You build personal
wealth by owning valuable things. That means you either need to spend money to buy valuable things or you need to build valuable things. Which one can you do?
What is meant by valuable things?
Anything that appreciates in value or generates free cash flow for its owner. There are lots of asset classes that fall into this category, with the most common being shares and property.
Many founders mistakenly believe that their biggest challenge is marketing. Focusing on improving your marketing is very important, but there’s no point getting better at marketing unless you have your systems ready for the growth that better marketing will generate. To many founders this feels like putting the egg before the chicken, but here is an example of what will happen if you haven’t sorted this out.
A restaurant had its biggest month ever because of nearby events and local hotel occupancy levels being maxed out. Knowing this was coming, the restaurant management decided to stay open longer and open on days it normally closed to take advantage of the situation. It generated three times its average monthly revenue – a phenomenal achievement! But it’s profit for that month went down to 3% when it usually averaged 13%. All of that extra stress, effort and pressure on the business and it made less profit than a normal month! What went wrong?
Two major things, (1) they didn’t take into account the overtime and extra costs of opening the extra hours, which took a huge chunk of their profits. More importantly though, (2) they had not created the scalable systems necessary to deal with the influx, so they were constantly having to throw money at the problem in the midst of the influx, by giving staff more incentives to work extra shifts, by compensating guests and by hiring things that they could have avoided. Restaurants are usually very systemised businesses on the surface, and this one was too. But it (like most businesses) was not systemised in some of the most critical ways, and in the end the owner had to work extreme hours to generate less profit than a normal month.
Generating business wealth
Businesses build personal wealth for founders in two ways. The first is the business developing/buying/owning appreciating or cash generating assets, much like if an individual owned these things. In this case we aren’t talking about the tools or vehicles the business uses, instead it is things like intellectual property that it owns and licenses to others, the property it owns, or shares it has in other companies. This is, at the root of it, what Warren Buffet does with Berkshire Hathaway. It requires you to invest your business’ cash into buying these assets so they generate a return for the business. Conceptually simple.
The second way a business generates personal wealth for its founders is by systemising. Founders can find this to be one of the hardest concepts to get their head around – either because their business is currently too small to imagine what is needed, or because they think they already have some systems and can’t imagine what is possible because they haven’t seen it done well before.
Think for a second about what you are actually selling if you sold your business today. If it didn’t have you in the business, could it continue to generate revenue on its own into the future? If the answer is no, then your business is only worth the assets it has – you have effectively added no value to the business despite all of your hard work. So systemising is about creating a business that generates revenue without that revenue being reliant on the individual effort of any one individual.
Let’s take a couple of examples to demonstrate this. Ninety-five percent of trades businesses can only generate revenue from the director working on jobs. A typical tradie wakes up in the morning, goes to a job, completes the job and then goes and does some quotes for new work, squeezing in the administration of the business when they can. This type of business will stop generating revenue the minute the tradie stops working. This is not a valuable business and this business does not generate long term wealth. It might give the owner a comfortable living while they are working, but they are not building an asset that is sell-able when they stop working.
Freelancer’s are exactly the same. They can generate great cash and should be able to create a comfortable life for themselves while they are working. But as soon as they stop working, they stop earning. There is no value in their business beyond the exertions of the owner because there is nothing in the freelancer’s business that someone can buy if the freelancer wants to sell it.
Why systemising is valuable
At its heart, systemising aims to build yourself out of a job in the business. This is what makes a business more valuable than the assets it owns. That’s because when you have systemised your business, it generates revenue without you and it can continue doing so without you.
The best systemised businesses can also scale using these systems because they have been setup to work despite the volume of work coming into the business – businesses that achieve this ability to scale without you are the truly valuable ones. Systemised businesses are valuable in two ways:
- You earn money without working yourself.
- Your business can now be an asset for someone else because they could buy it and it would continue making money for the new owner.
The bottom line, if you want your business to be worth something, is that you need to create a business that generates revenue without you.
Learn how to do this on the ImpactBase Pre-Seed Program.