Understanding Residual Income – One of the Most Important First Steps to Starting a Small Business

Understanding Residual Income – One of the Most Important First Steps to Starting a Small Business

Establishing a business model that adheres to basic wealth building principles is among the first steps to starting a small business.

Some of these principles are:

Residual Income
Leverage
Assets and Liabilities

This article focuses on the first of those principles, understanding residual income.

Occasionally referred to as Passive Income, Residual Income is an income source received regularly, without having substantial effort necessary to sustain it.

So let’s take a look at some examples of business models utilizing various amounts of Residual Income.

Building Contractor
Contractors are usually hired for various construction jobs. In most cases they’re hired to do a certain project, they will carry out the job, after which they get paid. They perform a job once and they get compensated once. If they want to get paid again, they must go out and complete another job.

This probably appears to be fairly normal to you because most folks are accustomed to receiving payment in exchange for work; it appears normal. However, this particular example business model has actually zero dollars of residual income! If the building contractor wishes to take a family vacation or gets sick, he isn’t getting paid. If he hopes to retire, no more income comes in. If he passes away, his business dies with him and his family does not continue to live from the business proceeds.

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Insurance Sales
As an insurance sales company, you are able to sell a variety of insurance plans. You may sell car insurance, life insurance, medical health insurance, or whatever. Whenever your company sells an insurance plan, you receive money once at the start, but then you will receive money each and every month in which the customer pays his or her payment. People usually keep the same insurance provider for a long time and as a result you would continue to be paid for many years.

As you have seen, this particular business model offers some residual income. You work once then get paid for years into the future. This is exciting because you can take vacations and continue to get paid. The problem with this particular business model is that the policies eventually expire and if unattended, your customers fade away.

The interesting thing in relation to both of these examples is that they require you. You are part of the formula. There is a big difference between being an entrepreneur and being self employed. If you are part of the equation, that means you are a necessary part of the long term business model then you are self-employed!

Planning and creating your own business model to include a strong element of residual income is vital during the first steps to starting a small business. Unless you are merely searching for a job or a place to go to work every day, you need to learn how to build residual income into your business model.

Let’s return to our insurance company example. Instead of becoming a self-employed insurance agent, consider it from a higher, more entrepreneurial level; create an insurance selling team. There are lots of jobs to be filled. Your role would be as the president and to merely oversee the operations. You will have to have a manager to oversee the employees. You will want numerous agents doing the actual product sales. Perhaps you would want some office workers. Most importantly, You will definitely require a written set of operations manuals in order to direct the employees regarding their duties and responsibilities.

You see, with this example you’re not necessarily part of the long term formula. You develop the business model and you develop the procedure, but then you are totally free to retire or go on vacation or start a different company.

Think about your small business during these crucial first steps to starting a small business. Does your business model offer residual income? How will you structure the business model so that it does deliver residual income? If you do not have residual income as part of your business model, how will you ever take time off or at some point retire?

I really hope you now possess a basic awareness of this essential wealth building principle. I would recommend also reading my other business building articles on Leverage and Assets Vs Liabilities. Feel free to take a look at my web page to read more.

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