BUILD & MAINTAIN YOUR POSITION
Staying out of the rat race involves:
- INCREASING CASH INFLOW (Business) - Always growing the business to increase profit
- CONTROLLING CASH OUTFLOW (Personal) - Controlling personal spending
Okay so you’ve got out of the rat race all you need to do now is ensure you stay out. This involves on never being complacent. You have to learn one fact in business – if you stand still you lose. Nothing lasts forever especially in business. So if your intention is to create a business that will provide you a set level of income, with no growth or efficiency strategy, then you will be at the mercy of your competitors. Also if you decide to spend every penny of your profit on fancy cars or houses then you’ll be at the mercy of your creditors!
- INCREASING CASH INFLOW (Business)
I have identified two ways to increase cash inflow from your business; Duplicate & Diversify or D&D as I like to call it. Lets look at what each one means in more detail.
Duplicate means exactly what it says. If you have an idea that works in one market then just simply duplicate it in different markets. Examples of this are all around:
|Business||Original Market||Other Markets||Description|
|McDonalds||USA fast food market||Rest of the world fast food market||This is probably the most famous duplication ever. They had one idea of selling the Big Mac and just took this idea to every country in the world.|
|Tesco||Food retailer in Brighton||Food retailer in the whole of the UK||On a more local level Tesco have taken their food retailing idea and brought it to every town and city in the UK.|
|Me!||Renting of properties in Essex||Renting of properties in the whole of the UK||I found that I didn’t need to close to any of my investment properties as it wasn’t me who had to repair them if anything went wrong. So I just duplicated the rental property idea a hundred times around the UK!|
|Gap||Adult clothing||Chlidren clothing||They mastered the art of providing trendy clothes at reasonable prices to adults so the just entered the children’s market and repeated the process.|
Is your idea capable of being duplicated or is your business very centred around you? Does your service or product require you and you only or can you delegate your role to someone else? The key to duplication is taking yourself out of the business and getting other trained individuals to run the business for you i.e. employees!
For duplication to occur you need to to:
|Ensure that profitability is large enough to take on an employee or employees.||If you want to duplicate then you need to be sure that the business profits can afford to pay for someone to do your job. As you will be moving out of the original location and moving in to another location you’re going to have to pay someone to do your job.The costs of employing someone are:|
· Their gross pay
· Employer’s National Insurance (around 10% of gross pay)
· Employer’s Liability Insurance premiums
· Employees expenses while doing their job
· Other benefits you want to give and/or the employee expects
Remember that your employee gets paid before you so if you make £2,000 profit for the month and your employee’s pay is £2,000 per month then your pay is NIL! As a rule of thumb if you can get an employee to do what you do for one fifth (20%) of net profit then consider duplication. So if your profit is £100k without an employee and you can get an employee for £20k p.a. then duplicate. If your profit is £50k then forget it. Focus on building your profit to £100k before duplicating.
|Obtain market research data||First consider how you want to segment the market. The obvious ways you can carve up a market is by:· Geographical – Can you sell to outside of your area or is your product or service sales restricted to only that area. So a shop that sells Liverpool FC merchandise really can only trade in Liverpool itself whereas a sportswear retailer can trade all over the UK.|
· Age – If your product or service is aimed at a certain age range consider whether you can you sell a similar product or service to outside of that age range. JD Weatherspoon pubs, a successful pub chain, are aimed at the over aged 30 drinkers. They have now started a wine bar chain, Lloyds, that caters for the age 18-30 drinkers. It wouldn’t surprise me if they think of something for the over age 50 drinkers!
But there are more subtle ways to carve up the market. Consider:
· Social Class – If your product or service is aimed at a certain class of people then consider if you can take that idea to a different class. So if you had a home delivery food service aimed at the lower working class i.e. burgers, chips etc then consider adding a range of dishes that bit better i.e. pasta, paella etc. so it appeals to the middle class.
Once you have identified the market you wish to attack then do some test marketing if possible. Don’t just jump in straight away thinking that it will work because it works in the market you are currently in. The type of data you should be able to get are:
· People’s opinions on your idea in that market
· Existence of competitors and their pricing
· Costs relating to being in that market i.e. rent, rates, wage costs
· Internet & Library information on that segment of the market
You will never have enough data to be fully sure that moving into this new market will be profitable. You simply have to take the plunge at sometime. But the more data you can gather through talking to people, seeking out your competitors, scanning the local press and the internet the better chance you’ll have of avoiding costly mistakes.
|Train up staff||Depending on the type of business you have will determine the level of training you’ll need to give to any potential employees. One thing is for sure though - they will need some form of training. Do not even consider sending them to any kind of day course, college or residential training programme. You are a small player. This is what larger, more established companies do – not you!The best person to teach them the job is you. I would say that the reason why someone does a good job is due to training AND experience in the ratio of 20:80 respectively. So training is a key part of the process but so is experience – allowing the employee to make their own mistakes. See below.|
|Delegate well||No one can ever do all what you do as well as you. You have to accept this. There will be errors made by the people you have delegated to. The reason for the errors will be sometimes down to you and sometimes down to them – but it doesn’t matter whose fault it is as long as lessons are learnt.You must have reasonable expectations of your delegates. They could be new to the whole business and be inexperienced. As long as your delegates are:|
· Loyal and trustworthy
· Have the intelligence to do the job
then they have the capacity to take your business very far.
I employ a rent collector. He is very trustworthy, loyal, hard working and more than able to do the job. He makes mistakes here and there like we all do. But I have a reasonable expectation of him. However, he consistently surpasses my expectations (which is great!) but then sometimes I forget to be reasonable and expect the earth and more from him! Try and identify employees that have the three attributes mentioned above and keep hold of them. If you stay loyal to them they will stay loyal to you.
|Adjust to the new skill requirements from yourself||The transition from being a one man band to employing several people is a big one. You have to let go of some skills and replace them with another. Skills that you should let go of are:· day to day operational activities – things like admin, individual customer queries, cleaning and anything else that can be done that doesn’t require much thought power or skill. You need to put a value on an hour’s worth of your time. If an hour spent with a prospective customer can generate £500 worth of profit then evaluate it to the cost of £7 per hour for an employee doing a day to day activity – it’s a simple case of maths!|
Skills you should be focusing on are:
· Choosing the right employees – a business’ success is dependant on the people that work for them. If you have the skill of picking the best employees such as a book keeper, manager, sales person and technical person then you have won half the battle. The skill of recognising talent will ensure your success.
· Choosing new markets – the success of your business requires you to know where’s a good deal and where isn’t. Not only does your own livelihood depend on it but your employees’ livelihood too. Over time your ability to assess risk will be the most important skill you will acquire. Its this ability that separates you from the layman in your chosen field.
· Raising Finance – a business’ ability to raise finance and deal with the financiers will ensure that you’ll never go bankrupt.
· Being the face of the business – to grow the business requires you to be the best promotional tool there is. So if you can home in on tricks you know of to gain further business then perfect them! This will involve meeting the decision makers of your customers and suppliers.
· Motivating your workforce – you have to be able to manage your staff and this means getting the most from them. The granting of responsibility, the paying of bonuses and treating them with respect is key. John Cauldwell, the boss of Phones4U, hit the press by making the top 10 branch managers millionaires by paying them a £1m bonus due to a staggering year of business as a result of their hard work.
|Create & implement control procedures||If you do manage to duplicate then you will need to create and implement procedures that:· Control cash outflow so that you receive all the cash that is generated from your business and not spent on bogus expenses.|
· Ensure that all the cash resulting from a sale is recorded and collected so that fraud or theft cannot occur.
· Make sure that all laws are being followed surrounding your business including employment law. All this can be found from any good business book.
To diversify means to do a business that is different to the one that you are actually doing. The beauty of diversification is that is lowers your overall exposure to business risk. This is because you are not dependant on one market. So for example if you only sold luxury items such as fine wines or cherished registration number plates then you are exposed to the general state of the economy. If we were to go into a recession the demand for such items will only diminish only until we recover thus potentially putting you out of business.
In my example I have the following businesses that function, as much as they can, independently from each other:
|Business||Factors affecting its success||Justification for having such a business|
|Accountancy practice||You always need an accountant. There are little factors that will make the role of an accountant redundant.||I trained as an accountant so to get my own practice seemed the most logical thing to do. It also provides a steady income thus forming a foundation to all my other businesses.|
|Nightclub & Bar||The general state of the economy may affect the amount of disposable income customers have to spend on going out.||I spent a lot of my time DJ’ing when I was younger so I had an understanding of the business. I am now understanding there’s a lot more than just DJ’ing in the nightclub business! The returns to be had from a nightclub are massive if you get it right. This business is my high risk entry.|
|Property business||People always need somewhere to live. If interest rates were to rise then my profitability would go down.||This was my first business and I had already identified the supremacy of property above all other investments. It is relatively low risk and provides me with a solid income irrelevant to the state of the economy.|
|Cherished number plate business||The general state of the economy may affect the amount of disposable income customers have to spend on luxury items.||I had an interest in these goods. I started this business due to my knowledge of what I thought would sell as well as increasing my overall spread of business interests.|
|Book writing||The general state of the economy may affect the amount of disposable income customers have to spend discretionary items such as books. Also the internet does pose a threat (albeit a small one) to overall book sales.||This is something I love to do but happen to get paid for it. If I could find more of these businesses then I would do them! Its passive income. Once the book is written then you receive regular royalty cheques for a long period of time even though you do not do anything during this time.|
|Consultancy||Businesses always need a consultant. There are little factors that will make the role of a consultant redundant.||I like to meet and chat to new people – so why not get paid for it! Please check out my services at the end of this book.|
|Websites||The website market is a highly competitive one as the barriers of entry are low. It is easy to conceive that a rival website could threaten yours.||Technology really excites me. The possibility of becoming a millionaire very quickly, with minimal investment and with a simple but effective idea keeps me knocking on that world wide web door! This is a low risk entry business with huge possible returns.|
All of these businesses were formed by repeating the following steps detailed in this book:
- STEP 3 – decide what to do and identify the right business for you
- STEP 5 - get started and implement the business of your choice
- STEP 6 - don’t give up and persevere.
So once you’ve set up a business that’s making money then look into doing something that’s different. Don’t put all your eggs in one basket. I know of many start-up entrepreneurs that put everything in to one idea. Okay some make it and do make a lot of money but the majority go down at some point. Nothing lasts forever! You need to mix and match as much as you can.
Keep abreast of several markets that interest you. Scan the newspapers, talk to people that own their own business, talk to customers, suppliers, competitors (if you can!) and whoever else that is doing business. Do not be afraid of asking direct questions about what they’re doing. You’ll be surprised how upfront some people will be. I am very upfront about what I do. The reason being that I hope they’ll join me! I want to collaborate with others so that we can take the idea further.
Apart From D&D (Duplication or Diversification)
Another way to increase cash inflow, but is less exciting, is to control business expenditure – more precisely the overheads of the business. The effect of this can be major or minimal depending on how profitable you are. If you’re making £200,000 per year and you reduce overheads by £10,000 then its no big deal. But if you’re making a £5,000 loss per year and you reduce overheads by £10,000 per year then it is a big deal – as you go from making a loss to a profit of £5,000.
Fixed overheads to consider when looking to reduce business expenses are:
|Overhead||Ways to reduce|
|Rent||Talk to your landlord. If you’re in a long term lease then it may not be so possible but if your lease is due up for renewal and you’ve been a good tenant then tell them you want a reduction.|
|Wages||Are you getting the best out of your employees. What about sub-contracting and only paying for work done rather than having the fixed cost of an employee.|
|Telephone||Consider switching networks, taking advantage of deals or other promotions that keep your phone bill right down.|
|Interest cost||If you’ve got borrowings then shop around for a better interest rate. Depending on your borrowings and the payback period moving lender can have a dramatic effect on the repayments.|
|Bank charges||There are many banks offering free business banking for the first year. Even better than that is banking with a bank like mine that never charges you. This is because they do not offer business banking so they just accept your banking activities as personal banking|
2.CONTROLLING CASH OUTFLOW (Personal)
If this is this last lesson I teach you then let it be the one that lasts with you. I could go out now and buy myself a brand new top of the range Bentley coupe AND an Aston Martin. So why don’t I go out and buy them? The first reason, and the golden rule, is:
‘I WILL SPEND MY INCOME NOT MY CAPITAL’
So how do you identify the difference between income and capital? I use this basic rule:
CAPITAL – this is an amount of money that can be invested to return an income
INCOME – this is an amount of money earned as a result of an investment made
What you deem to be capital is based on your personal circumstances and what you are willing to sacrifice now to invest for the future. For me, a sum greater than £1,000 is a suitable amount to invest. But even £10 is worth investing – it depends on your circumstances.
When I started my first job I earned £14,000 per year. I spent about £7,000 on my living expenses and I would invest the other £7,000, about £600 per month. Over the 5 years I worked this consistent £7,000 investment of my salary (total £35,000) now returns me an annual income in excess of £200,000 per year. As a result of this I was able to buy 5 properties in 3 years to return me an income so I could leave my job. During the next 4 years after leaving my job I was able to buy a further 65 properties. I will buy these cars when I earn enough so it does not threaten my lifestyle. This means when the total HP payment on both of these cars is less than 5% of my disposable income.
The second reason is because I know that my income will be irregular. It may even be a loss for certain months. Its no good having liabilities such as a large repair bill for a fancy car when you could be using this money to fund your business through the hard times. As a rule of thumb I spend only 30% of my profit generated from my business on everything I need. So if your business generates £3,000 per month then spend only £900 per month. This means that £2,100 is saved for the hard times if necessary or for future investment. Typical expenditures you should avoid unless you are sure you can meet their payments are:
- Mortgage payments for a house beyond your means
- HP payments for a car that you struggle to even get a service for
- Personal loans for personal expenditure for such things as holidays, clothes and high street goods
In other words avoid buying liabilities. That is buying goods where you have to pay for them over a long period of time. This only serves to increase your fixed costs and thus the risk of bankruptcy. Then you have to go back to Step 2 – Live Like A Pauper and look at ways of minimising these costs which can be a difficult thing to do once you’ve become accustomed to this lifestyle.
If you need help in leaving the rat race then the author offers a consultancy service to steer you in the right direction. He charges £399 per consultation and can help you with all or some of the steps detailed in this book. If you’re interested then contact him at:
Tel: 0870 990 3205 or visit: www.ahuja.co.uk