I decided to be an entrepreneur in my 20s.
I was into Rich Dad Poor Dad and my decision was influenced by it. I bought the idea of ownership of multiple businesses and not working for a business for the long run. I studied professional accounting (ACCA) as I wanted to deepen, learn, and acquire accounting skills, which is essentially the language of business.
As a student, I did well. I completed my ACCA examinations. Instead of pursuing a career path as an auditor, I chose self-employment. To many, the decision was not cool and concerning. Self-employment has little immediate perks: no salary, no allowances, no EPF, no medical benefits, no career path, and no titles. But to start an enterprise, I need to invest and spend. So, it is financially risky.
- Immediate income.
- Regular or more fixed income.
- Definitive career path.
- Many financial perks without financial risks.
- No immediate income.
- Income could be irregular and fluctuates.
- Income depends on business growth.
- Financial risks without much financial perks.
Hence, the mindset for entrepreneurs is different. This explains why it would be practical for entrepreneurs to manage finances differently. As one who now has years of experience as a self-employed, I realised that there are 3 things that I’d been practising which are helpful and had contributed to my financial standings today. If you adhere to them, I believe you can boost your chances of success in building an enterprise that is sustainable for the long-term.
They are as follows:
#1: Invest ‘Trading Income’ to Produce ‘Recurring Income’
There are two types of business income: Trading Income and Recurring Income.
- One-Off Income obtained in exchange of physical effort and labour.
- Not scalable.
- Main objectives: Pay Bills (stay afloat) + Raise Fast Capital
- Recurring Income obtained from 1 sale / 1 transaction / 1 deal made.
- More Scalable.
- Main objectives: Real Wealth and Value of the Business.
One could be in the same trade and earn himself two different types of income. For instance, a web developer could earn a fixed fee to develop a website, thus, earning one-off ‘trading income’. Alternatively, he could earn ‘recurring income’ by offering digital marketing services as an annual package to his clients.
Understandably, an entrepreneur may start off earning ‘trading income’ as they are easier to generate. That’s fine if the purpose is to raise capital to stay afloat. Over time, I believe it is smart for entrepreneurs to gradually shift their income, from solely ‘trading income’ to having more proportion of ‘recurring income’. In essence, it is best to strike a balance between both types of income. Example:
Proportion of Business Income:
- Year 1 = 90% Trading Income + 10% Recurring Income
- Year 3 = 70% Trading Income + 30% Recurring Income
- Year 5 = 50% Trading Income + 50% Recurring Income
Imagine: you begin with 100% trading income. After 5-10 years in business, you are still earning 100% trading income and have zero recurring income. So, if this is your case, I believe most likely, you do not own a business. You own a job and you would probably work very hard for the rest of your life.
Hence, on a personal basis, I’ll raise capital with ‘trading income’ and will invest most of these ‘trading income’ to generate ‘recurring income’.
#2: Have Reserves: Success Can Kill You Faster than Failures
I learned that success can screw up an entrepreneur faster than failures. Why?
Imagine this. Let’s say, an entrepreneur starts a trade, doing projects for clients. He earns trading income from his projects. In his first few years, his profits have increased as he received more projects. Thinking that he is a success, he spends and commits more. He upgrades his office, home, car, equipment … etc and he hires more people. On the surface, he looks like ‘the boss’, a true entrepreneur.
But in reality, he raises his fixed costs (worst still, debt commitments). He needs to service them: higher rents, utilities, mortgage, business loans, car loans, staff and many other related costs with ‘trading income’. In his mind, he is looking to grow and expand his business. But, he is just spreading his resources too thin. It is a risky move. But hey, aren’t entrepreneurs supposed to take on more risks in pursuit of greater growth and expansion?
Then, reality hits. He receives less projects due to an economic downturn. In his case, he is screwed. Profits are low. Commitments are high. So how? There isn’t much that he could do but to cough out the profits earned in his ‘good years’ to service his fixed costs. He may need to take on low margin projects to survive & keep his business afloat. Apart from business losses, he may lose all that he had built, including his ‘business’.
So, how to avoid this?
Simple. I believe all entrepreneurs could avoid such by:
- Being paranoid (know that there are always cycles in business).
- Balance Growth Ambition with Long-Term Sustainability.
- In good times, prepare for the bad times. (have reserve funds).
- So that in bad times, you have resources to invest for the good times.
#3: Active Wealth Preservation (as you build your businesses)
Here is the thing:
Many successful businessmen are very close from being a financial disaster.
This is common because many entrepreneurs fail to realise that wealth creation and wealth preservation require different mindsets. The attributes are different and acknowledging this would be super helpful to preserve wealth made out of the entrepreneurs’ businesses. Let me explain:
Let’s say, there are two engineers starting an engineering firm as equal partners (50:50). One is an electrical engineer. The other is a mechanical engineer. So for them, each partner brings in their unique expertises and capital to their firm. In their course of running the firm, one or both of them could:
- Incurred losses due to errors / negligences / external factors.
- Be sued.
- Lose their abilities to work due to death, disability or disease.
So, what will happen to their personal and business finances?
This is where having an A-Team of counsels and advisors would be helpful. Such would consist of professionals such as:
- Accountants (including tax advisors).
- Insurance agents.
- Estate planners.
So, instead of pouring all resources into ‘growth and expansion’, it is also crucial to allocate some resources (time and money) to work on wealth preservation in protecting wealth held both personally and within the business. It would not be smart to spend a lifetime building something (worth millions) and not preserve, protect, and safeguard it.
So once again, the key lessons for entrepreneurs are as follows:
- Know the differences between trading and recurring income.
- Invest ‘Trading Income’ to Produce ‘Recurring Income’.
- Good times don’t last. So are the bad times. They work in cycles.
- Prepare reserve funds during the good times.
- So that you can invest in the bad times.
- Have a team of advisors to assist you in financial planning.
- Strike a balance between wealth creation and wealth preservation.
If you can practise the above, I’m sure that you would go far in your business. In the end, I believe that being an entrepreneur requires more discipline in the art of managing finances. Good entrepreneurs are ones who take initiative to learn and be better in their finances.
As such, stay grounded and let’s keep learning!
Post any comments, if you are an entrepreneur and have more tips to handle or manage finances better.