How people earn their income falls into four sectors, as detailed by Robert Kiyosaki in his book ‘Rich Dad, Poor Dad – Cashflow® Quadrant’.
I believe it is an important concept for business owners to fully understand, as I have found that clarity on the principles of how people earn their income can also be an insight for many owners of businesses as to what may be holding them back from achieving their massive creation of wealth.
The principle here is, on which side of the vertical line do you earn the highest portion of your income?
Let me give you my interpretation of how this model works. It’s fairly clear that as an employee (top left) you work for a company and earn a salary or wage based on your attendance or your hours. Annual leave would be paid along with various allowances for sick leave and public holidays. Your ability to earn more money as an employee will come down to your skill and ability in your workplace combined with your capacity to negotiate pay increases and bonuses on an annual basis. Overall many people will say if you are an employee of a company then your income is fairly well set.
The next is being self-employed (lower left). This is where a person chooses to move away from the relative comfort of working as an employee and works for themselves. Examples of self-employed professionals can vary – think of consultants, tradespeople, dentists, doctors, freelance writers and photographers. They are effectively working for themselves and put in the hours and effort to enjoy the result of their income. One issue here occurs when a self-employed person takes holidays, their income ceases (or significantly declines) during that period of leave. Whether you are an employee or a self-employed person, both models rely on the individual to physically attend the place of work and put in the hours and the effort to earn their income. Furthermore, your income is limited to the maximum sustainable hourly rate, multiplied by the number of hours that you could work.
Now let’s move across to the business owner quadrant (top-right). The business owner model is a system which is based around a business that produces either products or services on an ongoing basis. It employs staff or contractors and has learned how to leverage the employees’ skills via a series of processes in order to generate income (i.e. sales). Business owners in the true sense can earn a strong income from their business without the ongoing hourly input. In other words the business can operate effectively day to day and week to week without the owner having to be physically involved with the business to ensure its smooth operation. You might consider how many weeks you could be absent from the business, and remain comfortable that the business could still earn as much income as if you were physically there during that period.
This, in my opinion, is the real difference between being self-employed and being the owner of a business system. A lot of people who own businesses have not been able to successfully move from being self-employed to being the owner of a business system, and this is one fundamental issue which needs to be understood and conquered if the business owner wants to generate the wealth and have the freedom of time and lifestyle that they believe owning a business would bring them. Too many business owners find themselves trapped in the business working long hours and making most of the decisions and not getting the rewards that they want. This occurs for numerous reasons but mainly because the business owner does not believe they have a strong enough management team that is able and willing to develop the business systems and take the business forward. This enters into a whole new area of business restraints and human resource management issues; but in short, if the owner cannot work for extended periods away from the business, whilst it continues to flourish, then the business is a big job and hence a potential headache and restriction on your lifestyle.
Business owners who have successfully worked this out are able to take on more issues and grow their businesses quickly and successfully because they don’t need to be hands-on. As a result, they aren’t restricting their business size and or growth rate based on their available time or skill set. These business owners tend to have more spare time away from their business and are able to create higher levels of personal wealth then the average business owner.
So when it comes to the issue of growing your business through acquisition, a lot of business owners don’t understand how they’re going to find time to take on another business when they are already struggling with the one they are currently running. The emphasis here is on the fact that they are currently running their business rather than having the business working for them. It is often at this point that I ask business owners to reflect on other successful businesses that they have seen around them to understand how those businesses have grown to a considerable and profitable size when many of them started off as small privately-owned businesses.
Finally the other quadrant of income generation model is the investment quadrant (lower right). This is where an investor can accumulate funds and invest them so they are passively making money both during daylight hours as well as when they sleep and are on holidays. Examples of this for an employee could be superannuation or an investment property where the employee passively generates income without a direct involvement on a weekly or monthly basis. The same applies to self-employed people as well as business owners who can take their surplus earnings and put them into wealth creation investments.
It is clear how investing in shares, superannuation, property, gold or the like does not require the individual’s constant attention, or take up all their time in managing their investment. This does not mean that investments are ignored; however, they can be looked at and managed from afar. To my way of thinking, a business is to some extent like any other investment; you have good people looking after it for you, and following your direction based on the returns you would like and how it should be operated. This concept works well for those business owners who have got it right and understand the benefits of acquisitions, because on the one hand each acquisition is leveraging off their existing business systems and on the other hand it is adding to their passive investments.
Warren Buffett is a good example of taking this concept to the extreme. While he is known as an investor, with many people believing he buys shares in companies, what he actually buys, in the majority of cases is a controlling interest in those businesses that he believes in, and he can then work on them from a distance. Buffett very rarely becomes actively involved at an executive level. So he has taken this concept of being a business owner to the fullest extent by demonstrating that the business should be treated as an investment which you take a keen interest in, but not necessarily become too active.
While you don’t necessarily need to go that far, it is possible for you to become wealthy by owning business systems and growing them successfully, rather than trapping yourself in the world of being self-employed where your business controls you. So through the strategies shared in this book, you’ll see that this is possible to learn and implement a different way of thinking how to ‘own’ your business and develop a more relaxed lifestyle and wealth creation system.
About the Author: Warren Otter
Warren Otter assists medium-size business owners with their growth and lifestyle ambitions. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment for over 20 years.
He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.
At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.
Also, have a look at the other articles on this site. Best of luck in running your business.