The book The Millionaire Next Door found that being a business owner increases the probability of financial independence. Since the release of the book, the lazy analysis from that finding is if you want to be rich, quit your job and be a business owner! However, I have met as many broke and bankrupt business owner as I have long-life employees so changing ones occupation is, in and of itself, not the magic bullet to financial independence.
Instead, having met many successful business owners, I would suggest that a more accurate means of examining why some business owners do so well, and one readily translatable to employed people, is to examine some of the habits that contribute of successful business owners.
I am particularly struck by the following habits:
An acute appreciation for cash flow. I have met many business owners in many life. Usually, you can tell by a short conversation with them who are the successful ones and who are not. The successful ones do not spend an inordinate amount of time taking about sales (good, bad or indifferent). Instead, they either talk about how to free up cash flow or they spend good money hiring someone who understands cash flow if they do not (I have often remarked that the first hire for a start-up company should be a good book-keeper).
Cash flow is the oxygen of finance- business or personal. Without positive cash flow, ones range of options diminishes. I have often believed that real estate investors do well not because of the assets itself but because the nature of the asset forces the investor to analyze cash flow every single month. It is a discipline a stock investor only has opportunity to do once a quarter.
An understanding theres only two sides of a ledger and you can only control one. There is only two sides to the ledger- income and expenses. The running joke for those who have experience in the start-up community is that the revenue forecasts for the bank or investors are really just guesses (and they know this but have to play along in the game). The only side you can control is expense side so you pay attention to that side of the ledger.
A healthy attitude about debt. Ed Rempel is a regular columnist for Million Dollar Journey. He elicited a lot of comments in his last post about financial independent people not paying off their debt. I would not describe debt as an either or proposition in that you either have lots of it or you have none. Instead, the question for business owners is whether: (a) the debt is being incurred for revenue producing purposes; and (ii) whether the revenue being returned is contributing to positive cash flow.
It is, unfortunately, an analysis which is harder to apply in our personal lives since the largest sources of debt are to purchase depreciating assets (auto) or for shelter (unless it is an investment property or one is renting part of their principal residence).
They know the exit strategy before they play the game. I once met a real estate developer who does not buy land without actually lining up a developer or anchor tenant for that land- even if the commitment is not for another 3-5 years. By doing this, every single decision they make while they own the land is premised on the exit strategy already entered into when they signed the offer.
On a personal perspective, the question to be asked is why am I buying product X and how does it fit into my strategy rather than product X yields 9%, lets buy it since the yield may throw off the risk tolerance one is willing to incur as part of a strategic plan.
If the government is truly serious about solving the financial literacy problem, a good starting place may be to teach how students how to run businesses in school rather than run stock picking contests which only encourages needless risk taking. If this all sounds daunting to you, I would focus on the cash flow habits. Monitor it religiously and, to quote Seymour Schulich, use a simple metric- if there is more cash in your bank account month to month, you are moving in the right direction.
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