negative if it has worsened.

note: there may be some predictive purists out there that state that nothing is predictable, but business is built upon predictions (whether it be scientific method or ‘intuition’).

What if you haven’t been anywhere?

To calculate where you’re going, you must measure the current time period (now) and some period x before now. If you haven’t been anywhere, where you’re going will be 0. Positive means you’re growing. Negative means you’re dying. Zero means you won’t be going anywhere (and thus, relatively dying, since the rest of the world is growing with or without you). So you have the option of growing, accelerated de-growing (ie, dying), or dying by relativity.

If you haven’t been anywhere, you won’t be going anywhere.

This may sound rather harsh, and defenders of the underachieved may champion that “they’ll get around to it” .. but the reality is that an energy of activation must be overcome for some momentum to be built in one direction or another. Once that energy of activation to be overcome, the first and most important step will have been taken. You will have created a predictive factor for a next step. The more momentum you can build in a particular direction, the further you will go in that direction.

In a business, you want growth. Lots of it. How you measure that growth, is up to you. Ideally it would be measured by how well it serves its vision.

Questions for today:

1. Are you growing, or dying?
2. How much momentum to you have in either direction?
3. How do you measure your growth?

(Business Tip: KPIs are a great way to have each business segment measure its own growth.)

1. Revenue ($)

    Everything that puts money into the bank as a result of a product or service being sold. Needless to say, if you aren’t putting money in the bank, nothing else matters. Marketing and sales most directly affect this vital number.

2. Cost of Goods Sold aka COGS (%)

    The direct cost of selling the product or service. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the product or service. This should be measured as a % relative to the amount the product or service is sold for. As a conceptual example, you buy a trinket for $1 and sell it for $2. Your gross profit would be 50%. Operations most directly affects this number.

If you have a variety of products, then you will need to average out the COGS (remember to use weighted average).

eg, (Product 1 COGS * % of total Revenue) + (Product 2 COGS * % of total Revenue) + (Product 3 COGS * % of total Revenue.

 A corollary follows that Revenue – (COGS * Revenue) = Gross Profit.

Eg: It costs us 40c to make and ship 1 trinket. We sell it for $1. We make 60c gross profit (60% gross). It costs us $70 to buy one case of gift bags. We sell it for $140. We make $70 gross profit (50% gross). If in one month, we have 50% of sales revenue come from cards, and 50% of sales revenue come from gift bags, then we have an average gross profit of 60% for that month.

Most companies need a minimum of 50% gross profit to survive, and most regular retail operates on this sort of margin.  If you are in a sweet spot, you will have 70%-80% gross profit (essentially, a 300% – 500% markup)  Milk this for as long as possible!

3. Expenses ($)

Expenses can be divided up into two categories:

a. Fixed costs.

These are costs that vary < 5% on a month to month vasis, and typically include such things as rent, phone, salaries, etc. Things that are the basic necessities for a business to run.

b. Variable costs.

These are costs that may vary >= 5% per month, and include things such as marketing, computer equipment, legal fees, etc. Can be considered ‘reaction costs’, as each cost in this category is in response to a need in the company. For example, marketing is relative to the need for growth in the company. Equipment is relative to the need for operational efficiency in the company. Legal fees are relative to the amount of legal counsel required for a particular situation.

Equipment and computer purchases can be considered capital investments – moved to a balance sheet and depreciated over time, so are not necessarily included in COGS, Fixed Expenses, nor Variable Expenses.

4. Net Profit

The bottom line number. Consider this the heart beat. Once number this stops being positive, your company has a limited time to live. The amount of time it has to live is often called “the runway” – the amount of tarmac your plane (business) has to go before it takes off or crashes. Of course, with outside investment, this runway could be extremely long, buying you much more time.

Net profit = Revenue – (Revenue * COGS) – Expenses

With these numbers in mind, one can now forecast your breakeven and Net Profit projections by setting base premises and plugging into the equation. For forecasting, I typically create nine sample scenarios, holding Revenue, COGS or Expenses at a constant, and providing Bad, Neutral, and Ideal situations.

Here is an example with constant revenue and COGS:

Example 1 (conservative current)

Base premise #1: Revenue = $30,000.

Base premise #2: COGS = (45% COGS).

Base premise #3: Total expenses remain a steady $15k per month.

Net Profit = Revenue – COGS – (Fixed Expenses + Variable Expenses)

= $30,000 – ($30,000*0.45) – ($15,000)

= $30,000 – ($13,500) – ($15,000)

= $1,500

Example 2 (conservative current + COGS improvement)

Base premise #1: Revenue = $30,000.

Base premise #2: Gross Profit remains a steady 60% (40% COGS).

Base premise #3: Total expenses remain a steady $15k per month.

Net Profit = Revenue – COGS – (Fixed Expenses + Variable Expenses)

= $30,000 – ($30,000*0.40) – ($15,000)

= $30,000 – ($12,000) – ($15,000)

= $3,000

Example 3 (conservative target)

Base premise #1: Revenue = $50,000.

Base premise #2: Gross Profit remains a steady 50% (50% COGS).

Base premise #3: Total expenses remain a steady $15k per month.

Net Profit = Revenue – COGS – (Fixed Expenses + Variable Expenses)

= $50,000 – ($50,000*0.50) – ($15,000)

= $50,000 – ($25,000) – ($15,000)

= $10,000

Once the company is able to reach a profitability streak, the profit can then be reinvested into the company, taken out as income, or a mixture of both.  If it is reinvested in the company, be sure to calculate ROI on the investment and compare it to other personal investments (real estate, stocks, etc)

 Questions:

1. Measure – Do you know your critical financial data?
2. Assess current situation – Is it where you want it to be?
3. Plan – To get to where you want to go, do you need to affect Revenue (sales & marketing), COGS (operations), or Expenses (operations, marketing, sales)?

Business Tip:  Create a check and balance system of verifying the measurements to detect early warning signs of error or fraud.