Business and Finance 101

Get Your Money Right!

I’ve had a large number of requests to write about business and personal finance. So many thousands of books and essays have been written on these subjects that I feel it will be difficult for me to add much more. However, I will cover a few crucial areas that I believe most businesses and households neglect when it comes to managing finances. The subject of money is often stressful, so I understand the temptation to avoid looking at your bank account and just praying that it will all be ok. Every time I get hit with a huge tax, fee, rent increase or my businesses have a lousy month for revenues I feel the stress as well. However, if it’s one thing I’ve learned, pretending it will all be okay without any strategy or action to back it up is useless. As Jim Rohn liked to say, “You can’t go in your garden and chant ‘there’s no weeds’!” The weeds will grow right up over your toes if you don’t recognize them and pull them out. So, here are the areas I think most households and businesses should pay attention to on a weekly basis:

1. Cashflows and income. It’s absolutely imperative that you track your income regularly. If you are in business, this will help you identify trends throughout the year and allow you to plan accordingly. If you get paid a paycheck once or twice a month, count that too. Make sure that you’re netting the correct amount. I can’t even tell you how many people I come across that don’t know how much was in their last paycheck. The same goes for business. Most small business people I know don’t know how much they made last month! They just keep grinding, spinning their wheels and getting nowhere! I’m asking you to keep track of the amount of money coming in on at least a weekly basis. If you only get one paycheck monthly, try to increase your streams of income so that you are getting paid multiple times a month from different sources.

2. Expenses. How much does it cost to run your business every month? How much does your family spend monthly? From my experience, the majority of people sorely underestimate their monthly expenses. Every business and individual should have a very detailed breakdown of every single category in which money was spent. Once you see how much you are actually spending, I guarantee it will be eye opening. When it’s all said and done, how much money did you have left over at the end of the month? Everything else was an expense that needs to be accounted for. If you had a little too much “month left at the end of the money” so to speak, it’s time to cut back your expenses and try to simultaneously to increase your income. If you can do both, you have discovered the fastest way to becoming financially free.

3. Know your numbers and what they mean. TRACK EVERYTHING!!!! This is the area that most businesses are neglecting. For example: what are your payroll hours as a percentage of revenues? What about rents as a percentage of revenues? What is the lifetime value of a new customer? How much new revenue does a new client produce in their first transaction? How much revenue does each billable payroll hour produce? What are the total costs per operating hour in your business? How much net revenues or expendable income are you left with at the end of the month? What is your best quarter for growth historically? How much are your COGS, or Costs of Goods Sold? You must know the answers to these questions and more if you want your business to succeed for longer than just a few years.

4. Work on your business and not in your business. If your business depends on your daily efforts to succeed, you are self-employed. You do not actually own a business. There’s nothing wrong with that either, just don’t be fooled into believing that you are an entrepreneur when you’re really working 80 hours a week and only making a few thousand a month. You may just be the lowest paid employee in your business. A true business owner spends most of his or her time reading market trends, strategizing, optimizing systems and making sure the business follows the regulatory and tax requirements. If the owner is not present, the business should still function well. The owner simply works to optimize the profits and expansion of the company and then decides how best to spend or reinvest the profits.

5. For households, follow the 70-10-10-10 RULE. When you determine your monthly profits or wages, never spend more than 70% of the money you earn. This includes all expenses like housing, cars, insurance, food and entertainment. 10% of your left over money should go to active capital, or starting your own business, which will produce additional monthly income. 10% of your income should go passive capital, or an investment run by others that will produce monthly passive income. The last 10% should go to charity or helping others that you care about. I strongly believe in this last one because the secret to living is truly giving. Helping others succeed will result in you doing even better. What goes around comes around and when you help others, you will reap the benefits. (If your monthly expenses are taking up more than 70% of your income currently, work immediately to reduce your expenses and increase your income. Eventually, as your income increases greatly, your expenses may only by 50%, leaving you with more to invest in businesses and spend more on helping others.

6. Know how much it costs to acquire a new customer. Track your marketing ROI, or Return on Investment. Many companies with advertising budgets are not properly tracking the lifetime value of a client, the efficacy of their marketing, or the total cost that goes into acquiring a new customer. I have made this mistake many times. I’ve spent hundreds of thousand on marketing without calculating my exact return from the ads. My new rule is that if I spend one dollar in advertising, it must produce more than a dollar in revenue in the first month. Other companies use a longer time frame as their metric depending on what they sell, but this rule has helping me control my marketing costs significantly. I also focus as much as possible on direct marketing so I can track who is engaging with an advertisement and then I can subsequently track what marketing pieces led to new clients. Another cost associated with new customer acquisition is the payroll hours it takes to call prospects and past clients, and the creation of media (such as signage inside and outside the business), etc. Just be sure to track all costs associated with new customer acquisition. As a general rule, the companies that can afford to spend the most to acquire a new customer and then have that customer produce higher than market average revenues for the business will win!

7. Love the business you are in, but fall in love with the customers more. Business is hard, so it helps greatly if you are passionate about the business you are in. I love health and fitness and bodybuilding, so this is easy for me. But I’ve learned that companies do best obsess over their customers, rather than the products or services they produce. Customers are the ones who pay all the bills at the end of the day. They are the real bosses. Every one needs to feel special or significant, so if a company can solve a problem with their products while making the customer feel special, they will do better than companies who do not.

8. Know the difference between good and bad debt. We live in a debtor nation. The country itself has a 20 trillion dollar federal debt and household debt is at record levels. Debt cycles are the reason for booms and busts in economies and a business or family that takes on too much debt will face significant financial hardships. However, there is a difference between consumer debt and business debt. The latter is a type of debt that produces income and is paid for by others. For instance, if I take out a mortgage to buy and apartment complex that produces cashflow, the tenants are paying for that debt. I am using the debt to create profit. This is called leverage and can be a good thing if used wisely. Consumer debt on the other hand is debt that is paid by the debtor. This includes home mortgages, student loans and auto loans as well as most credit card debt that we are familiar with. Do not let debt sink you or your business!!!! Go back to the 70-10-10-10 rule and see how much of your monthly expenses are debt service, or paying back money you’ve already spent.

There are so many more business lessons, but I think these eight rules are a great start for any business owner or head of the household. I’m hoping any of these tips will lead to financial abundance for you and your family for many years to come.

In health and riches,

Sean

A Warning

How the Economy Works

Americans are not taught enough at young age about how money and the economy works. It’s an uncomfortable subject and most believe it’s impolite to talk about money. So, we go on through life not fully understanding the subject of finance or how succeed in accumulating wealth. Most of what I know, I had to learn through trial and error as well as reading about how ultra wealthy people think and act. Unfortunately, despite volumes of literature having been written about the subject, most people consider economics a boring and complicated issue that should be left to the experts. I feel the need to dispel some myths about economics so a better understanding can be reached about where we stand economically today.

Myth 1. The economy is complicated. This is false. An economy is simply the sum total of all the transactions that take place in a given market. Everything can be boiled down the basics, the broad economy is nothing more than individuals trading goods and services for something they deem more valuable than what they are trading. If people are spending less, the economy slows. If people spend more, it expands.

Myth 2. Savings doesn’t matter. We are told to save money at a young age, but if you look at the pundits on television talk about the health of the economy, rarely do they refer to how much a family has stashed away for savings. Instead, they talk about consumer spending. Now, spending is an important indicator of economic health, but so is savings because savings is a measure or future investment and spending. If you are saving your money, it’s because you intend to spend it at a future date for something you need at that time. If you are not saving, you are limiting your ability to spend money in the future, instead opting to spend it now. Savings is one factor that leads to the creation of new capital investments and businesses. If the savings rate is low, this is an indicator the future business creation may slow.

Myth 3. All debt is bad. This is wrong and it keeps people from thinking and expanding in a big way. Most big companies use leverage, (debt) as a way to expand business and income. There are two types of debt, consumer and business. Consumer debt can be bad because generally we are using it to buy goods and services that do not produce future income. Business debt can be good if it is used to produce future income.

Myth 4. People spend based on how much money they have. This is wrong. The ability to spend and the total economy is based on two things; income and the credit (debt). You can buy things with cash, or with credit, which is a future promise that you will pay. The biggest indicator is how people will spend is based on their available credit. Unfortunately, people buy things based on what they believe their future income will be, not what they make now. So, they use credit to buy things that don’t produce income. Eventually when the bills come due, if their income has not gone up enough to cover the new debt plus interest, the person has to default on their credit payments. The company that holds the debt must now take a loss of income and subsequently reduce the amount of credit to consumers. If this happens on a large scale with many people, the reduction of credit will lead to less available purchasing power and less transactions in the economy. Less transactions leads to a slow down in the economy, job losses because companies are selling less and often a reduction in pricing of products.

Myth 5. Wealth is money. False. Wealth is an increase in production and output. If you have a farm and are able to collect twice as much crop as the year prior, you have increased your wealth. People think that the government can just print money to take care of all debt and economic problems. If this were true, we could just all quit our jobs and have the government give us money. Obviously, this cannot happen or basic services necessary to living would never get accomplished. Moreover, an increase in the money supply, if credit levels are still high, without a corresponding increase in the production of goods can lead to an inflation in pricing. In other words, the ability of your money to buy products and services is reduced as more money enters the economy.

Where We Stand Today

At the time of this writing, household debt and government debt has reached record levels. (1.06 trillion for consumer credit card debt, 1.5 trillion in student loans and a total of 18 trillion if we include personal mortgage debt). Government debt has also reached a record 20.6 trillion largely due to unfunded liabilities such as pensions, MediCare and Social Security. The average cash savings of the typical American family is less than $1000 dollar. Nearly 40 percent of families have no cash savings at all, meaning the ability for these families to make future purchases is significantly reduced unless their income expands greatly. Already, auto loan defaults, student loan defaults and credit card defaults are on the high and expected to reach higher levels. In my own businesses, I have seen more credit card declines every month. We have a serious debt problem happening right at the same time the stock market is at an all time high.

What It Means

The American consumer is tapped out as far as their available credit. This likely means that despite all time record level stock prices (which have very little to do with the real economy for most people) their ability to make future purchases will decline, leading to a slowing economy. Of course, no one can predict the future, but if the numbers are any indication, we are at the peak of the debt cycle and what follows will likely be more defaulting on debts and subsequently job loss and a retraction for many businesses. Be warned. Invest in yourself, your skills, your health and save the rest of your money so you can capitalize on lower prices during a downturn. Remember, people always sell things for less when they believe times are bad.

Sorry for the negative note. I’m just trying to be clear on what I see happening so I can help you and your family thrive! If you want a great YouTube video on some of these concepts, look up Ray Dalio’s video on “How The Economic Machine Works.” I promise you’ll learn something.