The 7 Steps to the Respecting Capital Technique
At the end of last year I saw an article that blew my mind! According to smallBiztends.com 82% percent of businesses that fail do so because of cash flow problems!
Let me say that again…82% percent of businesses that fail do so because of cash flow problems!
Today I am going to show why we run our KW offices & all our businesses DEBT FREE. Being debt free is how my family and I choose to live our lives. We teach how we achieve this in our lives through our wealth building workshop. Today I want to show you why and how we do this for our BUSINESSES as well.
The reason we run our Keller Williams offices debt free is because times can get hard in the real estate world. As real estate cycles I want our people to know that this entity, this space is protected. I want KW offices to be a fortress and place of security for them, their businesses and for their families. One of the ways I can do this is by running this company financially sound.
The special sauce I use is formulated by a strategy I call the Respecting Capital Technique.
We use the Respecting Capital Technique in all our real estate businesses, from flipping residential properties, to managing large commercial properties (over 125,000 SF), to our Keller Williams Brokerage offices (home to almost 500 agents), our Residential Sales team, and our Closing and Title offices.
Several of our KW agents use this same technique to grow their business to new heights, while making more money than they ever have and giving more time back to their families and communities.
Today I am going to show you how to use the Respecting Capital Technique in your business. We’re going to cover this step-by-step.
Step 1: Build a safety fund of cash.
Before you ever get into business you should build a safety fund, or a safety net, of cash. If you are unsure of how much cash you need, then you should build a Pro Forma. Here is a simple Pro Forma template to get you started. So what is a Pro Forma? A Pro Forma is a method by which individuals and firms calculate financial results using certain projections or presumptions. Once you have built your proforma you will be able to easily pull your monthly expenses. Here’s where the calculation for your safety net comes in. Your safety net should equate to AT LEAST 3-6 months of the monthly expenses required to keep your business running. We;ve built a safety net around our Keller Williams offices that has us covered for 16 MONTHS! Yes, that is correct. If not a single agent sells a house for 16 months, we can still keep our doors open, without making any changes.
When we look back at that statistic that blew my mind this year, 82% of businesses failed due to a lack of cash. You can solve this problem and your business will have a much better chance of succeeding. Keep reading…
Step 2: Run your company with Cash
According to Due.Com, the number #1 hidden cost of starting and running a business is debt. IF that’s the case, WHY HAVE IT? The deck is already stacked against you when starting a business if you start in debt.
So let’s remove the stress of the # 1 issue knocking businesses out of the startup game. REMOVE Debt as an option when starting and running your business to complete step 2
Step 3: Your top line income on your profit and loss statement is here today. Understand that it may be gone tomorrow.
Top line income can also be called Revenue, Gross Sales or in our real estate world, Gross Commission Income, or GCI for short.
A quote that helps me run my businesses is “Only the paranoid survive”. Be paranoid. Be paranoid that your income is here now. However, imagine for a second that next month your income is not there? How does that make you feel? Does that make you freak out just thinking about it?
Now imagine you still had a debt to pay. Sadly, this scenario is more common than you think. Don’t believe me? It happens to small businesses and large corporations all the time. Let me just say the name Amazon…or Netflix…and tell me you’re can’t name at least 5 companies that went out of business when the market pivoted and they didn’t. That top line revenue they were used to seeing was suddenly gone and they still had loads of debt to pay.
Step 4: Keep your fixed expenses LOW!
According to Bussiness2community.com, The top 2 biggest expenses in your business will be staff wages/benefits and your rent or mortgage, if you own your space.
When using the Respecting capital technique, step 4 is keeping your expenses low. One way to do that is by growing your expenses only after you have grown your income. LEAD WITH REVENUE, not expenses.
It’s just like buying your first home. You don’t go out and buy a $2 million dollar mansion. You buy a starter home and you work your way up over time. We can do the same for our businesses. Scale your expenses as that top line income grows, all while holding your expenses accountable for a result. Which leads me to step 5…
Step 5: Hold your expenses accountable.
That is right, when you spend money on an expense category of your business, you need to hold that expense accountable to bring back a 2 to 3 times return on that investment. Let’s say you spend $500 on a Facebook ad. That ad better bring back $1,000, $2,000, $3,000 or more BACK in revenue for your business
We do this everyday in our house flipping business. We have used the respecting capital technique to complete over 200 house flips. Whether you are spending money on a house flip, advertising or rent, you need to hold these expenses accountable.
Step 6: Save 10% FOREVER.
After you have your 3-6 month of expenses saved up, you should then save 10% of your profit FOREVER. This is where your wealth will be built. For those of you who are familiar with, The Richest Man in Babylon, this is the first step of Gold.
Step 7: Give
To me, this is the most important step. The profit that you are blessed with needs to be given a purpose. For our businesses, we focus our giving on ways that will bring people closer to Christ.
Why are we so adamant about the Respecting Capital Technique?
The reason I put so much weight on the Respecting Capital Technique is because: We have over 500 people in our organization that are counting on us to make really wise financial decisions. Yes my wife and I could buy countless luxuries if we wanted, however we refuse. Sure, we could deck a brand new brokerage offices with chandeliers and marble countertops, but again we refuse. We refuse because building a solid foundation and a secure, financial wall around our businesses is of more value to us and the families that count on us!
We hope this helps you on your journey toward running a financially sound business that will provide wealth and support to you and your loved ones for years to come.
If YOU have a question about wealth building or running your business debt free, contact us. Your question might be our next video!
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