The number one way to create wealth is owning a business. You might run the top new unicorn startup or you might just have a small local business, but in order to grow, you will need to eventually invest outside of your business. Even big companies like Facebook have had to invest outside of their core to achieve growth.
For small business owners, this could simply mean putting the cash flow you earn into other assets like real estate or equities. Of course, it could mean hiring new people and reinvesting back into your business. When you’re small and can make that work, it creates the best growth.
From a numbers standpoint, let’s say you have a company that generates $500,000 with a team of five, each produces $100,000 in sales and cost $35,000 to employ. Unless your costs exceed $325,000, you have capital to put back into the business without borrowing. Rent, inventory, marketing, and general admin costs shouldn’t run more than 80% of that number, leaving you with at least $65,000 pre-tax.
As long as you don’t have a capital intensive business or need to open new locations, you can put that money back into hiring new employees and marketing to drive new sales. If your business can generate $100,000 per employee, then its just a numbers game at that point. I know this is an oversimplification and in the real-world it doesn’t work this way. However, when you start to think business in these terms, you realize where you need to focus.
At some point this practice will not yield the same level of growth and it will be necessary to invest in other assets. Yet, as long as you can earn better than market returns (+9% compounded growth) then keep pouring the cash back into your business.