Velocity of cash

cash flow, Financial Independence

Many years back I had read one book by Prof Ram Charan- Every Business is a Growth Business. Prof Ram Charan is one of the most well known gurus of multi billion dollar CEOs. I have mentioned his books earlier also.

In this book, that I mention above, he tells a story about how a lady in India , who is selling some items on the road and has a simple logic – she wants to sell of all the items that she has got to vend that day, even if she has to give a little discount for a larger quantity because then she can turn the cash around.

In business the equivalent logic is that profit and loss is on the balance sheet for record purposes, what matters is the ability for you to cycle the cash. If you can turn more cycles on your working capital you can generate much higher profits. Cash is real. Profits are only for the books. Companies close because they are not generating cash, not because they are not generating profit. A lot of people in business even now don’t understand the value of cash and hunt for Gross Margins. Gross Margins are important when you are giving a lot of credit because then if you are not even making margins then your business will crash.

Something which I am trying to wrap my arms around is that Cashflow is more important than Networth. I have been a big proponent for the magic of compounding and how it creates magic , the longer you let the money compound.

I have recently been reading a lot of books written by Garrett Gunderson and also following his YouTube channel. His emphasis is that Networth is like a P&L statement which has little significance if cash is not getting generated. His view is that assets which don’t generate regular cash are worthless. As per him the fundamental issue for generating financial independence is cash flow not net worth. I am always looking for ways that can help me figure out a quicker way to financial independence.

As per him like in a company if there’s a machinery and it’s generating products that generate cash for the company then this asset has value. A building which is lying vacant and not generating cash just sits on the balance sheet without creating any value. The value of the land on which the building is sitting may appreciate over time. But the cash which the machine is generating can keep multiplying depending on the velocity that it can generate.

So if I am making 10% margin on every $100 of product sold and I am able to cycle that cash 12 times in a year, then at the end of the year I would have made $120 dollars (a 120% return) while the $ that I invested in building the product are still with me. On the other hand the land lying idle will appreciate maybe 5-10% per annum.

While the above concept is clear to me, what I am trying to get a handle on, is that, for an individual oter than giving property on rent, what other methods exist to get the assets to create cash flow.

If you’ll have got personal assets other than property which is generating cash, I would like to hear from you. Pls put in the comments below

Till next time then.

Carpe Diem!!!

Law of compounding – for real life improvement

Affirmative action, compounding, Human Brain

I read – maybe 10 years back – Delivering Happiness by the CEO of Zappos – Tony Hsieh. I don’t quite remember everything in the book except that it was the journey of Zappos. However there is one statement from the book which Hsieh makes, which has remained with me since then, if you can improve even 1% everyday, imagine the improvement you will have at the end of the year – 367%. However inspite of having read it and also put it on a board where I could see it everyday, I have not improved 3670% in the last 10 years. The idea is simple I understand it but I still don’t go about achieving it.

The Japanese have a incremental improvement method called Kaizen which is about bringing about small incremental improvements continuously resulting in massive improvements over a period of time.

Both seem to be very simple concepts but we don’t end up following them. If you have been following my blog for sometime you would have noticed that as I am getting more experienced at writing things I am also questioning things about how I can be improving myself. Right now I am working on improving my reading capabilities. I have an agenda to read at least 3 books every week, consistently over the next few months, inspite of all the extended working hours we are having due to the lockdown. I want to check if I can improve my reading, which means I gather more knowledge, which then I try to put into action and therefore improve myself on a regular basis.

Yesterday however I was watching a YouTube video of Dan Sullivan of Strategic coach and he explained a very simple concept because of which I may not be achieving our goals for real life improvement. His logic is that there are no impossible goals, there are only impossible timelines. And because we give impossible timelines to ourselves, we end up messing up on achieving our goals. In case you are interested you can watch the video here.

As per him if we were to give ourselves long enough timelines, then our brain will not put barriers. The timelines he talks about doing a 10X is 25 years and breaks it down into quarters. So in 25 years there will be 100 quarters. If we were to use our compounding equation S=P*(1+r/100)^n. So if we put P=X and S=10X and “n” =100 then “r” turns out to be just 2.5% growth per quarter.

Is it feasible to improve 2.5% per quarter or less than 1% per month. Should be possible. If we were to break down our improvement points into clear bite sized goals then 1% per month should be very feasible and 10X in 10 years should also be feasible.

The reason this compounding works is because as a human being when you improve the first time, the next improvement is over the previous improvement and this cycle can continue forever. This is exactly how compounding works on your money and this how compounding works in real life as well. However our brain is conditioned to think in terms of linear activities. It is just not capable of comprehending non-linear equations like compounding and therefore whether it comes to money or self improvement our brain plays games with us.

Its one of those laws which are universal in nature and should apply to me as well. If I can improve by more than 1% every month in different areas of my life, based on the knowledge I acquire by reading the books and taking action, I should be able to grow. Let me see how this goes. Just to share the progress in the last 3weeks I have been able to complete 8 books. All non fiction books. These include Crushing It by Gary Vaynerchuk, Bold by Peter Diamandis, Attackers Advantage by Ram Charan, Triggers By Marshall Goldsmith etc. All these books are quite dense, as you will see in the picture, but I am trying to keep to my target.

Let me know if you also see Compounding in other areas of your life. I will be very interested in hearing your story.

Till next time.

Carpe Diem!!!