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In theory, that is if everything works out, can someone explain to me how owning a small business e.g. a restaurant (yes I know restaurants are hard to run) can get you wealth? Is it by earning profits (minus operating costs) after all loans and debts are paid off? Again I'm only looking for the theory and trying to understand the business logic/process, thanks.
A business is successful when it serves it's customers well. When you serve your customer well they return or will continue buying your product. The result of serving your customers well is wealth. The result of a poor product or poor service is to eventually go out of business.
Small business has a hard time getting funding that's why it's important to allow small business to keep more of their profit so they can reinvest and grow. While big business has access to working capital via public funding (stock market).
Excellent book. This explanation helped me put a lot together and from those teachings along with taking action (taking risk) literally changed my life for the better. Some people don't like him but I suspect one of two things. It's not magic and takes action on your part including a major change in financial mindset that some people will never get or because his other books do get more complicated (he's a big advocate of real estate investing). Cash Flow Quadrant is about financial mindset though.
The middle class is told to go to school so you can get a good job "working for someone else" (E - Employee mindset) and they will never be able to shrug that mindset, other people simply aren't able, willing to give up "job security" and take the risk or willing to put the effort in.
The image below is called the cash flow quadrant. It's displays how people earn their money. E for employee and S for self employed are on the left. B for business owner and I for Investor is on the right.
Most people who start a business actually own a job (shown on the left side the quadrant below).
You as a employee (an E) exchange your time for money but you have only 24 hours in a day x 7 days a week. Your earning potential is limited by your time. In addition you as an employee are taxed the highest where "big" business and investor, put their money to work for them and can also lower their tax burden. Small business, especially sole proprietors are taxed heavily like an employee. For example a doctor who owns his own practice is self employed. He is in the S quadrant. He may make big money but that puts him in a high tax bracket meaning he pays a lot of taxes actually reducing how much he keeps. Essentially when you vote to tax "the rich" you are voting to raise taxes in the S quadrant and not the right side of the quadrant. If you plan on making big money unless you can earn your income from the right side of the quadrant and you remain on the left side you support raising taxes on yourself.
Here is the cash flow statement of an employee as apposed to a rich person... The middle class work for a paycheck, which pays for their liabilities (monthly bills). The rich buy assets (ownership of a business and/or stocks) that provide cash flow that pay for their liabilities.
As the middle class become successful they tend to buy liabilities and they end up in the rat race, where someone who is building wealth typically owns a business and buys assets that produce cash flow. They don't exchange their time for an hourly rate instead they invest their time to grow a business (which at first they may make very little) but if they succeed then their cash flow increases. They also buy assets that will produce passive cash flow.
Money is redistributed upward from rent slaves to land lords.
Buying is not always better than renting. Many times it is but everyone's situation is different. It depends on what other investment opportunities are available to you and what the return on them would be.
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How does owing a small business gets your wealth
By growing your investment (in the business)
Can come via several options:
1) grow revenue though expanding business
2) multiply the business (open additional branches that are profitable)
3) increase revenue through better profitability. (More efficient or higher prices for same expenses)
4) make business attractive to buy
5) groom staff to run your profitable business, so you can create another business
It is pretty rare for a start-up business or a restaurant to own their real estate. Property ownership and leasing is yet another business. If, as a business enterprise you are able to afford your own property, you are usually more prudent to have a seperate entity own the real estate and lease it to the business. Liability / risks due to business loses / customer liability / IRS or bank seizure / personal estate planning / cash flows / better tracking of related expenses / tax planning/ depreciation...
In addition to the chance to make much more than an employee (for most people) owning a small business opens access to all kinds of tax and retirement plan advantages. The kind of person who can create a successful small business usually has the smarts/courage to leverage those tax savings into even more money. Having said that, looking back at the businesses I have started, my greatest gains (besides retirement savings) came from unrelated real estate I invested in with the profits from those businesses.
Disclaimer: it was more often luck than a plan but lucky money spends the same as smart money. Owning small businesses gave me the chance to take those gambles.
I heard a good quote the other day from the father of the guy who does that "Flipping Out" show on Bravo. He said you don't get rich from income you live off income. You get rich off investments.
As far as small businesses, same thing holds true. I would say the good thing about small business is there's no cap on you like a salary and working for someone else. When you have your own thing you can get away from trading time for money or hours for a specific amount of money.
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