← The $100M Entrepreneur Podcast
The $100M Entrepreneur Podcast
You Can Be Rich and Still Not Free: How to Turn Business Profit into Real Wealth
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What I had to understand is that even though my business was making really good money, I noticed early in my life when I got an income rise, I had an expense rise and that didn't work. Okay. The purpose of your business is to generate enough profitability so that you can take money out and invest it elsewhere. If the income stops when you stop or the income reduces when you reduce, then that's active income. We love active income because it's a great way to get us started in life. You can be rich, but still not free. Let's fix that here today. So the difference between financial freedom and business freedom is very real. Especially when you're going for these multimillion dollar businesses and aiming for that hundred million really means you need to look at the balance between your business freedom and your financial freedom. So there's really two balance sheets that matter. There's the balance sheet of the business and then there's your personal balance sheet. If all you're worried about is the business balance sheet, you forget the fact of what business is supposed to be about. You know, since day one, I've been teaching people you need to have a second account in your business called the profit account. And you select a percentage of the business revenue and you say, okay, that is what should be profit. You would know based on past years, okay, X percent is our annual profitability of the organization. So you open the profit account, that profit account gets X percent put in there every single week or every single month and that's taken out of the business. Now one thing I do suggest about that profit account is that you have a second signatory to that account. For me, it was my dad and he knew the rules. I can only invest that money, I can't go and spend that money sort of thing. So financial success and financial freedom are two different things in business. Okay? So when you're building a great business, you can achieve financial success, meaning you have a really great active income. You have really great then passive income from the business, meaning the active income, if you show up every day and as you build it further, and especially aiming for a hundred million where you've still got great income coming in and it's relatively passive, right? The business is there now ultimately, reminder, you are going to have an exit from your business. Either the negative exit, you kill it, it kills you. Or the positive exits, a passive exit or a financial exit. Right? So if you're going to have those things, you still need to be taking profit out of the business to give the business real value type thing. So if the income stops when you stop or the income reduces when you reduce, then that's active income. We love active income because it's a great way to get us started in life. It's a great way. If you're building to your first million in business, it's all about active income. If you're building to your first 10 million, a lot of it is still active income. When you're building to a hundred million, very little of it becomes active income. The vast majority of it is now passive income. Right? But it's gotta be profitable. Profitable to a point. See, the purpose of your business is not to pay the bills. The purpose of your business is to generate enough profitability so that you can take money out and invest it elsewhere. Not just spend it elsewhere, but invest it elsewhere. So it's gotta cover the bills of the business, it's gotta cover the bills of the life, and it's gotta be able to invest money outside of the business. That's really what we're looking to do consistently in our, in our business. So the wealth triangle looks like this. Okay, so you got business profits, you got cash flow control, and you got asset investments. So your business is one of your assets that's generating profitability. Your job with that profitability is to make certain that you turn that into investment assets, whether that be stock market, other businesses, real estate, what, whatever it is that you're investing in. The profitability from the business then gets put into other places. Now, the cash flow control is the balancing act of how much comes out, how much do we invest in, how much do we spend in our life, and how much do we invest in other assets. So it's kind of thinking of it this way. When I teach my 30x wealth course, what I teach people to do is to build a business that is your family's wealth business. Now, it might be a trust, it might be a business. You should get local advice on that. But ultimately, what you want to do is build an asset called your family trust, family asset company, whatever it might be, that takes the profitability and invests in other things. Now, that business needs a full business plan. But the business plan isn't about operations, it's about wealth creation. What you'll invest in, when you'll invest in it, what are the rules, all of those sorts of things. So in this case, what I'm trying to get you to do is move beyond the financial asset of the business and say, okay, my business is the cash engine. It's a phenomenal cash engine. But it's not the final product, it's not the ultimate that we're aiming to achieve in this thing. You know, building a great phenomenal business is the cash flow engine. It's like the vehicle to pay for your life and the vehicle to build your wealth. So that vehicle in and of itself should be an asset. Okay. It should get to a point where it can run without you, so that it is an asset. But it should also throw off enough capital to be able to go and invest in other things. And that capital has to come in after taxes, of course. So it's, it's one of those cash flow strategies of balancing income, assets, all of the investment future for your family. Now this comes back to where I have the discussion with people. They're like, well, you know, should we just. You shouldn't discuss money at the dinner table. Yes, you should be discussing money at the dinner table. You should be discussing all of the taboos with your kids because if they don't get your opinion, they're getting someone else's. So don't not discuss it and then let other people give them their opinions, chat with them about investing, talk about money, talk about, yes, politics, religion, sex, all of the prohibited things. You need to be talking with your kids about that. And one of the ways to do that, once you build that wealth entity, okay, your wealth entity, a trust or a company, whatever structure your local area needs. You should be having board meetings once a quarter or once a month, depending upon the size of the business, with your kids and the age of your kids. And if you're at those board meetings, you're discussing that. Okay? So business equity and personal wealth creation are two different things. Why I'm teaching you this. It's really important to understand that if all of your wealth is tied up in two things, usually most entrepreneurs, it's their business and their home. That's where 80 plus percent of their assets are. We need to be reminding ourselves that we want to be taking money out of the business. It's a great cash engine. And building personal wealth creation, building other assets, other companies, stock market, real estate. And you can learn all about them on 30x Wealth. You can learn all about them on my entrepreneurs training how to buy and sell companies. But today, I want to get to you what. Let me tell you my story of why this became important to me. What I had to understand is that even though my business was making really good money and we had the money to spend, I noticed early in my life, especially in my 20s, when I got an Income rise. I had an expense rise and that didn't work, okay? When I got the income rise, I had to take that money, invest it, take some money, invest it, take the money, invest it. To get to a point where my income outside of the business was greater than my income inside of the business. So if you look at financial freedom two ways, right? First way, your business makes passive income. That covers all your bills and life. You're financially free at that point. The second layer, though, is when your investments make an income above make income, whether it be dividends, rental income, business profitability from investment businesses. When your second level of wealth is when your investments actually pay for your lifestyle, okay? At that point, you reach a point of basically you can't spend as much as you're making because the business is making enough to cover your life, your assets are making enough to cover your life. Everything at that point is pure financial freedom. Okay? That's what we're aiming to get to. So if we look at some of the, I guess, freedom metrics, okay, so if we look at passive income multiple, let's start there. What is the passive income multiple? It means how many times does your passive income cover your living expenses? Okay, so you've heard me talk about number of days, meaning that your business or your income from your assets, all of those things, if you stopped working today, they would pay you for X number of days and you could just keep living, right? For most people in the world, that's a negative number. Okay, they're paying this month's. They're using this month's income to pay last month's bills. We want to be in a position where we have a passive income multiple of at least two, so one from the business and one from our investments. So two times our expenses are coming in in passive income. Great position to be in when you're in that position because you have to keep investing at that point in time. So time leverage score, really what we're looking at is how much time does it take to make the money that you're doing. So that's why active investments, such as businesses generally take more time than do passive investments like real estate or the stock market type thing. Now, of course, you can have a real estate business or a stock market business. That might be what you're in, but ultimately you're looking at the time leverage and the allocation of your time to these things. And that goes back to the making money versus managing money things. As you get better at managing money, it'll reduce your time leverage. Eventually you'll have other people managing your money for you sort of thing. So these are some of the things. So how do you structure your finances for your freedom? Okay, so first and foremost it's about graduating from the lowest level of income from your business. Where people just take money out of the register or write themselves a check, they call it drawings. Okay. You know, moving from that to then giving yourself a salary and a bonus structure. Why do you want to give yourself a salary and a bonus structure? So that if you replaced yourself, the company's already making or paying that money to someone in order to do that. The third phase where you're drawing profitability from the company either every quarter or every month, drawing down the profits of the organization so that you are getting a dividend from the company. It's like if you can pay yourself like an investor rather than an employee is where we ultimately want to get to. Now that means a shift in thinking away from cash flow to more capital based thinking. Let me explain the difference between the two. A cash flow business thinker is thinking income profitability and monthly or quarterly distributions from the company. An asset based thinker is thinking what is the company worth? Ultimately our biggest payday from our own business is when we sell the business that financial exit. Okay, so when we think about that ultimate financial exit, then what we're looking for at that point in time is the capital value of the asset. Now if you don't know the value of your business currently, reach out to one of my action coach team and get them to put you through the process of working out. What is your business currently worth based on its cash flows. EBITDA based on its ability to run without you. Based on all of these things we can ultimately work out. Obviously industry or profession is important what market you're in and also market cycles. See, if you're looking to sell to in a down cycle, you're obviously not going to get as much as you are in a. When there's plenty of money around, when VCs are throwing money around, it's, it's different. But also if you get to a strategic buyer, what's the value to a strategic buyer buyer versus the value to a financial buyer? Two very different things. So have a chat with someone and work that out. So here's what I'd like you to think about doing this week. Have a look at where every dollar of profit flows. So where do the, the profits of the business flow out of the business? Okay, how much of it goes to just living expenses and stuff rather than Actually going into further investments type thing. So we've got to get ourselves into a position where we have that. And that may mean moving to multiple bank accounts in the business. For example, having your profit account, having your investment account, having your taxation account, like all those things you got to pay annually or quarterly. There should probably be an account where a percentage of weekly revenue or monthly revenue is put into those accounts so that you can do it. But ultimately, that investment account you're now planning, okay, if we're making, let's say you're making, I don't know, 10% profitability, your EBITDA is 10%. And you say, okay, I want 2% to go into the profit account. I want 2% to go into THE investment account. I want 3% to go into the lifestyle wealth account. Yes, you're allowed a lifestyle wealth account. Okay. Where it's like, this is just fun things that we get to do. You get to decide and you get to plan where your profitability goes. Financial freedom is different to business freedom. Having the business that runs without you, a business that makes great profit is one thing, but planning where the profit goes. Now I'll tell you why we want to plan where the profit goes. It's amazing to me that when I get a business owner who starts to plan where the profit is growing, just how much profit actually grows. If you start plan where we're going to invest our money, all of a sudden there's more money to invest. Why? I believe it's two things. Number one, where you put focus, things change. Okay, not complex by that, but then energetically, the world rewards people who are respectful with money. If you're very good at managing money, taking care of money, investing money, the world says, hey, look at this person. They're doing real good with money. Let's make sure they get more money to invest. Now, that could be other investors bringing money to you. It could be other ways of doing things, or it could just be the way the universe rewards those who show respect to money. The more you respect money, the more money comes. It's kind of like the gratitude thing, where you show gratitude. You get more by investing the money, by being a good steward of the money, by being a valuable contributor to the money's growth, allowing money to make money rather than just time making money and other people making money. When you put money to work magically, the world shows you more money. Anyway, we're going to be back next week and we're going to look at the owner's operating system as against the Business operating System. Thanks for joining me on the A Hundred Million Dollars podcast. If you've got value from today's episode, make sure you've subscribed and share this with all of your friends. Never miss a strategy that could change your business and your life. And remember, the fastest way to scale is to learn from those who've done it. That's what this show is all about. See you on the next episode.