Although he recently lost the “big one,” Manny wants to celebrate with the Saints. Being the consummate professional and a “great party guy,” he wants to get in on the fun and action in New Orleans. Manny wants to sell 14 karat gold Mardi Gras beads at a discount to the public at the local mall in one of those attractive kiosks. The kiosk costs Manny $1,000 per month. His additional overhead costs another $1,000 per month. Right after the game, he negotiates a price for his gold Mardi Gras beads at $15 per gram, since the price of gold is $250 an ounce. Manny buys 1,000 grams of gold Mardi Gras beads. His standard markup is 1.5, in that he sells his gold beads for only $22.50 per gram. His closest competitor, the Ravens, sell gold Mardi Gras beads for $30 per gram. Manny is very busy for the first few weeks and hasn’t been keeping up with the news that the price of gold went up to $350 an ounce right after he purchased his order. In late February, Manny is so happy with his “Gold Mardi Gras beads at a Discount Kiosk” he wants to open another one in another mall and pay an employee $10 per hour for 10 hours each day. The second kiosk costs $1,000 a month.

 

Time to dig deeper

Manny wants to add a gold bead distribution business in which he delivers various gold beads to businesses throughout the New Orleans area. He wants to hire a couple of the Saints as drivers of the trucks so he doesn’t have to worry about them next year, in case he returns to the field of dreams. The depreciation on his two trucks this year will be $600 per month, which is a fair and accurate amount since the expected life span of the trucks is about five years. Manny has discovered over the last year he has about $1,000 or so after paying all of his expenses and paying himself an owner’s draw of about $3,000 per month. However, due to the recent increase in the cost of gasoline, Manny has discovered his net profitability is approaching zero.

Manny has room on his trucks for other things. What would you suggest to Manny in his new Mardi Gras gold bead business and his gold bead distribution business?

 

Transactional income and leveraged/residual income

When developing a business, especially one that has a walk away income, it’s important to understand the basic differences between transactional income and leveraged/residual income. With transactional income, a service provider or product seller must be personally involved in some manner. Hence, their presence is required to earn money. Most service providers understand that if they go on vacation, their income drops accordingly.

Most entrepreneurs understand the value and differences between standard transactional income and the better option of leveraged/residual income, since the money flow isn’t so dependent on their day-to-day participation. There are five basic ways to develop leveraged/residual income so the owners have some financial freedom in business: time, technology, money, attitude and people.

Time: Become more efficient with more FEOs per hour.

Technology: The use of hardware, software and intellectual property to increase income.

Money: To invest money so the interest and derivatives earn money on their own.

Attitude: The right attitude with a celebrity development will significantly increase income.

People: Making money through the efforts of employees/contractors/others is very successful.

Send an email to consultants@californiabusinessdevelopment.com or call (707) 584-4529 for several ways to improve your understanding of developing your transactional and residual income.