Paying yourself first

Discussion in 'Investor Psychology' started by Xenia IM, 14th Mar, 2015.

  1. Mr. Fabulous

    Mr. Fabulous Thought Criminal

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    The truly wonderful thing about the technology age is that you can start a part time business, with little (or even no) capital and build it up whilst still working.
     
  2. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    Only exception being when operated in conjunction with a highly positive cashflow venture.
     
  3. Rixter

    Rixter $uper Investor (Retired)

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    How can some one pass comment on someone else's judgement and experience when they them self have no idea of that persons experience in the first instance. That in it self states far more about one's self than the comment being made - maybe a invaluable business lesson in itself if one is hoping to become successful themselves one day. :)

    I have run/owned conventional type business's in the past and have digital business's operating now.
     
  4. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    So true.
    Extremely low risk play with unlimited potential reward.
     
  5. MTR

    MTR Bling Bling

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    I like this idea very much, though no plans to start any business venture, other than what I am currently doing with property and that is enough for me today:)
     
  6. Rixter

    Rixter $uper Investor (Retired)

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    This is how Dr Geoffrey Edelsten originally created his wealth before falling foul with the law.
     
  7. Rixter

    Rixter $uper Investor (Retired)

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    Exactly....the internet is the cheapest place to fail in business.
     
  8. Rixter

    Rixter $uper Investor (Retired)

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    Ever thought about starting a digital online type business?
     
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    I understand what you're getting at, but keep in mind that Virgin Australia deliberately ran at a loss for years in order to gain market share. It could be argued that they employed negative gearing as part of their business plan. It happens all the time.

    The difference between Virgin and most property investors is that they understood up front how and at which point they'd make a profit. A lot of property investors simply think the money will come, they don't plan for it.


    I also don't quite agree with the previous statement that business is less risky than passive (property) investment. Even when most people fail with property investing, they tend to walk away with something if they stick at it for a couple of years. The failure rate in business is significantly higher and when business fail, there's often a trail of bad debt left behind. People do have better odds of succeeding the second time around, but the same can be said of property investment.

    There is definitely potential to generate more cash flow from business. This is the reward which is generally higher, but so are the risks.


    One of the 'pay yourself first' things I believe business owners should try to do as soon as possible, is to actually pay themselves a salary. Many new business owners simply take money out of the business when they can afford it. If you can pay yourself a regular salary, your cash flow forecasting will almost certainly improve, and odds are that you'll probably pay yourself more in the long run. Obviously the business should only pay the salary to the owner that it can actually afford on an ongoing basis, but that's all part of good budgeting and planning.
     
  10. cimbom

    cimbom Member

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    Yep, I have a few ideas. Need to look into it a bit more.
     
  11. MTR

    MTR Bling Bling

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    Peter, I think some good points, though I also know when starting out in business many business owners don't pay themselves because it is dependent on their cash flow etc and its probably quite normal in the early stages.

    Paying a regular salary and increasing this would be totally dependent on whether the business grows and is successful.

    There are plenty of business' in struggle street at the moment.
     
  12. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    Yep, you can go afford to go "bankrupt" multiple times before you hit the jackpot.
     
  13. Xenia IM

    Xenia IM Property Manager

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    The great thing about struggling businesses is that there is always "something" that you can do to trade out of it.

    I cringe when I see tribunals giving tenants multiple chances when they are already $2000 - $3000 in debt for arrears, if they do not have investments or businesses set up, there is nothing an individual can do to reduce that debt - more savings maybe but that mean "going without".

    With established businesses, you just jump on the phones, increase sales training, get more clients - add another product to offer clients, there are endless creative opportunities to increase cash flow and trade out of debt.

    the ones that don't do it just don't know how - it again comes down to a mindset thing.
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    I completely agree and I"m not suggesting the salary needs to be what the person is worth, but it should be something. It took me years to figure this out myself, but when I did it improved the way I ran my business.

    The right amount depends on the business owner and it can be reviewed periodically. It can even be $10 per month, at least this makes you put the right book keeping process in place.
     
  15. Mr. Fabulous

    Mr. Fabulous Thought Criminal

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    Just thought of a way that this might be possible. Sell equity to one or more of your people. Not for everyone and certainly not simple, but could be a workable solution.

    Although, I wouldn't want to purchase equity in a business from an owner that wanted to hand 100% of the responsibility off to me. If I have 100% of the responsibility, I want 100% of the equity!
     
  16. Mr. Fabulous

    Mr. Fabulous Thought Criminal

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    I understand exactly where you're coming from Ace. Then my initial reaction to the proposition is 'Why not just plow all your capital into the highly positive cashflow venture?'

    There's a reason astute business people don't pour capital into businesses that lose money year on year.
     
  17. Mr. Fabulous

    Mr. Fabulous Thought Criminal

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    Yes, but at the same time, it doesn't make it a good business strategy. They got a massive cash injection upfront in order to build the business to the point where it could be listed. They then listed at $2.50, immediately after which the price steadily fell. It then recovered to reach a high of about $2.80 briefly until it started (again) to fall steadily and has been languishing at 20% of its original value for years.

    Here is the chart for the share from launch: https://www.google.com/finance?q=ASX:VAH&ei=YIoPVbmxIaqOjALI54DwAg

    So the seed investors made out like bandits and everyone else who invested post IPO is doing... not so well. If this was an investment property portfolio, do you think the owner of said portfolio would be in a position to retire?

    You could say: 'Yes, but people choose to purchase the shares, no one forced them.' But we're not talking about investors, we're talking about business owners implementing a strategy of deliberately losing money for years. Personally, if I was looking at a proposition and this was part of the strategy, I'd pull a Buffett and run in the opposite direction!
     
  18. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    Simultaneous accumulation phase of assets for future growth.
    Negative gearing can still be neutral or even slightly positive cashflow after all deductions.
     
  19. Mr. Fabulous

    Mr. Fabulous Thought Criminal

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    Hi Ace, that's a good point and I think reflects perfectly why property investing is not a business. For an investor, putting money into a property that loses money year on year, with the hope of receiving capital gain at some point in the future might make sense, but makes zero sense for a business.
     
  20. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    I'm kind of inclined to say that this stuff happens all the time. The wealthy seed investors make out like bandits, take their money and leave the masses to hope to make money where they can. :(