On the previous post about Bum marketing, I made the mistake of giving internet marketing examples to businessman thinking. Apparently, I was wrong, so I will stick to the normal businessman concept, and add internet marketing examples at the end.
So, Cashflow.
What does it mean? It is very simple, but very important. It basically is income minus expenses.
That is it. But so many people do not seem to get it. I’ll explain.
If you think like a worker, you price everything depending on its price. How much it costs you. You buy a new stereo for 200$ for example, and if you find a deal on another store for the same stereo for 180$, you think you saved money.
You didnt. You just found a cheaper way to burden yourself with another liability. A stereo is not an asset, simply because it does not give you money. It depreciates in value constantly, and actually, it loses 50% of its resell value the minute you open the box.
An asset, is something that gives you money. Simple as that. It can be real estate, royalties to a program or a book, company shares, anything.
When you buy something, you need to buy assets. Limit the liabilities to the minimum, and focus on buying things that give you money, or appreciate in value over time.
For example, you all have an internet connection, a flatline. That connection, is a liability to the majority of the population, because it makes you spend money, and time as well. The minute you start using that internet connection to earn money, it becomes an asset.
Domain names are assets too. But only if they give you recurring income, or if they appreciate in value, by developing a site on them. If you leave them sitting there, they are liabilities.
A businessman always thinks on ways to turn his liabilities into assets. Websites used to be liabilities, until some businessmen recognized the potential in monetizing them. The minute they started earning income from their sites, their hobby liability became a money making asset.
You need to start thinking on cashflow constantly, and to do that, you need to learn to recognize which of the things you own are assets, and which are liabilities. So I will repeat myself, assets give you money, liabilities eat your money.
Why do we need to think in cashflow terms?
Because when you do that, you can monitor your current, and future investments. Lets do a typical household example. Ignore the actual numbers, they are just to show my point.
- You have an internet connection, a liability, that costs you e.g. 50$ per month. If you start doing work with it that produces a mere 60$, then you turn it into an asset, that has a cashflow of 60-50=10$.
- You have your house, that costs you 600$ per month. If you rent out the sub-basement to a guy to store his stuff for 200$, you turn it into an asset, even if its a leeching one. Cashflow 200-600= -400$ (yes, negative cashflow).
- You have your day job, that gives you a 1000$ income. You are an employee, so you have no way of increasing your salary other than doing a second job, so it stays at 1000. Cashflow +1000$.
- Lets assume your monthly spend is 400$ for food and things. Cashflow -400$.
- Put in a credit card that is eating away your money, 100$ payments. Cashflow -100$.
Now add all that up in the above example. We are left with 90$. That is your total cashflow, the 90$. It simply means that you are left with 90$ every month. That is what living paycheck to paycheck means.
We have tried to improve every subcategory, we rented out the basement, we do some work online. The mere action of turning a liability into an asset means that at least you understand the businessman way of thinking. Â Do the numbers again, without the changes in italics. Yes, the total cashflow is -150$. That means, that you would get to a point were your job would not be enough to support you.
How can you improve the other areas? Paying out the credit card is one. Or even better, investing the money from the credit card to something that pays off the card itself. Lets say that you are conservative in your expenses, and cannot reduce them further. Your employee job has no way of earning you more money.
What do you do?
The answer is, What other assets do you have?
And this is the chicken and egg problem. To make a business grow, you need to leverage on your assets. To leverage on your assets, you need to buy them. To buy them, you need to find a way to stop living paycheck to paycheck, and in order to do that, you need more assets…
Unless you inherit some property, the only way to get assets is to make them. How? By working your ass off.
When others go for walks, you need to work on your part time business. When others buy shiny new liabilities, you need to buy small assets. When others watch porn or sports, you need to read and learn to hone your asset creation skills.
To continue the above example, what I would do, is to try and pay off my credit card with the left over cash every month. Lets assume that moving out to a cheaper house is not an option. I would limit my personal expenses to 250$. And work my ass off every night on the internet with the skills I have to generate more income. As soon as I had some cash to invest, I would scour the internet marketplaces for opportunities that fit my budget. (actually the above scenario is really mine, so the advice is as solid as it gets)
What can you invest on? Websites basically. Look at the online marketplaces, sitepoint etc for revenue generating websites. Find a few that fit your budget, and contact the seller, ask for a shitload of proof and stats, and decide whether the investment is solid or not.Â
Buying a website for 500$ that earns 80$ per month is not impossible. As soon as you buy it, you have an asset that adds +80$ to your total cashflow. If we add it to the above example, you get from 90 to 170$ per month. That means, in two months time, you are left with another small capital of 340$ to invest again. Buy another asset. Build up your assets, slowly find things that give you money.
Cant find a profitable website for 340$? Buy a domain. Scour the domain marketplaces, and find a domain costing 350$ that earns you 50$ per month from domain parking. No, its not impossible to find a deal like that, one, because people are stupid, and two, not everyone understands ROI.
A purchase like that increases your cashflow to 220$. That means, in 2 months, you will be able to buy another revenue earning website. Wiggle some cash from other expences, and you have 500$ to reinvest in your second website. Lets say we didnt get that lucky, and found a deal that gives us 60$ income. Cashflow goes up to 280$. It still is a good deal.
With 280$ cashflow, you can buy cheap websites/domains one every month. 6 months later, your cashflow will be enough to buy 2 websites every month. Or one much bigger. But all the monitoring of those sites chews up too much of your time. Big deal, sell the small ones. Get a capital gain of lets say 1500$, and reinvest it into a bigger website, with more revenue, and less time needed to maintain. Cashflow +300$.
With some spare change and working our ass off online, we manage to pay off our credit card, deleting the -100$ cashflow. Wee!
But the new site gets a load of visitors, and your crappy shared hosting cannot handle the load. So you need a cheap VPS. Cashflow -100$.
The site costs 100, and gives 300, so it still remains at a positive cashflow of 200$. That is good.
So, you are left with little more cashflow, a VPS that is an asset, more experience and skills, and a good site that you can work on to squeeze out more profit. Your credit card is paid off, and you are left with ~300$ every month to reinvest.
Get to that point, and the rest will be clear enough.
The example is written only to make it clear, that you need to think in cashflow, and separate your assets and your liabilities. Once you have that laid down, you can see what to do in separate areas of your finances to get positive cashflow. As soon as the cashflow gives you a small capital, invest in something that adds to your cashflow. Build it up, and soon you will have a cashflow that allows you to buy one moderate investment every month. A year later, you can sell all the smaller ones, and invest on something big, something that brings in a whole new salary.
I honestly hope this posts makes sense, and helps you. The concept of cashflow is so simple, yet so many people are unaware of it. I have used the exact same method to get out of the exact same situation described above.
Give me some feedback on this post, I really want to explain this well.
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