Multiply Your Money

Article by: Brian Macharia W. He is a Personal Finance Educator and Author of Budget Like A Goal Getter

Now that you have cash coming in through the first money skill (Make Money), and you are controlling your cash flow using the second money skill (Manage Money), it’s time to build generational wealth through the third money skill: Multiply Money.

“When money realizes that it is in good hands, it wants to stay and multiply in those hands.” ~Idowu Koyenikan

The wealth creation road has two lanes: Entreprenuership and Investing.

In this final segment of the three money skills to master, we shall analyze what it takes to multiply your money through business and investing.

1) Entreprenuership

“An entreprenuer sees an opportunity, puts together a team, and builds a business that profits from the opportunity.” ~ Robert Kiyosaki

In this subtopic of entreprenuership, we shall look at three areas:

  1. a) Your business goal
  2. b) Types of business models
  3. c) Keys to succeeding as an entreprenuer

 

  1. A) Your Business Goal

When starting a small business, it’s advisable to have the endgame in mind from the beginning. That is, have a clear vision of what you eventually want to do with the business.

Is your goal to start, scale, then sell the business?

Or, is it to start, scale, then keep the business?

Your money can be multiplied greatly by achieving either of those goals.

  1. B) Types Of Business Models

A business model is a simple illustration of the process by which a business makes money.

It’s the job of the entreprenuer to design (and redesign) a business model that is both effective and efficient at creating, delivering, and capturing value.

Here are some of the most common types of business models:

  1. i) Advertising-Supported Model: a person or company monetizes its audience or users by selling advertising opportunities. E.g., TV stations, magazines, and social media sites rely on this model.
  2. ii) Subscription Model: a company charges a recurring fee for customers to keep accessing a product or service. E.g., Netflix.

iii) Retailer Model: a retailer buys goods from a manufacturer or distributer, adds a profit margin, then sells the product to the customer. E.g., Supermarkets, grocery stores, and kiosks use this model to earn money.

  1. iv) Ecommerce Model: an online store offers a credible, convenient platform where buyers and sellers can meet and transact. The ecommerce company then earns money by charging transaction fees. E.g., Amazon and HustleSasa.
  2. v) Freemium Model: a company offers some of their services or products for free, then they charge for access to more features or products. E.g., Linkedin.

Because it takes a significant amount of time and money before startups break even, it’s crucial to start your business with the right business model in place.

To see what a good business model should cover, check out the Lean Canvas, or the Business Model Canvas. They are great templates for startups.

  1. C) Keys To Succeeding As An Entreprenuer

(i) Have A Good Business Idea.

A good business idea is not simply the one that sounds good or looks good. It has to be a good solution to an existing problem that a good number of people need to be solved.

In the idea stage of a business, before much capital is commited to the venture, the entreprenuer’s job is to objectively validate the business idea to see if it has a product-solution fit, and a product-market fit.

In his book Running Lean, Ash Maurya provides two key questions for verifying the viability of your business idea:

“Do I have a problem worth solving?”

“Have I built something people want?”

The first question checks whether you have a product-solution fit.

The second question determines if you have a product-market fit.

To find out the answers to those two questions, try doing a short inexpensive test phase of selling (or giving away) your product/service to your target customers then collect their feedback.

What are they saying about the effectiveness of your solution? Are they complaining about the price? Are they ordering for more? Are they suggesting you add something or reduce something?

The customers’ complaints and compliments are important data for helping you know whether your idea passes the product-solution, and product-market standard.

If your business idea passes the two standards, go ahead and pursue it. If it doesn’t pass, adjust it and take it through the test again. If it still fails, consider abandoning it and look for another business idea.

(ii) Create A Good Business Model.

Another important job of the entreprenuer, is to design a good business model around the business idea.

The business model is the foundation of your enterprise.

Both the Lean Canvas and Business Model Canvas have nine parts that make up their one-page models. Some of the elements include customer segment, cost structure, value proposition, and revenue streams.

Filling out the one-page business model template causes you think objectively and critically about your business. For instance, on the aspect of revenue streams, in which ways will your business earn money? From who? Is it through advertising revenue from advertisers or sales revenue from customers? Or is it both?

Each part of the business model is meant to be continuously tested and refined as you conduct your business. This calls for the entreprenuer to be an observant, curious, and flexible person with problem-solving skills.

Given that 80% of businesses fail within the first five years, having the right business idea, and combining it with the right business model greatly reduces the risks of your enterprise so that it can have a strong chance of surviving the risky startup phase.

(iii) Create A Good Business Plan

A business plan is a document that explains your business goals and the steps of achieving the targets.

Having a simple business model that works, and a strategic business plan, makes your enterprise attractive to lenders and investors who can help you to scale your business.

(iv) Create Good Systems.

“Management works in the system; leadership works on the system.” ~Stephen Covey

One thing that a business and the human body have in common is systems.

The simplest definition of business systems that I’ve come across is from the book OPM: Other People’s Money. The author, Michael A Lechter, describes systems as, “defined processes or standard procedures.”

Another vital role of an entreprenuer is to create the systems that will enable every aspect of the company to work optimally.

For the business to scale and consistently make huge profits, business systems need to get created, repaired and upgraded to accommodate the next level of growth being envisioned by the entreprenuer.

In his book Rich Dad’s Guide To Investing, Robert Kiyosaki lists the following as some of the typical systems/procedures  required for a business to function efficiently:

(a) Daily Office Operations Systems: (e.g., answering phone; purchasing and maintaining office supplies and equipment.)

  1. b) Product Development Systems: (e.g., developing product and protecting it legally; developing packaging and collateral material)
  2. c) Order Processing Systems; (e.g., taking and recording orders; fulfilling and packaging the orders; sending the orders)

(d) Billing and Accounts Receivable Systems; (e.g,  billing customers for the orders; receiving payments for the orders and crediting customers for payment; starting the collection process for delinquent receivables)

(e) Customer Service Systems; (e.g., responding to customer complaints, replacing defective products or performing other warranty service)

If you’d like to learn more about how to systemize your business, I recommend reading the following books: Systemology by David Jenyns; Work The System by Sam Carpenter; The E-Myth revisited by Michael E Gerber

(v) Become A Good Leader.

“Everything rises and falls on leadership”

~ John C Maxwell

Leadership is a soft skill that’s crucial to the success of your enterprise.

Because business requires interaction and transaction with different stakeholders,  your ability to build a team, articulate a vision, create a strategy, assemble resources, and inspire people, will greatly determine the future of your business.

When you combine a good business idea, a good business model, a good business plan, good systems, and a good leader, you will have created a scalable and sellable business asset that will make you rich beyond your wildest dreams.

2) Investing

An investor is someone who takes a risk to invest money in assets (like businesses, bonds or properties) for a reward in the form of income or growth of the investment value.

In this subtopic of investing, we shall cover three things:

  1. a) Your investment goal
  2. b) Asset groups
  3. c) Keys to succeeding as an investor
  4. A) Your Investment Goal

Before you choose an asset to invest in, you need to define what your investment goal is, then pick the asset that is well suited for enabling you to achieve your investment goal.

Generally, investors have the goal of attaining one or more of the following investment goals:

  1. i) Protection (money preservation)
  2. ii) Income (regular earnings)

iii) Growth (increase of asset value)

Your financial goal is the destination. Your investment goal is the road. Your asset is the vehicle.

For example, if your financial goal (the destination) is financial freedom, your investment goal (the road) should be income, and the asset (the vehicle) should be an investment that consistently pays you money ( e.g., a rental property, bond, or intellectual property.)

  1. B) Asset Groups

In the investment world, assets are grouped into various classes based on shared traits such as levels of risk, reward, liquidity, and volatility.

If you are looking to grow your money through investing, here are some of the  asset categories available in the market:

  1. i) Equities: these are high risk, high reward assets such as stocks of publicly traded companies. This asset class is right for you if your investment goal is regular income or asset growth. It’s also a good fit for long-term financial goals like accumulating university fees for your five-year-old kid.
  2. ii) Money Market: these are low risk, low reward assets like fixed deposits, T-bills, Commercial papers, and Money Market Funds. They are good for someone whose investment goal is protection (money preservation) and income. They would be a good fit for short-term financial goals like saving up an emergency fund in one year.

iii) Fixed Income: these are low risk, low reward assets such as T-Bonds, Corporate Notes, and Annuities. They are good for you if your investment goal is regular income. These investments would be a good fit for long-term financial goals like achieving financial freedom or paying school fees.

  1. iv) Real Estate; these are high risk, high reward assets such as land and buildings. They are good for the investor who is looking for regular income and/or asset growth. It would be a good fit for long-term financial goals such as attaining financial freedom or paying university school fees.
  2. v) Commodities: they are high risk, high reward assets like gold, oil, gas, crops, trees. They are best for your if your investment goal is asset growth.
  3. vi) Collectibles: they are high risk, high reward assets such as artworks, antique furniture, classic cars, vintage wine and toys. They are meant for the investor seeking asset growth.

vii) Crypto currencies: they are high risk, high reward assets like Bitcoin and Ether.

They are good for the investor whose investment goal is growth.

viii) Venture Capital: this is a high risk, high reward investment in becoming a shareholder of a private company. It’s good for you if your investment goal is growth and/or income.

  1. C) Keys to succeeding as an investor

(i) Have An Investment Plan

Consult with a fiduciary (certified financial advisor) to make a systematic plan for achieving your financial goals. The advisor will help you with: assessing your current financial position; defining your financial goals; determining your risk appetite; choosing the right assets to invest in; reviewing your investment plan; and adjusting your portfolio.

(ii) Do Due Diligence

Before investing, research and authenticate all the key aspects of the investment you are considering. Ask questions that relate to the legal, financial, tax, issuers, terms, and testimonial aspects.

(a) Legal: is this company legally incorporated? Is this investment product approved by regulators? Is this company facing a lawsuit?

(b) Financial: does this investment or company perform or pay as well as is being claimed by the issuers or in their marketing messages? Can I comfortably afford to invest and loose in this investment?

(c) Tax: is this company current with their taxes? What’s my tax obligation as an investor in this deal/product?

(d) Terms: what are the terms and conditions of this investment? What are the financial and legal consequences of breeching them?

(e) Issuers: who are the people/entities behind this deal? Do the leaders and managers have the requisite expertise  and experience to make this investment a success? Are there any prior or pending court cases concerning any of the key people in regards to their character and conduct?

(f)Testimonial: what are former and current investors/employees saying about this investment/company? Do their sentiments make me confident or doubtful about investing in the product?

It’s recommended that you always work with certified specialists to guide you in determining the authenticity and suitability of an investment before signing any document or investing any money.

(iii) Know Your Entry And Exit Strategy.

If you are planning to invest in a stock, at what price will you buy it at, and at what price will you sell it at? If you are investing in bonds, is your entry strategy buying from the primary market or the secondary market? If you are an entreprenuer, is your exit strategy a buy out or an IPO?

Being clear in advance about when to invest and when to divest keeps you from making emotional decisions that could negatively impact your investment.

(iv) Understand Economic Seasons.

The economy works in cycles of inflation, deflation, growth, and decline. Each of these seasons affect your portfolio since certain assets thrive or suffer under certain economic conditions. For instance, real estate investors thrive during inflation and growth, but suffer during decline. Conversly, Treasury bond investors thrive during decline, but suffer during inflation and growth.

(v) Increase Your Financial Literacy

Ignorance increases risk. Knowledge increases returns.

Being ignorant of financial information makes you a risky investor.

“Without financial education, your risk goes up, your taxes go up, and your returns go down” ~ Robert Kiyosaki

Investing and entreprenuership are risky undertakings. The best way to control the risk is by ensuring that you as the investor are consistently learning more about the financial world.

As you become better at the art and science of entreprenuership and investing, you will find your money multiplying exponentially.

That wraps up our study of the three money skills.

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