No one sets out to start a business with the vision that they’ll be stuck working 9 to 5 (plus some) for the rest of their lives. No, we set out with a vision to create a job we love on our terms, give ourselves flexibility, and make a pretty penny in the meantime.
But the path to this idyllic business-owning lifestyle is hardly straightforward, and it certainly doesn’t happen overnight. What’s more, it definitely doesn’t happen unless you put a plan in place to make sure your business can operate without you.
We’ve unpacked the business owner and entrepreneur journey to help you understand where you are now, and how to move to the next stage, to ultimately make yourself redundant in the business.
In this article
- Are you a freelancer or an entrepreneur?
- The four approaches to building wealth
- The business owner pyramid
- Explaining the two financial hats
Are you a freelancer or an entrepreneur?
That’s the first question I ask many of the founders I meet for the first time. I do this because I need to be clear that they understand the difference.
An entrepreneur is a machine builder. She creates a vision, validates a product or service, employs people to fulfill that service, and expands it.
The primary goal of the entrepreneur is to scale herself from the business, so it is not dependent on her time. To create a machine that grows and sustains itself.
The majority of independent business owners are not machine builders; they themselves are the machine. They are the sole cog relentlessly spinning, trying to do paid work. If they do not do the work, they do not get paid.
Yes, they may operate out of a company structure, have a logo and have some staff – but fundamentally, they are still the machine.
Entrepreneurs, on the other hand, build an entity bigger than themselves.
They design the machine so it’s not dependent on their time. Instead of working in the business, they work on it. They make money while they sleep. They build a business they can one day sell.
Henry Ford didn’t make cars. He built a machine that manufactures and sells cars. Jeff Bezos does not sell books, he’s building a machine empire that sells everything.
These are examples of entrepreneurs. They don’t get stuck in sales, marketing, product – whatever part of the business they love. They build organisations that function without them.
Your goal as an entrepreneur is to do the same. So, ask yourself what type of business owner you are? Are you an entrepreneur or a freelancer?
Four approaches to building wealth
I had an interest in money from an early age – mainly because, when I was growing up, we didn’t have much of it.
One of the first books about personal finance that I ever read was Rich Dad Poor Dad by Robert Kiyosaki.
In it, Kiyosaki frames four approaches to building wealth. Yet only two can help you to break free of the day-to-day grind.
He explains that each of us falls into one of the following quadrants:
EMPLOYEE – THE E QUADRANT
Your income is derived via a salary which you cannot control. No matter how hard you work, your income will always be capped.
SELF-EMPLOYED – THE S QUADRANT
This describes the majority of people who call themselves ‘business owners’ – even those with a number of employees. In this quadrant, the company is entirely dependent on the owner’s time. If he or she stops working, their income stops as well.
BUSINESS OWNER – THE B QUADRANT
This is the realm of entrepreneurs, people who design systems – machines comprised of people and processes to generate a profit.They may have input into the business operations and decision making, but the business doesn’t rely on them day-to-day to operate.
INVESTOR – THE I QUADRANT
Investors use money to create more money. They don’t have to work, because their money is working for them.
Unless one is a child prodigy entrepreneur, all of us started in the E Quadrant; we were all employees once upon a time.
Then we created our own business, and we bought into a misconception. We thought we were heading straight to Business Owner (the B Quadrant), but what typically happens is that we shift from Employee to Self-Employed. Rather than owning a business, we own a job.
Let that sink in.
And I’m not just talking about solopreneurs here – the freelance graphic designer working from a home office, for example. You can be in the S Quadrant and have a dozen employees in a fancy office space downtown.
You may own the company, but the company owns you, too.
When I first started my business, I was so proud of the leap I’d made. I felt like I was in complete control of my destiny. But as my business grew, I was working more and more hours.
Sure, I had employees, but they needed me to stand over their shoulder. My clients needed me, too. My company was completely dependent upon my time. And, thus, so was my income.
Three years later my business is still reliant on me to get shit done, but 80 per cent of my time is leading at the helm of the ship, not in the engine room. As a founder and CEO – that’s exactly where you need to be spending your time.
The Cashflow Quadrant is a useful model to help frame what it means to be a business owner.
The business owner pyramid
So, how do we get from the E quadrant to the I quadrant?
There are six stages that every owner and founder moves through as she grows her business. The stages can be presented as a pyramid.
We’ll assume you already play the role of the CEO, but you share one (or all) of these jobs within the Business Owner Pyramid.
While it’s likely you wear multiple hats every day, the point here is knowing where you should spend the majority of your time – leveraging your impact across the entire organization.
Let’s start from the bottom.
Stage 1 – The technician
The technician does the work being sold to customers. These are the folks who make the product, fulfill the service, and support your customers. They are responsible for delivering whatever it is people buy from you. In the early days of Apple Computer, Steve Wozniak was the
technician. The lawyer in her upstart law firm is a technician. In fact, the vast majority of independent business owners are technicians. If the work stops, the money stops.
Stage 2 — The manager
The manager is responsible for supervising the technicians. She is in charge of ensuring the work gets done on spec and on budget. Managers spend the majority of their time on operations, quality assurance, coaching, and leading a team of technicians.
Stage 3 — The salesperson
This person identifies business opportunities, generates leads, develops relationships, and closes deals.
Stage 4 — The marketer
The marketer is responsible for spreading the vision of the organization. They tell the story of the business to the right people in the right way.
Stage 5 — The CEO
The CEO is responsible for everything in the company. Whether you’re a one-person business or have a hundred employees, this is you. You’re in charge. But if you’re still stuck spending too much time (really, any time at all) in the prior four roles, you haven’t graduated completely to the C-suite.
Stage 6 — The owner
The peak of the pyramid is nirvana for every person who starts a business. The owner is the investor. She receives financial returns from the performance of the business without direct involvement in the day-to-day management and running of the business.
The CEO will report to the owner on the overall performance of the business. As an owner, real wealth is generated via payments of profits and value creation of the company.
This is where you want to be!
I see a lot of first-time founders stuck in the technician and manager phase of their business model. They don’t have time to do the high leverage activities because they’re too busy just trying to do paid work.
If you’re currently stuck in the technician, salesperson, marketer or even CEO role, you’re probably wondering how to break off the shackles and move up the pyramid.
In order to scale yourself up the business, you need an intimate understanding of your business model and its financial drivers. The numbers leave clues on how best to spend your limited resources in order to level yourself up the business owner pyramid.
For example, it’s natural that you will be doing most of the heavy lifting when it comes to Technician work in Stage 1. The focus here is to build the business to a stage where you can afford to employ some help to take over the heavy lifting.
Once you elevate yourself from Technician to Manager, the next step is to build the business so you can afford to employ a manager – which elevates you to Stage 3.
Learn how to assess when you can afford to hire, then make a plan for scaling up your next few hires and moving yourself up the business owner pyramid.
Quick tip: It’s a classic business owner mentality to think that by doing the work yourself, you’re saving the business money and therefore generating more profit. This. is. Wrong. Well, it might be right this week. But you need to consider what your hourly rate is truly worth if you were to instead be working your way up the business owner pyramid to grow your business. By using your resources at a technician level, you are losing the opportunity to grow your business and generate much greater returns.
Explaining The Two Financial Hats
As a founder, you have two roles. As mentioned earlier, one is the owner and the other is the CEO. One owns the business machine and the other operates it.
As the owner, you wear an investor hat. The investor considers the financial capital injected just like the shares bought on the stock market or real-estate investments. You want to ensure the capital and time invested in your wealth-creating machine will provide you with a financial return in the future.
As the CEO, you wear an employee hat. Your role is to operate the business and ensure it’s well managed financially.
It’s important to note that these two roles will conflict.
As the owner, your motivation is to maximize the financial return from your business. To generate a return on the investment of capital and time you have contributed while building it.
The dilemma you will face is the trade-off between taking income now as a CEO versus long-term wealth creation for your role as an investor. As a CEO, you want to be paid for your time, so you want to maximise the salary you draw from your company.
Yet, the more income you draw from the business now, the less capital there is to invest in the business to create long-term value.
But, drawing the minimal amount of income leaves more capital to create higher long-term value (if reinvested wisely), but at the cost to your current standard of living outside of the business.
I see a lot of early-stage business owners paying themselves salaries and director drawings that are simply unsustainable for their phase of the business. They are limiting the growth potential of their business because they are sucking all of the capital out of it that it needs to grow.
In your business’s startup phase, it’s unlikely you’ll have the resources to support an industry comparable income while investing cash flow into what the business needs to be self-sustaining.
If getting paid top dollar right out of the gate is your priority, then perhaps you’re better suited to
freelancing or contracting – or, dare I say it, employment.
Ultimately, working your way up to business owner status, at the top of the business owner pyramid, takes time – and in some cases, involves financial sacrifices in the short to mid term.
There’s no overnight solution, but with a plan in place, there’s no reason why you can’t make yourself redundant in your business.