Build a Business that Won’t Trap you in Self-Employment
Starting a company is easy. One form and $0-$100bucks depending on what state you live in. That's all. A company is just a legal entity, its what you do within it that matters. One guy in a basement doing web design is a company. So is Google. A company is what you make it, and there are a million different ways to make a company.
Owning your own company means that you have the option to build it in such a way that profit, (your income) is no longer dependent on the time you spend on it. Now, are there businesses that are still dependent on the time that you put in? Of course. For Example: if you start a business knitting newts, and you can only knit 5 newts per hour, and you sell each newt for $3, you are still making at most $15/hour (it would be significantly less, with administrative time, selling time/cost, overhead, etc. Important considerations.) So your newt-knitting business is not really a scalable business. This is an incredibly important point: Most people's 'businesses' are just jobs that they've created for themselves. There is nothing wrong with this and is what many people want when they are starting a business. But, at that point, it is not a scalable business.
Photo Credit: Steve Jurvetson, my favorite Venture Capitalist
Math backup: Say your actual profit for newt-knitting is $12/hour. Costs of production, selling cost, etc. all average out to you making 12/hour. Though you own your own business, you are making only a job-type wage, and to make our goal of $47,000 you would have to work almost 11hrs/day for 365 days/year. Even if your business did incredibly well, you spend 20 hrs/day knitting newts to sell. This would still be a dismal situation. Though you would be making more money, it would still be directly correlated to your personal sacrifice. All the money in the world doesn't matter if you are busy knitting newts 20 hours/day.
Now, there is absolutely nothing wrong with creating a business to create yourself a job, but it is an incredibly important distinction. It is important to understand the goals the business you are building from the very outset. Be sure to control expenses, price, and plan accordingly. You don't want to end up furiously knitting newts, making only $12/hour. This is a tough place to be, because you are trapped into the prices and expenses, without the margin necessary to hire people, or accumulate the cash necessary to invest in infrastructure. You are forever knitting newts by yourself, for $12/hour. This can be avoided (or achieved) with proper planning.
There is more in this topic in my previous post about building a scalable business
As always, there is much more to come on this topic. Stay in touch.
EJ
Deconstructing the Challenge (pt. 3) – Eureka!
Read Time: ~3 mins
Once again, the goal is to make $47,000 per year, as a full-time student. We have been through every traditional method of making money, and a slew of rather nontraditional ones as well. We have been through drug dealing, blood donations, and swim lessons. They weren't very promising for reaching our goal.
There is a fundamental problem that underlies all of these different options. An assumption that leads most of the world to lead lives that are constrained by self-imposed limits. You may notice that almost every potential income calculation was in comparison to a unit of time. The problem is how people perceive the relationship between money and time.
Most opportunities for employment or methods of generating income involve sacrifice, most commonly time, but in our examples you would also sacrifice your vitality (blood and plasma), safety (drug dealing), etc. Most jobs, from the highest level officers, to minimum wage laborers, pay you for your time (which is worth more depending on your skill set and knowledge base.) As the previous two posts worth of math have shown, this is probably not a viable way to create the kind of income that we are looking for. The reason is that none of these methods are scalable.
Not scalable means that there is a direct, one-to-one, correlation between the time that you put into making money, and how much you receive. For most college students, and many people worldwide, they do not have the skills or reputation to create a substantial amount of income just by trading their time for money.
So we have to challenge this base assumption, we have to escape the endless cycle of the cash-per-hour way of life. So if income generation is our goal, let’s take a look at someone at the extremes of success. Pick someone rich, the people who are among the richest in the world: Bill Gates, Warren Buffet, Oil Sheiks, Ted Turner, etc. They all own their businesses (or did, before going public).
Do you think Bill Gates would make any more money on a day that he goes into the office than on a day that he does not? Hell no. His income is largely independent of how he spends his time. This is not a characteristic that is only because he has thousands of employees or a giant company, this is something that is very possible even for one savvy person starting a business.
It's all about building a scalable business. That means that your business functions in a nearly identical way whether you have one, ten, 1,000, or 10,000 customers. There are almost infinite options for this; almost any business can be scalable if framed correctly. But all of these options are dependent on how you, as the business owner, organize the company. The key to successful business practices, as far as creating a scalable company that suits our purposes, is to organize it in such a way so that it does not depend on your time.
There will be much more on this topic in future posts. For now, this is the main take-away: In order to generate significantly above-average income in less time, it's crucial to create a highly scalable business to generate high levels of income from a standard time investment.
More to come... stay in touch!
EJ
Deconstructing the Challenge (pt. 2.5)
Read time: ~3 mins
Ok, so it seems that I overlooked some options for creating income. How about investments? People seem to be making lots of money in the stock market, right? Why don't I just hit a long ball there, and be done with it? Lets take a look...
So if you wanted to play the stock market to try, to make some serious money, there are a number of considerations. First, you can only play with, and thus get returns on, however much you already have (aside from 'margin trading' - another thing altogether) . For most college students, and I suspect most people overall, there is not a lot of spare cash laying around. What kind of money are we talking here?
So an uncommonly awesome stock portfolio would return about 10% annually(this does not take into account trading cost, taxes, etc.). Individual stocks could do better/worse, but overall a well-diversified portfolio doing well would return 10%. So lets use that return. How much money would you need to invest, in order to have that 10% return earn us $47,000 each year? To return 47k, you would need to have $470,000 invested in the stock market. Almost a half-million dollars. Probably not a realistic scenario. If you do have that kind of cash lying around, rock on. You should probably stop reading this and go buy another car.
This is not to discredit the stock market. It is a great institution, and a great investment (usually) for long-term investments. However, unless you are very knowledgeable, and very dedicated to making short-term gains in the market, it is probably not very feasible. (When I say knowledgeable and dedicated, I mean have a serious working knowledge, and work on it full-time, as a day job.) I am proceeding under the assumption that we do not want to just sit in front of a computer all day, following stocks. I have a few fellow students that I know that do or did participate in the market at this level, and let me assure you it is not highly profitable. In fact, it is as likely to lose your initial investment as it is to increase it. I am not interested in potentially losing money, over which I have little control. Lets assume that you don't either. No one should ever be in the market with money they could need in the next five years.
This conclusion includes other, similar investment areas like Currency Arbitrage, Commodity Trading, and Real Estate. All viable areas of investment. The point is, there are millions of ways to make millions, but not all of them are suited for taking on our challenge.
Final word on stock and other such investments: Awesome, great and necessary. However, not for our purposes. The market is not, and is not to be perceived as, a get-rich-quick method. That is a very, very dangerous misconception. You have been warned.
Thanks for reading...Conclusion is next to come!
EJ
(Much credit to my father for inspiring and advising on this post. And in appreciation for a lifetime of finance lessons.)