Understanding the Cashflow Quadrants
Today I want to talk to you about the Cashflow Quadrant. Now, this comes from Robert Kiyosaki and his book, The Cashflow Quadrant. This is not a substitute for reading the book, and I strongly recommend that you read at least the first 150 pages, which contains what I believe to be the heart of the book’s message.
The Cashflow Quadrant book explains with great clarity how cash flows to us, each one represented by one of the four quadrants. Let me explain these quadrants for you:
On the top left is E, for Employee. This is the quadrant for people who trade time for money, whether through an hourly or a salary rate. The SE in the lower-left stands for Self-Employed which are people who are in business for themselves, they are typically who make up most small businesses. The B in the top right for Business owners represents people that have built the business to the point that if they were to step away for four to six weeks, the business would not only continue to operate, but it could continue to grow. I can use Gary Keller as an example of this because Gary could probably step out of the company for four to six weeks, and most of us wouldn’t even know it. Mostly, because team leaders, operating principles, and regional directors would still go do their jobs. I want you to be very clear about the difference between self-employed and business owner: self-employed people are typically people that work for themselves 80 hours a week, so they can avoid working for somebody else 40 hours a week, but if they step away from the company for more than a few days, won’t continue to grow or even function. Finally, at the bottom right is I for Investors, who are people that simply trade capital for more capital.
Using the Cashflow Quadrant
Method 1-How does cash flow to you?
The first way to use the Cashflow Quadrant, is to look at your income, either through a monthly, quarterly, or annual lens. I typically encourage people to take the annual viewpoint. To do this, simply add up all the income that you made over a period of time; annually, quarterly, monthly. Then break it down across these four quadrants. What amount of your income is flowing in from each?
I recently did this with a client who owns their own real estate team. 84% of their income comes from the self-employment quadrant. About 8% comes from business ownership because she is an investor in a market center. Finally, about 7% of her income comes from investments, which for her is profit share and her husband’s 401k. Once you’ve done this for yourself, simply sit back and look at how cash flows to you. Are those percentages balancing the way that you want them to? When I showed this breakdown to my client and showed that 84% of their money comes from self-employment, they instantly started saying that it has to change. They want the majority of their income to come from the right side of the quadrant.
The left side of the quadrant, employee and self-employed, makes up 95% of the population, and they only control 5% of the world’s wealth. When you look at the right side of the quadrant, which is business owners and investors, that only makes up 5% of the population, but they control 95% of the world’s wealth. Ideally, you want to be on the right side of the quadrant.
Method 2-What is your exit strategy?
This method ties right into the first, and is all about the question, “what is your exit strategy?”
Craig Zuber, who’s a good friend of mine, taught me that question early on. Even if the ink is drying on your business license, or you’re a brand new entrepreneur, you should be asking the question, “How am I going to exit from this?” It’s one thing to be working in your 70s because you love it, but it’s completely different if it’s because you have to.
You’ve probably heard me talk about how there are different types of agents. You have the growth-minded vs the lifestyle-minded, and the entrepreneurs vs the intrapreneurs. I believe that who you are on that graph will greatly determine what your exit strategy is. If you’re more lifestyle-driven, meaning the business is simply a means for you to support a lifestyle, well, you’re probably not going to move from self-employment to business owner and on to investor, because you’ll never really let go of control. What you might want to consider is how you take the profits from your self-employment and invest it in a way that will allow you to exit the business at the time you would like. In fact, I know a lot of people who’ve done just that. One of my original mentors, who was very much a lifestyle person, paid her house off, bought upwards of 15 rental properties, owns part of a market center, and now does whatever she wants with her time.
What I want you to hear is that you don’t have to be a growth-minded agent. In order to exit your company, you can do it strategically through your investments. You don’t even have to build a company or a business in order to plan your exit.
Now, for some of you that are more growth-minded, you might think of business as the place where you can self-actualize. It’s like your athletic sport. You might exit through the ownership of your business or even multiple businesses, because you’re playing a different game than others. It’s not about a lifestyle, it’s never really been about the money for you. But at the end of the day, the exit strategy needs to be in place because your purpose doesn’t have to be to only make money. One day you might look up and want to go do something else and knowing what your exit strategy is early on, and setting it in advance is hugely powerful.
So just to recap this: get clear on whether you are more growth or lifestyle-minded, and based on that, what’s the best way for you to exit the company through the Cashflow Quadrant.
Method 3
This method pulls on a different thread. When many people start companies, they start out self-employed, and then their goal is to move into the role of business owner. There are a lot of steps in that transition, but I think there are three above all that you absolutely have to nail, regardless of what business you’re in, to become a business owner that can enjoy the freedom and flexibility of owning but not having to operate.
Step number one: systematic lead generation through your database. Gary Keller always says that whatever your goal is, you need to figure out how big your database needs to be to support it. Whether you’re a realtor or chiropractor, it doesn’t matter. How can you systematically hit your goals through lead generation to a database?
The second step is talent acquisition. That’s the process of getting into business with remarkable people. Now, I’ve also heard over the years that your number one recruiting and retention source is your own personal standards and behavior. If you’re going to acquire talent, you’ve got to get good at leading yourself, because no one wants to work for someone that leverages for luxury. Who wants to work to support someone else’s amazing lifestyle while they’re sitting in the trenches every day doing the hard work? What I want you to hear on this point is that if you’re going to acquire real talent and surround yourself with magnificent people, you’ve got to be the example of what you’re looking for.
That segues directly into the third step, which is leading others, which again, is just an extension of how well you lead yourself.
I believe that if you screwed everything else, but nailed those three things you could move from being self-employed to a business owner. To recap, they are systematically lead-generating through your database, talent acquisition, and leading others. I think if you got that nailed, then you could build virtually any business that you want.
So I trust that this was helpful. I know this was a longer growth tool than normal, but I feel strongly that using these three methods with the Cashflow Quadrant will shed some light for you financially. How much of your income comes from each of the quadrants? What’s your exit strategy from the company based on who you are and what drives you? And lastly, what are the steps that you need to take if you want to move from self-employment to a business owner? I trusted this was helpful and I’ll see you on our next growth tool.
