Bigg success is life on your own terms. You are the entrepreneur of your life. Entrepreneurs look at the world through a different lens than do large company CEOs.
For example, large companies and small companies use different financial models. Large companies generally have the ability to raise large amounts of money when they need it.
For small companies, it’s much more difficult. So it’s more critical for small business owners to watch their cash flow. For us as individuals, our financial model is much closer to the entrepreneur’s.
The two decisions
There are two types of decisions which we must think about: investing decisions and financing decisions.
For large companies, these two types of decisions are independent. They decide what they will invest in. They determine how they will finance their firm.
In an entrepreneurial firm and for us as individuals, these decisions are interdependent. We invest in the things we can finance. It could be a new business or a piece of real estate. But it could also include a new car or a new house.
If we have an idea for a project, we first must either have the needed financial resources already available or we have to sell someone on funding it.
If neither of those is true – if we don’t have the money or we can’t sell someone on funding it, we can’t do the project.
Now let’s look at four ways to think entrepreneurially about your personal finances:
Entrepreneurs understand that they have limited resources. They recognize it, but still make the most of what they already have. You can carry that same attitude into your personal finances.
This is what we call it when a business saves money. Pre-fund your projects when possible. If you know that you need financing to make an investment, why not finance it yourself? That’s financial freedom.
If cash is king, reserve borrowing capability is queen.
Protect and preserve both your credit rating and your credit capacity. Then you’ll have the ability to fund your bigg opportunity when you see it.
Create value with your projects
Simply stated, Value = Cash Flow ÷ Cost of Capital.
Entrepreneurs must understand that capital comes with a cost. It may mean giving up a stake in the company. It may mean sharing the money with partners or bankers. In all cases, it requires a reasonable return on the money invested.
As an individual, your capital comes with a cost as well. You have to share some of the money you will make in the future with your funders. So just like an entrepreneur, you need to understand if the benefit you will receive from the project makes it worth the money you’re investing.
To determine this, look at the incremental cash flow from any project you consider. If the return on your investment exceeds the cost of the capital needed to fund it, you should do the project and vice versa.
Let’s say you have an old car that’s requiring a lot of repairs. You see that you can save money if you buy a newer car and pay interest. That’s a project that’s worth doing.
Smart entrepreneurs and wealthy people look at every cash outlay as an investment. They want to make sure they’re getting enough value out of the investment to make it worthwhile.
Now that value may be somewhat fuzzy – like it makes you happier or adds to your sense of well-being. In any case, thinking entrepreneurially about your money leads to bigg success.
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Thank you so much for reading our post today. Please join us next time when we’ll talk about the long and winding road to bigg success. Until then, here’s to your bigg success!
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(Image in today's post by srbichara)