Financial Freedom

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Are You Making the Right Costs Decisions as a Business Owner?

By | 2018-06-17T05:19:33+00:00 June 17th, 2018|Tags: , |

The world of business is rapidly changing! Outsourcing which used to be only for a few special projects is now becoming a common part of most business processes. This changes the way a business owner looks at costs they have to incur in the operation of their business. Take for instance the world of online business: people are making hundreds of thousands from the comfort of their home. Just ten years ago, what is happening today seemed impossible. Making this kind of money without incurring the high expenses associated with a business was a laughable concept.

It is time to think differently.

Thinking to grow your business the way grand ma did is not going to cut it anymore.

There are two broad categories of costs I will like you to consider when choosing your cost structure namely:

  1. Committed costs
  2. Discretionary costs

Committed Costs

Committed costs are costs an organization commits to for an extended period of time. It usually requires a contract and there are usually consequences for breaking the terms of the contract. An example is a 2 year phone contract.

Discretionary Costs

Discretionary costs are money wilfully assigned to a purpose. An example will be supplies bought in your business. It is important to note here that a discretionary cost does not mean costs you do not need in your business but rather it means costs that is more flexible in nature and can change as your business changes.


The rapid change in the business world is changing the structure of what can be called committed versus discretionary costs. It used to be labor used to be a committed costs but now with outsourcing it is becoming more discretionary. Most business costs are also moving in the same direction: That is from committed to more discretionary in nature. A good example is the cellular phone: most phone companies are beginning to realize in order to survive in the long run they have to get away from only offering long term contracts and giving people an option to only pay for services they need when they need it.

Discretionary costs allows for flexibility. That is you are able to change as the market changes. When your circumstances change, you will need the flexibility to change your cost structure to reflect the changes in the environment. Today it is possible to be more nimble in handling your business costs and taking on more than you should is never advisable.

Starting your business with discretionary costs

You have heard the term it makes money to make money. On the other hand, I think it takes wisdom to make money. There are lots of people out there that have taken very little money and turned it into a fortune by being disciplined. People who often say it takes money to earn money have not given much thought to how money can be made with very little resources. The costs of starting an online business are very negligent in nature. If you are willing to put time into growing your followers, you do not need a lot of financial resources.

The problem with people who unsuccessfully start businesses is that they start asking the wrong questions. Take a look below at 3 common questions asked and what should be asked in its place:

Wrong questions

Right Questions

How can I afford the “committed costs” needed to start this business (Committed costs could be machinery, rent, etc.)? What are the minimum resources I need to effectively serve my customers?
How much do I expect to spend in my first month or year of starting this business? How many units am I likely to sell and how do I directly link my profits to my costs per unit so I am not coming out of my pocket?
How much do I need in my marketing budget? How do I engage my audience so I can influence them to patronize me?


The wrong questions have one thing in common, they all deal with committed costs and the right questions are more discretionary in nature. It is difficult to stop thinking like grandmother; especially since things are still evolving. But, the idea that you need to have committed expenses to start a business is becoming ludicrous in today’s society. This is especially true in the labor market which used to be a business’s biggest committed costs. Websites like, elance, odesk make it easy to get what you need when you need it and only pay for what you use. Even seasoned companies are beginning to realize the change in the external environment and are structuring their labor force to become more flexible. Having more discretionary costs makes you nimble.

Cost Analysis

So now we know the difference between discretionary and committed costs, there is one more thing we need to do to stay nimble. At least on a quarterly basis analyze your costs to see if you are being efficient in the way you are running your business. It might be you have subscribed to services you are no longer using and will need to cancel.

Always, ask yourself how the costs you currently have add value to your customers.

The end result is you want to enrich your customer’s lives and the cost you incur should reflect this. If your costs are discretionary in nature then getting rid of non-value added costs will not be very difficult.

Non value added costs should not only be thought about in terms of money spent but also time spent on activities. The customer should always be in mind when adding or subtracting activities which consume time in your business. Your goal as the business owner is to continuously add value to the life of your customers. This process of continuously adding value is always on-going and the moment it stops, the business begins to die.

So do you have a business? How do you as a business owner determine what costs go into your business? Are your costs necessary? Do you add value to the lives of your customers?


Leave a comment below, I will love to help you make right costs decisions in your business.

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Achieving financial freedom from your business: Your Finances

By | 2017-08-15T21:18:05+00:00 August 15th, 2017|

Your financial system is the most important key to the puzzle to unlock your financial freedom. Marketing is the lifeblood of your business and with great marketing you can make great money. However, without a handle on your finances you can still end up broke.


Achieving financial freedom

Figure 1: Financial Freedom Plan

Your financial freedom system begins with having a financial freedom map.

Your financial system is made up of:

  • Your financial map: Your financial system starts with a map
  • Budget: Next the map is converted into numbers using what we call a budget
  • AIS: Update your budget in your accounting information system for comparison with actual results. While your accounting information system does not have to be done on a computer, using a computer eases the process.
  • Optimize: Develop processes and procedures around your financial system and optimize them overtime.

The steps to financial freedom are outlined in the map below:

Figure 2: Financial System

Business as a part of your financial freedom plan

The purpose of a business is to accumulate assets to produce future revenue. In determining your financial map you need to diversify where your financial freedom funds will come from. Your map should state what percent of your  freedom funds will come from various assets. Some of your financial funds might be allocated to real estate, some to paper funds and some to business. For instance my plan consists of 70% from business, 20% from real estate and 10% from paper sources.

You attain freedom when your assets are able to generate enough income to meet your needs so you no longer have to work for a living. You work because you want to. You attain financial freedom from your business, when your business gets to the points where it has enough assets that generates enough income. For this to happen, your business should have developed to the point where it has enough assets encapsulated by systems that consistently churn out income.

Beginning entrepreneurs attain majority of their income from transactions with customers. This plan cannot support financial freedom. To become financial independent you must become a level 5 entrepreneur where assets with the right systems consistently churn income.

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Income Statement Rich but Balance Sheet Poor

By | 2017-07-21T04:08:50+00:00 July 21st, 2017|

Income statement rich but balance sheet poor

People are so accustomed to boasting about how much they make but I think that is irrelevant. What is more important is how much of what you make do you get to keep. In other words you could be income statement rich but balance sheet poor.

Income statement

The income statement is the financial statement that tells you what is left over after subtracting what you spend from what you make. For instance if you make the average American income of $54,000 but spend $60,000 a year, you spend $6,000 more than you make. At the end of the year, you have nothing to show for what you made but more DEBT.

Balance sheet

Balance sheet is the statement that tells you what you have, less what you owe. Another way to say this is it tells you your net worth by subtracting your liabilities from your assets.

Any good wealth building strategy will take the excess from the income statement to build assets instead of liabilities. For instance, if you make $54,000 but spend $44,000 you have $10,000 left over to invest in income producing asset which in turn further increases your income.

When you overspend, it does not matter how much you make as you do not get to keep any of it. As a matter of fact, it seems the more you make, the poorer you really become. Poverty is when your balance sheet shows more debt than assets. Not only do you have nothing, you owe for what you don’t have. This is quite sad!

Proverbs 22:7 ESV

The rich rules over the poor, and the borrower is the slave of the lender.

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Achieving financial freedom from your business: Asset versus Transactional Model

By | 2017-07-20T18:10:28+00:00 July 20th, 2017|

The Asset versus the Transactional Model

The transactional model focuses on making money now while the asset model is more concerned with not just money earned now but can also produce income in the future. One of the characteristics of an asset is the ability to generate future revenue. To operate using the asset model, you need at least 3 systems as shown in the diagram below:



Transactional Model

It is very important to capture the value of what you do and be able to consistently replicate it without your direct involvement. For example, Ray Kroc does not have to be at every McDonald for it to run. Without capturing replicable value, your model looks like this:



Achieving financial freedom from your business

The asset model is more sustainable over the long run.

The transactional model earns income from the customer once without no way of repeating the sale. This is detriment to your financial freedom goals. If you are going to use your business as part of your financial freedom plan, you need a way of building recurring revenue. While the transaction model is a good way to start, it is not a good place to stop. To build financial freedom with your business, you need to work diligently at creating assets surrounded by system which in turn churns income.

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Achieving financial freedom from your business: Financial Independence

By | 2017-07-20T17:45:52+00:00 July 20th, 2017|Tags: |

A person becomes independent in their business by building assets.

Financial Independence

How does one become truly financially independent with their business?

Your main goal as a business is to build assets and then revenue from the assets (rather than building revenue directly). If you have just a product or service you will eventually hit the maturity and decline phase. However, when a business builds asset and then creates system around the asset to generate revenue, the business is sure to become a source of FINANCIAL FREEDOM. It also is a business that the business owner can sell if he or she so chooses to.

Assets could be tangible or intangible. When a business owner takes the time to develop systems so the revenue production process is not dependent on him, then he or she has built an intangible asset. This asset can be used to support the owners retirement goals.

Consulting/ Freelancing Model

In the freelancing model, the business owner derives revenue directly from the customer as shown in the diagram below:

become truly financially independent

The problem with this model is revenue is not preserved in assets. Therefore, as soon as the business owner walks out, the business dies also. This model cannot be used to preserve future revenue unless the owner was wise enough to take money out of the business to invest in other assets capable of meeting future retirement needs.

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Building a solid financial system

By | 2015-09-04T02:40:46+00:00 September 4th, 2015|Tags: |

Finances are a very integral part of the entrepreneurial journey. You can have the best marketing program but without a solid financial system, you never seem to move forward. Any business that is going to survive the long haul must have a financial system: A financial system affects every area of the business, and works hand in hand with the marketing and operational system. While having a financial system will not prevent adversities from affecting your business, it will give you a more solid anchor in handling the adverse events that come your way.

Building a solid financial system

In order to build a solid financial system, it is best practice to start with a plan of what you want to achieve. Once you develop a map, you can begin to define financial systems as discussed below:

A mapping system i.e. an overall strategy

Without a clearly defined purpose, a business might as well not exist. A purpose is the filter that clarifies what opportunities to accept and which ones to reject. Once you determine what you do, you can focus on allocating resources to what matters while minimizing waste.

Define your revenue generation system:

Any business that is going to survive needs customers and a system to reach and maintain them (marketing). Revenue generation is the system of bringing in paying customers. For your revenue generation system to work you need a system of getting (customer acquisition) and keeping customers (customer retention). Projected revenue is a function of your marketing and operating systems and is expressed as follows:

Sales pipeline * Conversion rate= Acquired Customers

(Acquired Customers + Existing Customers) * Retention Rate = Total Customers

Total Customers * Average Sales * # of repeat sales per customer = Total Revenue

Total Revenue – Cost of goods sold = Gross profit

Gross profit – Operating Expenses = Net Profit

The revenue equation simply states that the bottom line of any business is you need paying customers who choose to patronize you over extended periods of time. It will be hard to build a business if you consistently have to look for new customers with no recurring revenue.

Define your cost structure

A cost structure is the relative ratio of fixed cost to variable costs. A cost structure is important because it allows you to minimize your costs by clearly defining your cost objects. Understanding your costs behavior, prompts you to look for the best deals. This also enables you to stay away from expenses that don’t increase your profitability.

Generate regular financial reports

Having a good financial system means investing in a good accounting information systems. Also, you will need to educate yourself on basic financial knowledge so you know what the numbers mean in your business. You should also have a budget with which you compare your actual results from time to time.


Lastly, develop metrics to monitor set goals. Metrics are the first indicator that something is wrong. When a metric does not give the expected results, investigations will need to be conducted to find out the cause.

The journey from idea to financial independence is never an easy one. It is filled with lots of uncertainties, difficult decisions, impossible paths, etc. Not having the right financial systems in place adds to the difficulty. Lack of financial education limits what we can achieve through our business.

Challenge yourself to move beyond your comfort zone. Increase your financial IQ!

Why buy rather than start a business

By | 2015-08-24T04:41:04+00:00 August 24th, 2015|Tags: |

Slide1We hear a lot about starting a business, seldom do people talk about venturing into entrepreneurship by buying a business. Buying an existing business is less risky than starting one from scratch. Most new businesses fail within the first five years. An existing business has a history which could serve as a springboard to your success.

Some of the advantages of buying versus stating a business from scratch are:

Existing customers

An existing business already has customers which are a source of immediate cash flow. If you had to start a business from scratch you will have to spend time and money to get these customers.

Brand recognition

An existing business is usually recognized in its community. Brand recognition is something that takes a new business owner years to build.

Existing systems

An existing business overtime has experimented with so many strategies in building the business. By the time the business is ready to sell, the owner knows a lot about what works versus what does not work. What works is systemized and becomes parts of the business processes.

Existing assets

All the assets you need to operate in the business are often included in the selling price. For the most part you acquire these assets at relatively cheap prices.


More often than not the seller will train you before completely making a transition out of the business.

If you are thinking about buying a business, you do not need to have the selling price in cash. You can request a loan from a bank alongside with seller financing. The cash flow from the business will be sufficient enough to pay back the debt. Finally, do not hesitate to open up your mind to this idea. As you venture into entrepreneurship buying a business can increase your chances of business survival.

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Solving cash flow problems in your business

By | 2015-08-02T14:47:50+00:00 August 2nd, 2015|

As an entrepreneur, running out of cash is not an unusual problem. When you have cash flow problems, the first question you need to ask yourself is, “why did I run out of cash?” The problem of running out of cash can be divided into two broad groups namely:

  1. Marketing Problems
  2. Bad Financial Management

Marketing problem

Marketing problems are problems tied around your customers. Marketing problems show up in two ways

  1. Problems with getting customers (customer acquisition): Sometimes cash problems arises because you don’t have enough customers bringing in revenue. If this is your problem you need to look at your marketing system for what you can improve to make customers aware of you. You might need to remind current customers to refer you to others. Also consider running a marketing campaign or hosting an event, etc.


    One thing you need to know about customer acquisition is there is usually a lag time for most businesses. Which means just because you advertise does not mean you are going to have hundred new customers running at your door. Acquiring loyal customers takes time and rushing the process can actually have the opposite effect. This is why you have to consistently work on building your sales pipeline. You should always be generating leads due to the lag time between when a customer becomes a lead and a customer. Some businesses lend themselves to shorter lag times but regardless you need a consistent customer acquisition system.

    On the other hand, if your cash problems are so dire that you cannot wait for long term customer relationship, you can bring in new customers by having irresistible sales. Customers who come to your sales event might have no desire in becoming your long term loyal customer but at least they could help you meet a short term cash flow need. Do not let running sales become a habit to generate quick cash. Sales are only good when they are a part of a long term marketing strategy. Sales ran too often could cause severe damage to your business.


  2. Problems with retaining customers (customer retention): Customer retention means your problem is not getting the customers but keeping them. This could be due to a number of factors, but one I will like to talk about is having a poor operational system.


    Poor operational systems: Anyone who has lived long enough has experienced doing business with a company they swore never to come back to. This bad experience is normally due to a poor operational system. Sometimes cash flow problems arises from customers getting slammed by your poor procedures whenever they do business with you. They find your processes too cumbersome and more over the direct contact from your business is not sympathetic to their needs. If your problem is customer retention, first look at your operational system to see if everything is running efficiently from the customer’s perspective. Some questions to ask are:

  • Are we currently over capacity?
  • Do I need to hire new staff to take care of the overflow?
  • Would I want to be a customer of my own business?
  • What lessons can I learn from my successful competitors?
  • Do I have an operational system that standardizes customer experience?

Poor processes are quite lethal to your cash flow as bad word travels fast. Not only do your current customers not come back, they deter potential customers from doing business with you.

Bad financial management

Bad financial management is one of the biggest killers of business. Sometimes entrepreneurs go into business because they have a great idea but have no clue how to manage money. What is worse, they refuse to get help until the business becomes very bad. There are couple of things a business owner can do to keep from getting into dire cash flow circumstances. In this article I only focus on three bad financial management practices and how they cause problems with cash flow. These three issues are:

  1. Comingling business and personal funds: comingling business and personal funds is one of the things I see entrepreneurs do. The problem with this is business owners do not know where business income ends and personal income starts. You should have a system of paying yourself regardless of what business structure you have. Paying yourself lets you take the money you need for your personal expenses while the business still has money to re-invest.
  2. Poor collection practices: Let customers know what your payment terms are upfront. If you are having collection problems with a particular customer then you should change the policy so they pay you ahead of time. Letting customers go a long time without paying could be detrimental to your business.
  3. Charging too high or too low for your products: Your price should match the amount your target market is willing to pay. You should make it your job to study your target market. Using high end prices for a low end market and vice versa could have adverse consequences. For instance, charging lower than your target market expects might cause them to think your product or service is low quality and charging too high will send them to a competitor. Pricing is not an exact science and you might have to experiment a bit to find that right price. Of course, price should be set at an amount that makes your profitable.


In summary, when faced with a cash flow hurdle in your business,start by asking yourself why and then work your way back to a solution. Do not respond to a cash shortage in panic mode as you could find yourself in a worse situation. For example, running a sale because you need an immediate cash injection is a mistake if your problem is poor operational processes. The unpreparedness of the business could really turn customers off. Most of all, listen to your customers because they are the ones who inevitably determine if your business is relevant.

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Pricing Strategies – Profit Targeting

By | 2015-03-24T23:24:01+00:00 March 24th, 2015|

One of the questions new entrepreneurs ask is how to price their product. I think a more important question than pricing a product, is how much you get to keep. Profit targeting is when you plan your pricing to incorporate your desired profit level.

Business expenses are ether fixed or variable in nature. Knowing if your expenses fall within the fixed or variable category is important because fixed expenses affect your profit level whether or not you make a sale.

Fixed expenses

Fixed costs are costs that remain the same regardless of revenue. However, a business looking to expand will see an increase in fixed cost because of new investments made. Having fixed expenses is great when you expect high revenue levels.

Fixed costs can either be a committed costs or discretionary costs. A committed costs is a direct result of owning a resource or signing a long term contract. For example, signing up for a 2 year phone contract. With a committed costs, there is usually a penalty for cancelling early.

Discretionary costs

Discretionary costs arises from the business owners decisions. For example, a decision to subscribe to an online tool is a discretionary cost. The subscription could usually be cancelled without penalty. A business just starting out will want more discretionary costs than fixed committed costs.

Variable expense

Variable expenses are those that vary in proportion to revenue. For example, credit card fees is a direct percentage of sales.

Profit Targeting

To compute the target profit, you will need to know your selling price, total fixed expense and variable expenses. For example Brain, Inc. is starting a new online venture. Brain Truechild the founder of Brain Inc. plans to charge a $125 monthly fee. Brain has figured out his costs as follows:

Variable costs

  • Subcontractors: Each subcontractor will be paid $20 per job – variable
  • Marketing expense- customer acquisition cost is estimated at $15 per client.

Total variable costs = 20 + 15 = 35

Fixed costs

  • Website hosting fees – $15 a month
  • Other subscription fees – $30 per month
  • Other fixed costs – $100
  • Owners pay $485 (you should always incorporate pay in any business plan, whether or not you plan to actually withdraw the cash)

Total fixed expenses = 15 + 30 + 100 + 485 =630

Total costs = Total variable costs + Total fixed costs = 35 + 630 = 665

Analysis – Contribution Margin

Now Brain knows his fixed and variable costs, the next thing he will need to know is his contribution margin. Contribution margin is the amount each new subscriber contributes to meeting fixed cost. Since, Brain pays fixed cost whether or not he gets a new subscriber, it is important to know how much each new subscriber contributes towards fixed costs.

Contribution margin = Sales Price – Variable Costs

Brain’s contribution margin = 125-35= 90

Breakeven point

The breakeven point is the point where revenue equals expenses. Whatever you sell above your breakeven point is profit.

Break even cost is computed as follows:

Total fixed costs/ unit contribution margin = Breakeven point in units.

Brain’s breakeven point is 630/90 = 7 clients

7 clients translates to 7* 125 = $875 in revenue

All brain needs to break even is to have seven (7) subscriber. Anything above that is profit.

Profit Targeting

What if Brain wants to pay himself enough so he does not have to have a job? Brains cost of living is $2,485 a month. He already plans to pay himself $485, so he needs $2,000 more. In addition Brain will like to make an additional $3,000 monthly to reinvest in his business. This is a total profit of $5000 each month.

The formula to compute target profit is as follows: (Fixed expenses + Target Profit)/ Unit Contribution Margin = Number of units Brain will need to sell

= (630+5000)/90 = approximately 63 subscribers

Brain will need 63 subscribers. Now let us see how this number works out in a profit and loss statement:

Sales revenue (125 * 63)


Less: variable expenses (35 * 63)


Total contribution margin


Less: Fixed cost


Profit (due to rounding up the profit is $40 more)




Brains marketing strategy will have to focus on building a system of building his subscription revenue to 63 subscribers. The good thing is that once he gets a new subscriber, he earns recurring revenue from that subscriber which means he does not have to work at building 63 subscriber every month. If this was Brain’s goal for the year he only needs approximately 6 – 8 new subscribers each month. He should probably plan for about 10% more than his analysis because he might lose some subscribers along the way.

In summary, when you break down a big goal into numbers, it is easier to see how doable it is. Business is simply a game of numbers. You just need to know how to work the numbers to your advantage.

The more you see the possibility of a goal, the more likely you are going to see it to completion.

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Lifestyle CPA

Financial Keepers, LLC
Innovate Springfield
15 South Old State Capitol Plaza,
2nd Floor Springfield, IL 62701
Telephone: 417-812-5945