The other day I took my daughter to the local neighborhood playground for a play date. While there, I had a grand time chatting and joking around with the other parent. Eventually I mentioned my interest in personal finance and entrepreneurship and that steered the conversation in a new direction.
I told this other parent that I don’t believe that a job is a very logical way to earn income and he found this curious and a bit shocking. Then he politely asked just how one could earn income other than a job.
I said that there are actually a lot of different ways but growing up with traditional middle class ideals doesn’t expose us to anything different. We learn both explicitly and implicitly to pick a profession so that you can get a ‘good’ job.
Then I used this analogy for the mindset of the entrepreneur:
- Suppose you earn your living mowing people’s lawns. You can mow 8 lawns in a day at $20 each. You are earning $160 a day. So you make roughly $40,000 a year (before taxes, etc) - not so bad for something so straightforward.
- The middle class mindset is to learn more about landscaping and become an expert so you can charge $30 an hour. Then you buy the best lawnmower, so that you can mow a whopping 10 yards in a day! Now you’re making roughly $75,000 a year before expenses. Wow, now you are rolling in the dough!
- Now in walks the entrepreneur. He heard through the grapevine that you are making some big bucks doing some simple lawn mowing and decides that this might be worth pursuing.
So he hires someone to start mowing lawns – 8 a day. He pays the new employee $18 a lawn and withholds $2 for himself/the company. Now the employee gets roughly $36,000 a year before expenses, and the entrepreneur only gets $4,000. But the entrepreneur doesn’t work for it.
So after a little while, the entrepreneur decides that he wants to earn a bit more income. So he hires 9 more employees. Now there are 10 folks all on the work force earning their $36,000 a year before expenses. Now the owner is making about the same as the employees. At this point the entrepreneur is working pretty hard to obtain clients.
After some legwork, business continues to expand. Word of the company has gotten around and there is more business than the 10 employees can handle. So the owner hires 5 more people and better lawn mowers to speed up the process. He also increases the price of the service to $26 a yard.
The owner splits the price increase with the employees and now they are each mowing 10 yards a day and making $52,000 before taxes. The owner is now making roughly $187,500 a year before taxes.
Business continues to pick up and the owner, so he hires 10 more employees – bringing the total up to 25 people. Then he increases their share of earnings from each lawn from $21 per lawn mowed up to $22 per lawn mowed. The workers get a little bump in salary to $55,000 a year before taxes.
The owner is now making $250,000 a year before taxes and expenses. And he doesn’t mow any lawns. What's more is that now the business is stable, he is free to start a second business on the side if he chooses to.
And that is the entrepreneurial mindset.
2 comments:
This was a great post. I'm not going to run out and start a business, but it's interesting to see the process broken down in very straight-forward terms like that.
The only hitch I see is having the inital money to invest. In order to get the operation off the ground you'd need some capital to invest in order to pay the first employee. And I'm guessing for the first couple of years you'd need a regular joe job just to make $$$ to support the starting business. But I can see how it would pay off in the long run.
Me, I'm banking on the lottery. Failing that, insurance fraud sounds pretty lucrative.
Agreed- but with an annoying observation. (does this make your blood boil?).
In your example, I think you are comparing someone with a job against someone who is self employed, or a small business owner. Is that the same thing as being entrepreneurial?
I take entrepreneurial to mean someone who is "willing to take on a new structure or enterprise". That is, there is a certainly amount of innovation involved. In the example, I think the mindset would be someone who equips his people with flamethrowers to cut the grass, or trains dogs to ride lawnmowers, etc.
Meanwhile, from your first to your third blog, you obviously have a keen interest in building a business and making some $$. I think that is great. Money can't buy happiness, but wealth can buy time to do whatever you want to do.
Go Dunder Miflin Infinity ! ! !
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