Take Mike’s point about raising business capital, from this recent post:
Investment money [for your business] should come from cash flow and not bank loans
I happen to agree, mainly because business funding is hard to come by and can be very expensive …
… when, the BEST place to find the capital to run and grow your business is from the gap between:
a. Your Sales, and
b. Your Costs.
This is nominally called PROFIT, but that is dangerous because it implies that you can spend it.
Remember my friend’s friend who had a business making $3 million a year? Well:
1. He gave Uncle Sam one third, and
2. He saved one third, and
3. He spent one third.
Which sounded totally logical until I realized that his ‘cost of living’ was $1 million per year and the Rule of 20 says that he would need at least $20 million in passive investments to justify anywhere near that sort of spending level!
But, a business generating $3 million in earnings a year – as we now know – is usually worth 3 to 5 times it’s annual earnings AFTER TAX, which means his business is ‘only’ worth $6 million to $10 million … a huge amount, but nowhere near enough to justify blowing $1 million a year.
Then there’s still those savings, which (at 10% return) would generate the ‘missing’ $10 million to $14 million (i.e. to reach his $20 mill. Number) in, say, 8 to 10 years (of course, by then he needs $30 million because of inflation, which would delay things by another couple of years or so).
So, what to do with those profits?
1. Pay Uncle Sam one third, and
2. Save one third, and
3. Double the remaining third; multiply it by 3 to 5; then, divide the answer by 20 … and spend that [AJC: enjoy!], and
4. Add the remainder to 2.
Now, what to do with 4. (i.e. the savings generated by 3. plus 2.)?
Well, I would use it to:
a. expand the business, and
b. invest outside of the business
… probably in roughly equal measure – with any excess amounts (i.e. that the business doesn’t need in the foreseeable future) also moved into ‘passive investments’ outside of the business.
If you do this, Mike, you will:
i) Live reasonably safely and well, and
ii) Build your Perpetual Money Machine, and
ii) Probably won’t need the bank to fund your (international?) expansion
… at least, that’s how it all worked out for me 🙂