Is your business an investment or a lifestyle?

Business owners tend not to think of their business as an investment. 

More often than not they’re a ‘hands on’ owner, usually working hard in the business they founded, managing the team and driving the business forward.

An investment?

Not really. Sure, they may be a shareholder and take dividends on top of their salary but typically the business is their meal ticket. They run it as well as they can, they draw an income (maybe not quite as much as they’d like) and often there’s not much of a surplus after that.

So really it’s a lifestyle business.

They enjoy it (most of the time) and it pays the bills but is it a saleable asset? To have value the business needs to make a profit after allowing for replacing the owner’s drawings with a ‘market rate’ salary. In other words if a competent manager was hired to replace the owner, what profit would the business make? If the answer is nothing or a very small figure, the business does not have a great deal of value.

All is not lost though.

Lifestyle businesses can transform themselves into a business that is a genuine investment. A business that is resilient and sustainable and generates a profit without the day to day input of the owner.

It requires robust processes and systems and a strong and capable management team. It won’t happen overnight. It needs a plan and consistent effort.

A profitable business not reliant on the owner becomes a business worth keeping or perhaps selling to a buyer who can see a healthy return on their investment.

So thinking of your business as an investment can be a good thing. Transforming it into one is even better.

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Learning from the Babylonians

If someone asks me to recommend a book on personal finance I choose George S. Clason’s, ‘Richest man in Babylon.’ 

I’ve given copies to my kids (I’m not sure if they ever got round to reading it) and to several other friends and acquaintances over the years.

Clason was born in 1874 and started writing this book as a series of pamphlets in the 1920s. The pamphlets were circulated by banks and insurance companies and became very popular. Eventually they were compiled into the famous book.

The book is a series of stories which purport to draw on the wisdom of the Babylonians, some 6,000 years ago. They built a prosperous and successful city and dynasty that survived for centuries, founded on principles of trade and sound financial management.

The principles are timeless and if followed, with application and some luck, over a period of time should make anyone wealthier.

Here is a brief summary of the 7 rules for acquiring and retaining wealth as described in the book:

1. Start thy purse to fattening.

Simply put, save 10% of what you earn. Easy if you have a decent income, less so if you don’t. Very true, but Clason argues that whatever your income, regular saving is key. 

2. Control thy expenditures

Self explanatory this one - having a budget and sticking to it. Save the 10% and make sure you spend no more than the remaining 90% each month

3. Make thy gold multiply

As the 10% builds up into a reasonably-sized pot you need to make this work for you and generate an income. In today’s world Clason would say speak to an Independent Financial Advisor or propose investing wisely based on knowledge of likely risks and returns. He guards against. 'Get rich quick' schemes.

4. Guard thy treasures from loss

Clason’s view was that you should ‘protect your principal, ie if investing £1,000 make sure this is protected and is your minimum return. So under this rule the stock market or property investment would be ruled out. I suspect he might modify this rule in today’s world but the principle of being cautious about losses still holds true.

5. Make of thy dwelling a profitable investment

Again, self-explanatory but easier said than done for youngsters in the current housing market. House price inflation has outstripped wage growth for many years making it harder to get a foot on the housing ladder. My personal view is that it is still worth making the stretch to buy if at all possible. Government-backed incentive schemes can help and once on the ladder things should improve over time if household wages continue to grow.

6. Insure a future income

In other words, make sure you have some income for when you no longer work. For many of us this is an employment pension, supplemented by State pension. For the self-employed pensions often get neglected, especially in the start up years. Thinking ahead and providing for this well in advance is sound financial planning

7. Increase thy ability to earn

Learn a new skill, get a new qualification, keep learning. We know that pays off and increases earning potential in the longer run

That’s essentially it. The stories bring the rules to life and keep them in the memory.

By a mixture of luck, a fortunate upbringing and some mistakes made along the way I’ve kind of fallen into doing these things consistently over a period of time.

They’ve worked for me and I think can work for others too

Babylon may be no more but the Babylonians certainly knew a thing or two about the acquisition and retention of wealth.

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What's your dream income?

Earning without working or 'passive income' is many people's ideal. Like the guy in Nick Hornby's, 'About a Boy' whose dad wrote a hit pop song and he was able to live a life of leisure on the royalties.

So how do you start to acquire passive income? Many people in employment (and more now with the Government's pensions auto enrolment initiative) will be putting funds aside into a pension. For most, that, along with the State Pension will be their passive income in retirement.

But what about passive income before retirement age? How can we start to build up investments which generate income whilst we are still young enough to enjoy it?

I like George S Clason's book, 'The Richest Man in Babylon'. It's full of tips about thrift and personal financial management purportedly based on the wisdom of the ancient Babylonians. Two tips which have stuck with me are (and I might be paraphrasing here), 'Pay yourself first' and 'Save 10% of what you earn'.

'Pay yourself first' means that you put some money aside for investment before you start paying the household bills etc. That is top of the list and gets done every month. What's left is to live on. 10% is his suggested minimum for setting aside. This is easy to say and much harder to do, particularly if finances are tight. His point is that 10% of even a small amount will not be missed and over time will accumulate if invested wisely.

So let's look at someone earning £30,000 after tax, or £2,500 per month. Paying themselves 10% before they do anything else would generate £3,000 over a year or £250 per month . Within a few years this could build up to a sizeable pot. Let's be clear this is not for a holiday or to put towards a new car. This is for investment, to generate a passive income. Sure, the £250 will be missed but Clason's point is it will not be missed as much as we think. Most people will adapt and reduce their discretionary spending.

What to invest in is a separate question and will depend on a number of things. There are lots of tax incentives for some investments in the form of ISAs, LISAs, Help to Buy ISAs etc. Clason suggests taking some time and doing some research to find the right investment for you. An Independent Financial Advisor can help devise an investment strategy suited to an individual's goals and attitude to risk.

Generating a passive income stream is not easy. It takes discipline and sacrifice but it can reap significant rewards and potential escape from the drudgery of work. Starting early is key so take a tip from the Babylonians and 'Make thy gold multiply'.

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