On Friday we discussed the important but potentially deceiving wealth creation factor known as Profitability. Without it, we don’t have a business, but it is not enough. Proverbs says there is profit in all labor, but if you are being paid for your time, consider getting paid for your productivity where you can work as long as others but earn much more for your labor. Even though there is profit in labor, most of the profit is with the one who employs you, so consider becoming the one who employs others so you can leverage your time and reap more profits.
Wealth Creation Factor # 2: Velocity
In the two scenarios discussed in Friday’s blog (Isaac vs the gumball machine), the most obvious differentiating factor was what I call VELOCITY. It’s the second of seven factors that determine how long it will take you to generate a 100-fold return. VELOCITY is the speed at which a return is generated.
If the bank is offering a 10% interest rate on CD’s, that’s slow, even though it is much higher than what is currently being offered. But if the bank was offering 10% per month… Now you have some VELOCITY going for you.
As you consider which Revenue Generating Mechanism you will invest your time, talent and treasure in, one of the things you should consider is the VELOCITY factor. How long will it take to earn the profit it is capable of? If you can turn a 10% profit in a month and do that consistently for 10 years, an initial investment of $1,000 would exceed $9.3 million. See what a difference VELOCITY makes? That is serious wealth creation but is much harder to accomplish than the math makes it look, due to the remaining wealth creation factors you must consider.
Let me bring it down to a small scale. You can buy a gumball machine for as little as $40 and stock it for $20. With $1,000 you could buy and stock 16 locations with over 10,800 gumballs. At twenty-five cents a gumball, you will take in $2,700. That’s almost triple your money. The refills will make you much more because you will have your machine paid for.
From a profitability standpoint, the gumball business may be looking good to you right about now. Of course, there are other costs such as fuel and possibly revenue sharing with store locations but on the surface the numbers look good. But don’t ever make a business decision by what you see on the surface.
Never measure profitability without measuring VELOCITY. How long will it take to sell those 10,800 gumballs? A month? A year? A decade? This factor greatly impacts your annual profit.
So, when considering what you kind of Revenue Generating Mechanism you will build, consider not only the profit potential of a transaction (after calculating ALL the costs of performing that transaction), but make sure you know the VELOCITY at which your investment comes back into your hands for reinvestment.
I think a good minimum goal should always include multiplication vs fractionalization, so for me, I want to at least double my investment in a year. No bank is going to offer that but most banks will get that. They may only charge 8% interest on a car loan but because of fractional banking they can lend out as much as $9,000 for every $1,000 on deposit. That just gave them an almost triple digit potential annual return.
If you could do that in my gumball analogy, your $1,000 would buy you 144 locations and earn you $24,300. The banks are actually using another one of the seven revenue factors, which mimics one I will cover later in this series.
In summary, if you want to build a great Revenue Generating Mechanism…
- Think in terms of multiplication vs fractionalization.
- Be sure to measure Profitability and then
- Verify VELOCITY.
Then check back here to learn about the five other factors that can take you into multiplication from the fractionalization mentality. If you would like to be notified by email when the next wealth creation factor is published, just let us know here.