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The One Piece Of Financial Advice I Wish I Knew Sooner

Aaron Hoos

If I could go back in time, that would be shocking.

But assuming I could do it, here’s the one piece of financial advice I wish I knew sooner:

Passive income is king.

I grew up in a household that believed in the value of hard work. My parents worked tirelessly to provide for my sister and I. (Thanks mom and dad!)

I appreciate the many great lessons I learned from them.

Unfortunately, there was one lesson that I wish I’d learned differently and if I could go back in time I’d tell myself this lesson:

(I’m not saying this to disparage my parents or their hard work; they were raised in households that taught them that lesson too.)

So, what is the better way?

THE BIG LESSON…

Your time is the most valuable commodity you have. It’s there one moment and gone the next. And, many people trade their time for dollars in a job. Unfortunately, when you do, that time is lost and you miss out on other ways you could have used that time.

Passive income allows you to continue making money without spending your time to do it, which gives you the freedom to use your time for other things… whether that’s spending time with family or whatever you want.

To illustrate, compare two people:

Person #1 works at a job. For simple math, let’s say they earn $50,000/year by working 40 hours a week. At the end of the year they’ll have “spent” 2,000 hours (40 hours a week for 50 weeks) to make that money.

Person #2 creates passive income. For simple math, let’s say they create something that earns them $10,000/year. They put in some hours and maybe a financial investment early in the year, and then this cash-flowing asset generates them money for the rest of the year with little or no additional input.

Let’s tally their results from the year:

Person #1 invested 2,000 hours and got $50,000 in return. They’ll never get that time back but they have money to spend.

Person #2 gave some up-front value (of time and money) and got $10,000 in return… but they also got 2,000 hours throughout the year.

… and that is the key. Because they can spend those 2,000 hours with family and enjoying life, but also building more passive income assets.

So, at first glance, Person #1 is financially better at the end of the first year but Person #2 has been able to enjoy (not sacrifice) their time PLUS they can use that time to create more cash-flow.

The following years will look much different:

Person #1 will continue to be trapped in a cycle of “spending” 2,000 hours to get $50,000. Although they were ahead in the first year, they are trapped in the same cycle the following years and largely dependent on raises or promotions to increase that annual income.

Person #2 is free. They can spend their free time each year creating assets that generate passive income, for which there is no ceiling; meanwhile, the time they have available can be spent on whatever they want. Simply put, Person #2 has way more options.

And at the end of their life?

Person #1 ends their working years and hopes they have saved up enough to live out their golden years.

Person #2 can retire (actually, they’ve lived a life of near retirement already) and their passive income assets continue to give them money through retirement.

PASSIVE INCOME CREATES FREEDOM AND OPPORTUNITY

That’s the financial lesson I wish I learned when I was younger: many people trade hours for dollars but you don’t get those hours back and you can end up trapped trading hours for dollars. The better choice is to build passive income to create freedom and to create more opportunities.

What kind of passive income can you create? Here are a few ideas:

I’m building all of these now, and I have been for a while. But I wish I’d known about the power and possibility of passive income sooner because it opens so many doors. It also gives options when things change: for example, when I was a lone freelance copywriter and I wanted to take a vacation, I’d put my clients on pause and go on vacation, then feel the financial pinch when I returned (since I didn’t earn any money while away). But now, thanks to passive income generated from the assets I have above, I don’t have to worry and I don’t have to dig into my savings to cover me until I’m generating income from clients again.

Wondering where to start? Start by figuring out something you do really, really well that other people want to know. Then capture that information in some way (such as a book or infoproduct) and make it available for sale, then market it to the right people. You may not make a fortune on that first thing but you’ll get a taste for the life-changing possibilities that come with passive income.

Even if someone else does the same thing you do and sells a solution for it already, you bring your own unique approach and personality to it. Start by building something and selling it for a low amount. Don’t try to get rich in one go. Sell it for a few bucks and learn from those sales; get testimonials and feedback, then improve and raise your prices.

SUMMARY

If you are wondering what the next few years of your life should look like, do yourself a favor and spend some of those years building passive income assets. You’ll get a taste of freedom and you’ll give yourself more options.

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The Small Business Financial Health Scorecard

Aaron Hoos

Your business might be making money, maybe even a lot of money… but that doesn’t mean it’s healthy. But keep reading because I’m sharing a Small Business Financial Health Scorecard that can instantly give you clarity to help you create a strong, profitable, money-making company that grows without stress.

But let’s start with the bad news…

THE BAD NEWS

The entrepreneurial graveyard is littered with companies that looked like they made money but were forced to shut down. To the uninitiated, it doesn’t make sense—how can a money-making company be forced to close its doors?!?

But those who have started businesses can tell you: a money-making business is not necessarily a healthy one. There are other financial factors, too. For example:

  • Maybe a business makes some money but not enough to survive on.
  • Maybe a business generates some revenue but its high expenses keep it from being profitable.
  • Maybe a business generates makes some money but its receivables are too high; it’s just not collecting enough of that money soon enough.
  • Maybe a business grows too fast and can’t get the money needed to buy the raw materials to assemble more of whatever it sells. (That one is surprisingly common, and, when combined with the receivables problem, it’s a business killer.)
  • Maybe a business generates a healthy income but the owner is so central to the income generation that they just can’t grow. (This was a problem in my business for a while.)

There are other financial reasons, too, but those are big problems. And they can be catastrophic.

So, how do you make sure that your company isn’t just making money but is actually healthy?

I’ve created this Small Business Financial Health Scorecard to review against your business. Use it to identify how healthy your company’s financials are and to get clarity on the ways you can create a financially healthier business.

SCORECARD OVERVIEW

Use the Small Business Financial Health Scorecard every quarter. (You may be tempted to use itmore often than quarterly but I think a quarterly effort gives you time to set goals, take action on those goals, and see results; whereas if you try to do it more frequently you’ll end up with a bunch of goals, too many actions to do, no time to do those actions, and no real results).

There are 7 key financial measures on the scorecard, and they describe how money is made, processed, and used in your business:

  1. Producing
  2. Processed
  3. Paid
  4. Propagating
  5. Predictable
  6. Profitable
  7. Passive

… in that order. (The order is important).

Here’s what they mean:

  1. Producing: Your business is generating revenue.
  2. Processed: Your business has systems in place to send invoices, follow up on receivables, process transactions, pay vendors, and pay taxes.
  3. Paid: Your business is actually collecting the money you are invoicing.
  4. Propagating: Your business grows and the money you are making grows as well.
  5. Predictable: Your business is bringing in money in a consistent way, ideally the same amounts on the same day of the week or month.
  6. Profitable: Your business generates more money than needed for all of the previous points of the scorecard, leaving extra money at the end of each month or quarter.
  7. Passive: Your business generates revenue without regular effort (perhaps best explained as a large, single up-front action that creates ongoing income, versus the need to trade hours for dollars).

SCORING

At the end of each quarter, go through each of these 7 points on the scorecard and score yourself. It will take less than five minutes but you’ll get a very clear picture of the financial health of your company, as well as some smart strategies to improve.

Here’s how to score yourself: For each one of the 7 financial health measures, give yourself a score from 0-4, as follows:

0 = “Nope”. (It does not happen at all.)
1 = “Not really”. (It happens some of the but time less than 50% of the time.)
2 = “Not always”. (It happens some of the time but less than 75% of the time.)
3 = “A lot”. (It happens most of the time but less than 100% of the time.)
4 = “Dialed in! (It happens 100% of the time, every single time, without fail.)

This is the other reason I recommend that you do this every quarter: you might have a really good month and score yourself a 4 on something in the month… but over a quarter it’s harder to sustain best practices so you get a better sense of how things are going on an ongoing basis.

So, let’s look at an example from a fictional company, just to see how the scorecard works:

  1. Producing: The company is generating revenue and the business is working at about 90% capacity, so they’d score a 3
  2. Processed: The company has some systems set up and is able to process most transactions, pay most bills easily, and usually pays taxes on time (but admittedly it’s not perfect), so they’d score a 3
  3. Paid: The company gets paid immediately so they don’t really have any receivable issues at all, so they’d score a 4
  4. Propagating: The company is is not growing so they’d score a 0
  5. Predictable: The company is making money but it comes in completely unpredictably so they’d score a 0
  6. Profitable: The company makes a bit of profit, on some things, but not a lot, so they’d score a 2
  7. Passive: The company’s money is completely tied to the amount of time that the owner spends in the company (and if the owner was away, no revenue would be generated, so they’d score a 0

Part of the value of the scorecard is that it balances simplicity with objectivity. In general, multiple people with the same level of awareness about a company should each be able to complete the scorecard and score roughly the same score, while also still keeping the scoring within a reasonable time-frame.

HOW TO ASSESS THE SCORE

When you score your company quarterly, you’ll assign a score to each one on a scale of 0-4. Ideally you’re aiming to have a company that hits 4 on each point (or, a mix of 3-4, which is probably more likely).

However, many companies won’t hit 3s and 4s across the board. Instead, there will be a variance. The scorecard will not only give you an overall picture of where you are weak and where you are strong, it will also help you to know what to work on first: once you’ve scored yourself, the next step is to find the “first lowest score” and work on that one for the quarter.

Here’s what I mean when I say the “first lowest score”: Starting from the top of the list (Producing) look down the list until you get to the financial measure with the lowest score. In the case of a tie, choose the one that comes earlier in the list. Let’s use the scoring example we’ve been running through so far…

  1. Producing = 3
  2. Processed = 3
  3. Paid = 4
  4. Propagating = 0
  5. Predictable = 0
  6. Profitable = 2
  7. Passive = 0

… then you start at Producing and go down the list, and you noticed that Propagating, Predictable, and Passive each share the lowest score (a score of 0). But, since Propagating is earlier in the list than the other two (it’s the first lowest score in the list) that’s the one you need to work on.

The reason is: you can theoretically work on any of the 7 points on the scorecard, whether a great score or a weak score, whether earlier in the list or later in the list, but the scorecard was put together in a strategic way that can help you build a stronger business by focusing on the earlier ones in the list first and dialing those in before moving on to the later ones, thus helping you build a strong foundation and then build a stronger business on that strong foundation.

HOW TO TAKE ACTION

Once you have found the first lowest score for the past quarter, create a simple action plan with a few achievable goals to improve that area. Here are some ideas:

  1. Producing: You need to work on your marketing and sales to get more customers coming through the door.
  2. Processed: You need to work on your systems and processes to make sure you can accept the money and pay your bills.
  3. Paid: You need to work on your invoicing and receivables to ensure that you are getting paid in a timely fashion.
  4. Propagating: You need to build a strong, self-funding growth plan.
  5. Predictable: You need to build marketing programs, promotions, and products, that bring in income regularly; you should also reach out to past customers especially during slow seasons.
  6. Profitable: Review your income and your expenses; look at how income increases and expense decreases will impact your financials.
  7. Passive: Build or invest in income-producing assets that “decouple” your time from your effort so that you can continue making money even if you are not working in your business.

Work on this action plan for the quarter and then score yourself again.

And again the next quarter.

And again the next quarter.

… and so on.

KEEP GOING

You’ll want to score yourself every quarter from now on, and keep those scorecards.

That way, you’ll create a baseline for the health of your company’s financials but you’ll also see how other changes in your business will impact your score. For example, perhaps you grow dramatically one quarter—that growth is great but could also break some of your invoicing systems and processes, so you may notice a higher score in Propagating and Profitability but a lower score in Processed or Paid. Constantly scoring yourself will keep you aware of the financial health of your business while also giving you a clear and simple strategy to growing a financially healthy company.

Consistent reporting on the financial health of your company with a clear plan on how to grow, all while keeping it simple. That’s the power of the Small Business Financial Health Scorecard.

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Case study: Increasing profitability with passive income

Businesses survive (and thrive!) by continually generating income. But as a business owner, it’s easy to get caught up in a vicious cycle of performing a service, getting paid for it, performing another service, getting paid for it, etc.

That turns into a treadmill because you become dependent on that income and if you are not able to do the work, the income dries up. Additionally, you can’t grow beyond the time you have available to perform the service.

Therefore, if you are a business owner who wants to grow your business, you need to do it with passive income. Passive income is sometimes misunderstood. Some people think of it as “do-nothing-and-make-money”, which is basically impossible.

Rather, you should think of passive income as “work-once-and-get-paid-on-an-ongoing-basis”. That’s a big difference and successful passive income generation does require some initial investment of time, money, and effort.

Building passive-income-generating assets for your business is a great way to transition your business from a active (service-dependent) income to passive income. (If you’re looking for some ideas about passive income, check out this blog posts 5 levels of content monetization).

One of my clients came to me with that very problem. She is a well-known expert on the topic of finances but she was on a “treadmill” of services — consulting and speaking — that prevented her from growing her business a lot more. She had published one book, which helped her gain that expert status, but it was time to do more.

I brainstormed a few different options to help her generate some passive income and the one we decided to build first was an e-course that people pay to take.

First, we built a free e-course that provided great content. Second, we created a paid e-course that provided an advanced version of the free e-course. With so many people attracted to the free e-course, we were able to promote the paid e-course to a targeted, highly-interested audience, and people started paying my client for the course.

Just that one course wasn’t enough to completely replace and exceed the income my client was generating as a consultant and speaker, but that wasn’t her goal. Rather, she wanted to create a steady stream of income that continually trickled in, which is what is happening right now as people subscribe to her e-course.

And the best part is: Now that this e-course has been built once, it runs automatically and requires very little effort on her part to ensure that it continues. So the investment she made once will pay for itself and continue to pay her over and over again for years to come.

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Passive income versus active income

In this blog post, I want to talk about the differences between passive and active income and how they relate to your business.

THE BASIC DIFFERENCE BETWEEN ACTIVE INCOME AND PASSIVE INCOME

Active income is money you earn that requires your effort.

For example, if you sell a service that you must first complete – such as freelance writing, graphic design, etc. – you are being paid for a combination of time, skill, and effort. And if you don’t put in that combination of time, skill, and effort, you don’t get paid. Or if you sell a product that requires some work on your part (i.e. to assemble or customize or ship), that is active income as well.

Passive income is money you earn without any effort on your part.

For example, if you write a book, you can sell it and earn passive income because you only need to write the book once.

UNDERSTANDING ACTIVE INCOME AND PASSIVE INCOME

Active income is commoditized. You get paid proportionate to the amount of time, skill, and effort you put into the product or service you provide. In other words, for every product or “unit of service” you provide, you get paid. If you want to make more money, you have to provide more products or units of service.

Passive income is a bit of a misnomer. It should really be called non-commoditized income. When brand new entrepreneurs hear the words “passive income”, they start to salivate because it sounds like you’re getting a ton of money with no effort at all. Experienced entrepreneurs know that passive income takes some work to set up and run… but it’s non-commoditized because the money you make is not as closely tied to the effort you put in. You can start an ad-based blog and put in hours of time in the beginning to add content and market it, but you can easy up in the future as traffic builds. Eventually, you can run the business with very little effort on your part.

A good example of the difference between active and passive income is to look at two different real estate investors.

  • One real estate investor flips houses. She buys a house, fixes it up and sells it. That’s active income because she gets paid as long as she’s buying, fixing, and selling.
  • A second real estate investor rents houses. She buys a house and rents it out. There is a little effort in the beginning to buy the house and maybe fix it up a bit, and there might be some ongoing effort to maintain the property and collect rent, but ultimately it’s passive income because the second investor gets paid on an ongoing basis for her initial effort even if she doesn’t buy and rent any more houses.

WHICH TYPE OF BUSINESS SHOULD YOU RUN?

Your ultimate business goal should be to build a passive (non-commoditized) business that doesn’t require you to put in an hour of effort to get paid for that hour. But realistically, you need cash flow first and it’s very easy to start up an active income business that produces cash flow. So if you’re just starting out and you need some cash, start with an active business but immediately begin building passive income opportunities (i.e. ebooks, ads, and rental houses) into your business model.

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Passive income for financial and real estate professionals

Most financial and real estate professionals perform a service for their clients (for example: investing in stocks, selling life insurance, searching for a home to buy, or listing a home to sell). This is “active income” because it requires you to be present and spend some of your time and talent to deliver the service.

Unfortunately, you only have 24 hours in a day so there is a potential cap on the amount of money you can make by providing services to clients. And in some cases, if you have multiple service offerings (as is the case of a financial advisor who also sells insurance, for example), you can end up overloaded with so much service-offering that you don’t have time to grow your business any more.

That’s where the passive income model comes in and it can help you to grow your income and it can give you a little more freedom to reduce your face-to-face time with clients, if you want. I also like the idea of passive income for financial and real estate clients because these industries can be boom/bust industries so passive income provides another revenue stream to help smooth out the peaks and valleys.

WHAT IS PASSIVE INCOME?

Passive income is another type of business model. It’s a revenue stream where you don’t have to spend the time delivering a service. Instead, you sell something else that is complementary to the services you deliver (I’ll tell you some of the options later in this blog post).

For that reason, there is less of a “cap” on your income potential because whether you sell one or one hundred, you still spend the same amount of time.

The name “passive income” is a bit of a misnomer because there is still work involved. (Side note: If you look around the web at passive income possibilities, you are going to find a lot of opportunities that requires some effort even if they promise no effort at all, and you are going to find a lot of failed entrepreneurs who didn’t realize that their passive income required some effort to be successful). Some of the work involved might include marketing and advertising, emailing, accounting, and team management.

But don’t get scared off! What makes passive income so attractive is that you can put in some effort but get a much larger, ongoing result than you would by working one-on-one with clients.

You can continue working one-on-one with clients but the passive income part of your business allows you to generate additional revenue and grow your business to the point where you can dial back on some of your face-to-face time-intensive services.

PASSIVE INCOME OPPORTUNITIES

For financial and real estate professionals, there are many different passive income opportunities. Here are a few that are popular:

These are some possibilities that I’m really excited about and have seen many of my clients succeed with. (Plus the following two blog posts give you some ideas to turn your existing financial or real estate business into a more passive income business: How to be a lazy serial entrepreneur part 1 and How to be a lazy entrepreneur part 2).

HOW TO GET STARTED IN PASSIVE INCOME

  • Look at your own skills and weaknesses. That can tell you a lot about what you’re likely interested in promoting. If you have a weakness in the business that you’ve overcome, an ebook on that topic might be good. If you have a weakness that you haven’t overcome, don’t focus your efforts on creating a passive income stream around that. If you have a strength in a particular area, spend your efforts on that. (Case in point: I don’t love managing other people so my passive income streams are going to be focused on things I can do. It’s not likely that I’m going to build up a huge staff of people unless I can get an Operations Manager involved very early).
  • List the problems that your clients come to you with already and find ways to solve those problems… for example, by writing something (a book or an ebook) or by promoting someone else’s services (as an affiliate).
  • Look at your systems and processes. Is there something you do well that makes you so successful? Perhaps it can be developed into a product.
  • Look around to see what other competitors are doing and add your unique twist to it. (Note: I’m not recommending that you steal the content or the idea!!! But if you see a real estate agent who is selling an ebook on how to prepare a home to be listed, and you have a better way to do it, you should write your own ebook on the topic.
  • Here’s a blog post about how to develop products that are complementary to the services you already provide.
  • Click through Amazon and see what popular books are for sale in your category. Do you have any insight that you can share on one of those topics? Even if you don’t have enough for an entire book, perhaps you have enough for an ebook.
  • Send me an email. If you’re at a total loss, I’m happy to help with some free email-based consulting to give you some ideas and get you on the right path.

WHAT’S NEXT

It never hurts to broaden your options. Make it a goal in the next few months to create one more income stream. It doesn’t have to be big, comprehensive, or perfect. But get something together and put it out there and build from there. In the short term, you won’t retire from a flood of unexpected cash. But it will give you more credibility and more opportunity.