Category Archives: new business

The Coming Storm

What do you do when a storm is coming? If you are tired of hiding in the nearest ditch as the winds howl overhead, you might think about building a shelter while the sun is shining.

The sun is shining right now, believe it or not. For all the turmoil in financial, housing, auto, and insurance markets, business is pretty much moving along as always. By turning on the cash spigot, the Federal Reserve has pushed back the clouds–for a time.

The storm that is brewing has not been tamed, however. This morning, we hear that the deficit reached a record $1.6 trillion for the year ending Sept. 30. Over the next ten years, our national debt will increase by $9 trillion. All this assumes that the health care program now under consideration will not add to the deficit. Mmmmmmm…yeah.

When will all this come crashing down? And when it does, where does that leave you and me? No one can tell for sure whether our economic world will end in fire or ice. Death by fire, hyperinflation, seems the most likely to me. However, to to paraphrase Robert Frost, death by deflation will suffice.

Our economic world revolves around billions, perhaps trillions, of transactions that occur every minute around the globe. We have bread at the bakery only because our local baker can predict the near future. It makes no sense to buy dough to make bread if the price of bread can rise or fall radically in a matter of days. It is impossible to hire employees not knowing whether their wages will even buy a pair of socks next week.

The shelter we all need is between our ears. Those who learn to be entrepreneurs while there is time will survive, even prosper, as the economy melts or freezes. The rest will likely succumb to the elements. Whether we see an inflationary or a deflationary storm, a few basic things can determine which camp you fall into.

First, get interested in your finances. Many of us were raised soon enough after the 60’s to inherit a disdain for material things. We view with suspicion those who focus on wealth, thinking them shallow and self-centered. Horsefeathers. Money is one human value among many, but one without which the others soon dry and wither.

Second, pay off any unproductive debt. Unproductive debt is the kind that costs you money but does not make you any. For example, that car you bought during the Cash for Clunkers program is unproductive debt. And don’t try to tell me it will save you money over your old car. Run the numbers and see. Credit cards fall into this category as well, unless they were used to finance a business or other investment that makes more than you are paying in interest. By the way, read your statements closely. Banks are doubling and tripling interest rates, even on people with perfect credit. Productive debt can become unproductive debt overnight.

Third, expand your investment horizons. The lazy person’s retirement strategy–chuck money into a retirement account and forget about it–does not work any more. Learn which investments hold up better during hard economic times. Find out why holding only stocks, bonds, and mutual funds is extremely risky.

Fourth, make more money and keep more of what you make. I don’t look for the government to back off on spending. Instead, I expect them to raise taxes to unprecedented levels as they try in vain to save the economy. What are the easiest taxes to get? That’s right. Your salary and mine. Having an extra source of income from a business allows you to shield a larger portion of income from taxation.

When darkness covers the land, it is going to require every bit of wisdom and fortitude we can muster. No matter what happens, though, we human beings need each other. Smart people who learn now will be able to look around the rubble and see limitless opportunities. Others will wallow in self-pity wondering what happened. Which one do you want to be?

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Our Greatest Moments

I was twelve years old when Neil Armstrong said simply, “the Eagle has landed.”  Barely able to breathe, I had watched as fuel ran low and dust boiled up near the lunar surface.  I was as relieved as if it had been my father out there in space attempting the impossible.

Things did not always turn out well in these adventures.  I had listened  in horror two years earlier to the news that Grissom, White, and Chafee had died on the launchpad during training.  I knew even then that audacity, confidence, and ability were required to pull off such a magnificent achievement as landing on the moon.  What I did not know was that every time we slip the surly bonds of earth, a demon is loosed from hell to exact its price in terror.

My fascination with flight had started with the poem “High Flight.”  A short film of an F-104 Starfighter was played regularly on TV in those days as the poem was recited.  There were no words at the time to describe how watching that silver craft dance in the sky made me feel.  I just knew deep, deep down that something supremely significant, almost holy, was happening when a man could put on a helmet, get in a jet, and experience heights that his ancestors could not even dream of.

Now, in real time, I watched as Armstrong came down the ladder and stepped on the lunar surface.  I felt a little guilty for this, but for all the joy and admiration I felt, I also could not help but wonder what would happen if that lunar module failed to fire.  Surely the image of death by suffocation on that lonely sphere had entered these astronauts’ minds.  Why take that chance?  Why not be content with life on Earth?  Yet I knew that if there were a reason for our existence, this was it.

As I earned my private pilot license many years later, I experienced a pale reflection of what that terror must have been like.  More than once, I nearly soiled myself as I hit a weird air pocket on final approach or had some mechanical problem in flight.  There was no reason for me to fly.  It would never save me money in travel, nor would I ever be a commercial pilot.  I just wanted to experience, if even in a distant way, the feeling that Starfighter pilot had as he vaulted toward the heavens.

The demon of terror visits only those who invite him.  He does not bother with that mass of people who betray their human heritage by always playing it safe.  He knows that only the worthy rate his efforts.  For you see, he is the only one who can grant the gift of achievement.   A life worth living cannot be lived from the safety of a recliner.  No terror, no victory.

We do not have to be one of the dozen who have beheld another world firsthand to ask the demon his blessing.  We can do it as we confront our fears about life, love, wealth, and the scores of other things we live through each day.  Choosing to be a better spouse is scary.  Earning more money is scary.  Following our dreams is scary.  If we are not scared at least a little, we aren’t really living, and the demon waits for the next truly human soul to venture out and do something spectacular.

His gift?  Ask the ghosts of Grissom, White, and Chafee.  Ask the entrepreneur who has gone broke several times before succeeding.  Ask the author who has languished in anonymity for years before writing a best-seller.  They will tell you that the monstrous apparition that appeared as a demon left as an angel.  They also know each of us must confront him alone.  Will you?

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The Time Value of Money

We often hear the phrase “the time value of money,” but what does that actually mean? Fundamentally, it means that money now is “worth more” than money later. For example, if I were to put $100 in a savings account at 1% interest, I would have $101 (not including compounding) at the end of a year. How can that be? How does money get more valuable?

It doesn’t. The money itself, when there is no inflation or deflation, retains its original value. In order for there to be any return to money invested, it must be put to work. The only way money can be put to work is by using it to help transform one thing into another thing that is more valuable.

For example, if I take $100 to buy 100 plain wooden blocks and some paint, then invest my time painting the blocks for decorative purposes, I can sell them for, say, $120. The “extra” $20 is the result of my ingenuity and effort. I take cash, some raw materials, and my time and combine them to create value that did not exist before.

If I have an idea for creating such a product, but do not have enough cash on hand to purchase the plain blocks and paint, I cannot create value. A banker or someone else that lends money might recognize my idea as valuable and offer to lend me the money. Say I borrow $100 and agree to pay the lender $105 at the end of a year. I still make $15 on the enterprise. The bank also made money–$5.

This brings us back to our original example–the 1% return on a savings account. For nothing more than the trouble of depositing money in the bank, it pays me 1% It can do so only because it then takes my money and loans it out for 5% It can do that only because someone is willing and able to take that money and create more than 5% value with it.

Now, who makes the most money? We can figure this out by reasoning that a bank will never make money if it lends it out for less than it pays depositors. So the owner of the savings account necessarily makes less money than the bank. What about the business owner? If he/she makes less than the interest rate paid to the bank, that business is a losing proposition. In other words, the business has to make a 5% return just to break even.

This is of course a drastically simplified description of rates of return. The point is that the business owner has the greatest potential of making money. Note that I said potential. Business ownership entails risk, but it is essential for there to be a return on that $100 at all.

Whenever we invest our money, it provides us a return. Behind that return, there is a business, or multiple businesses, actually doing the work of creating value. If the investment is stable and strong, it can be a good strategy for providing for the future. It will never match the potential of a self-owned business, though, because too many other people take their cut first.

Wouldn’t you rather get the biggest cut on at least some of your income? I would, and I’ll bet you would too. Don’t wait, start learning now.

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By Land or by Sea?

Paul Revere made his famous midnight ride to warn the countryside of an attack by the British. He asked his friend, who was to be in the North Church tower, to light one lantern if the attack was by land, two if by sea. Seeing the first light flicker in the belfry, he leaped astride his horse and whirled to take one more look. A second flame! The attack would be by sea and Revere set out at a thundering gallop to take his place in history.

I wish we had someone in a tower who could look and listen for the shuffle of British feet manning the boats on shore. We are not so fortunate, though. We know only that our nemesis–an economic meltdown–is lingering in the dark, waiting to attack like our oppressors of that time. Whether it comes by land or by sea, we do not know.

In a sense, all of us are looking toward that tower. Like the Americans of Revere’s era, we have endured the harassment and insults of arrogant and incompetent tyrants. We know the big attack is coming, but from where? Deflation? Inflation? A major depression?

Our leaders think that injecting trillions and trillions of dollars of paper money into our economy will keep the enemy at bay. It may, for a while. In the end, though, the bill will come due and the unholy legions will come calling. When it does, where will you be? Asleep in bed armed only with a sheet of paper money or in a financial fortress built of solid knowledge and sound discipline?

Wake up, my friends. Midnight is upon us.

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Uncovering Your Hidden Value

All business operates on a simple premise. One person creates value for another. Outside of gift-giving and other types of benevolence, the creator gets paid. He or she receives value, often in the form of money, and both partners to the trade are better off than they were before.

Many forms of value are obvious. Clothing, shelter, food, and the people who create them are valuable because we need those basic things to survive. Music, paintings, sports and other non-essentials improve our lives even though we could live without them. But they too are commonplace and obvious.

Many people who start businesses are stuck in the obvious. They try to provide more of what others are already providing quite well: dry cleaners, groceries, web design, etc. There is nothing wrong with opening this kind of business. If you can do it better, faster, or cheaper than your competitors, you may do well. But why butt heads with the rest of the market?

Each of us has value to others that may have gone unrecognized. We may know how to do something unique or make something unusual that is valuable to 0thers. But how does one discover these hidden veins of value? Start by brainstorming fifty ideas for businesses. Don’t criticize or question any idea, just write down fifty. Even if some turn out to be “obvious” keep writing. Chances are, you will find something valuable that only you can provide.

The next step is refining your idea into a business model. A business model takes your initial idea and builds around it a “delivery system” that allows you to get paid for what you do well. More on business models next post.

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What is an Asset?

Accountants, financial advisors, and the popular press talk constantly about “assets.” Most people have only a vague notion of what an asset really is. My favorite definition comes from the book Rich Dad Poor Dad. An asset puts money in your pocket. A liability takes money out of your pocket.

Let’s think about that a minute. What kinds of things take money out of your pocket? Well, that bass boat sure does. Unless you make a heck of a lot of money fishing, more money goes into the monthly payments and upkeep than comes out in the form of income. If you are like most of us, you don’t expect any money to come your way on account of that boat. That, friends, is a liability.

This is not being judgmental, by the way. If you enjoy fishing, buy that boat by all means. As long as you have the money, live it up. In the case of a pleasure boat, no one really expects to make money. But what about your house? Haven’t you always been told that it is an asset? The truth is, it takes money out of your pocket too. Even if you have paid it off, you are still spending money on upkeep, utilities, and insurance. That makes your house a liability. But don’t you make money when you sell? Try that about now. And even if you could sell it, where would you live?

The only thing that truly counts as an asset is something that puts money in your pocket. Assets are money machines. When you put some amount of money in an asset, you expect to receive more money than you put in at some point in the future. There are two ways to accomplish this. One is for the asset to throw out a stream of money like, say, a savings account. (I know. It’s not much of a return, but stay with me.) As long as you keep that money in the account, you earn money. Another example is a stock that pays a dividend.

The second way for an asset to make money for you is appreciation in value. Imagine buying a Silver Eagle coin for $15 and selling it six months later for $20. This type of asset makes you money, but you have to sell it to realize the gain. House flipping was a popular form of this type of investing until the housing market crashed.

A successful business is a tremendous asset. By building a business, you can realize both kinds of return. A business creates an income stream as long as you own it. If you build it the right way, you can also sell it at some point for much more money than you put into it. Another great thing about building a business is that you can put much more than just money into it. You can put your know-how, your time, your social network, and your creativity into it. The bank does not care what I know or how hard I am willing to work when I open a savings account. I park some cash and it works for me for the rate determined by the bank, end of story. A business gives me an opportunity to capitalize on things other than money.

It all comes back to value. All businesses operate on the principle of creating value that other people are willing to pay for. Many times, we vastly underestimate how valuable we are to others because we are stuck in the J-O-B trap. Chances are, you have much more potential value than you realize. Next week, we’ll take a look at some ways to tap that hidden value.

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