Cashflow might be the most important element of any small business. You can have a great business idea, be an incredibly hard worker, and have all the mentors and connections in the world, but unless there is money coming through that door on a consistent basis, the business isn’t going to last too long.
How many times have you read about new startups and their burn rate, which is defined by Wikipedia as “a measure for how fast a company will use up its shareholder capital… if the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.”
For an individual entrepreneur, it works the same way. If the cash flow isn’t coming in, they might have to borrow money from friends, find more clients, borrow on credit cards, or go back to working a full time job.
In the pursuit of wealth and building a business, I propose that there are 3 types of income that solopreneurs should strive for:
1) Consistent Income
Consistent income is what feeds the bottom line of the business, and frankly, pays the bills. This is money that you can count on to come in without fail month after month, serving as a baseline for basic expenses.
Let’s look at some examples:
Joanne is a talented web designer. She left her full time job last year at a major publishing company to go out on her own and build her own business. Because she was so specialized in what she did and her old company really loved her work, they agreed to keep her on retainer, paying her $3,000 per month in exchange for being available to do small projects such as ads, banners, emails, templates, and website design projects as they come up.
As long as that is in place and she can do the work, that $3,000 will come in on a regular basis and Joanne can count on it to pay her rent and utilities every month while she builds up her private business. Nice work, your lights are still on.
– Or maybe you’re a writer and have agreed to produce 2 articles per month for a website at $100 per post.
– You might have an advertiser on your blog that pays you a monthly fee to run ads throughout your site.
– Or you’re a photographer and every single month you teach a class at a local college and you’re guaranteed $1,000 per month to put toward your iPhone, your cable bill, and your car payment.
In some cases, consistent income doesn’t have to be related to your business. We’ve all heard of the actor that waits tables or tends bar at night while they’re pursuing their dream and going on auditions during the day, waiting for their big break.
Entrepreneurs do this as well, taking a part time job in an unrelated field to have consistent revenue coming in while they launch their product or build up their side hustle… anything to have a consistent feed coming into that bank account.
2) Spike Income
The second type of income is what I call spike income. These are jobs that come in inconsistently, but can really bolster your bottom line.
Let’s go back to Joanne, the designer. She out there hustling and trying to bring in new clients. This month she got a web design job for a friend of friend that will pay her $1,800. Then she won a quick contract on 99designs.com to do a logo treatment for $600. And that December she’s thrilled, as she was asked to design the overall branding for a holiday promotion for a local business, including logos, online advertising, printed handouts, and in-store promotional materials. Total income for that job will be $3,500.
The reason this is spike income for her is that it is inconsistent:
– Once that friend’s website is done, they might not need any more work from her
– There is no guarantee that she will win the next job on 99designs
– And unfortunately, while she can propose promotions for New Years and Presidents Day, Christmas comes but once per year
Side note: Check out this interesting article on Spike Lee and Kickstarter on one of my favorite sites, CelebrityNetWorth.com.
Here are some spike income examples from my business:
– A speaking engagement at a conference or small company
– 1:1 salary negotiation consulting sessions with a client
– Successfully pitching and writing an article for a major magazine
– Product managing a new media training program for a large company
– Teaching a class online or in person when it is offered
Once again, there are no hard and firm rules for how money can flow into your business. Some people rent out their apartments on Airbnb while they are away, getting an influx of hundreds or even thousands of dollars a few times per year.
While the downside of spike income is its inconsistency, the upside is that it can grow your overall annual income tremendously as more and more spikes hit your bottom line.
3) Passive Income
The final type of revenue is passive income. For many, this is the long term goal for building wealth, having freedom in your life and business, and is the holy grail of making money… earning income while you sleep.
To be clear, unless your wealthy parents are funding your lifestyle via a trust fund, passive income isn’t something that comes easy. Rather, as Pat Flynn from SmartPassiveIncome.com says, “It’s working hard now to reap the benefits later.”
In the traditional sense, passive income was derived through things like stock dividends or real estate. For example, I would love to own a 3-family brownstone in Brooklyn or on the Upper West Side near Central Park. I found one for sale that offered two spacious one bedroom apartments and a sweet top floor studio – I could live in one of the one bedrooms and rent out the other two apartments.
That would be perfect if I could rent out the one bedroom for $2,500 per month and the studio for $1,500 per month. If my monthly mortgage payment on the building was
$5,000 (oops, $3,000. Messed that up on the audio podcast too), then I would be netting $1,000 per month in passive income. Sure, there is maintenance and repairs to do, dealing with renters, taxes, and so on, but all things being equal, as long as there is a tenant there, month after month I would be getting $1,000 in income, without quote “working.”
The flaw in this particular plan: That building costs $9 million dollars, so the monthly mortgage wouldn’t be just
$5,000 $3,000… it would be roughly $59,000.
But in the digital economy, you don’t have to lay out millions of dollars. In fact, sometimes you can build products that generate passive income for nearly free.
The key is that you are putting in significant effort to create a wealth-building product once, with the goal of generating recurring income down the line.
Here are some examples of passive income:
1) Writing a book that is sold to a publisher. This actually can generate spike income through an advance, and then passive income if royalties from book sales come in on a regular basis
2) Creating a digital ebook priced at $29 that can be sold on your website over and over again
3) Building an app for Android or the iPhone that can be sold in the app store and earns you revenue each time someone downloads it
4) Cultivating a membership site for tech geeks or weight loss or online dating or video gamers that provide a community and support, and charge a recurring monthly membership
5) Creating software or a website that charges users a monthly fee. I think of how many of these I use myself:
a. Amazon Prime
d. Aweber email hosting
e. Dreamhost website hosting
f. Libsyn hosting for my podcast
Yes, in some of these cases there are costs, such as shipping for Amazon and bandwidth for web-based sites. But all I know is they get my money every single month no matter what I do.
What could our designer Joanne do? If she had a specific talent, say, creating mobile responsive websites for children’s authors, she could work in all three forms:
1) Her old company pays her a monthly retainer for consistent income
2) New authors could come to her as one-off clients to build their websites as spike income
3) Based on her experience, Joanne could take several weeks or months of her time to build the ultimate responsive WordPress theme template for authors looking market their children’s books. Once complete, she can sell it on her on website or on a site such as Themeforest.net or Woothemes, and every time it is downloaded, she would make income
Whether you’re a Silicon Valley startup or designer just ramping up, maximize that cash flow and think about 3 types of income streams.
Check out my free online salary negotiation course, “How to Negotiate Salary: The Negotiation Mindset.”
Sponsor Message: Freshbooks Fresh Take of the Week: A Fond Farewell
I’m sad to announce that this will be the final episode with Freshbooks as the official sponsor of The Hopkinson Report. I’d like to thank my friend Saul Colt for introducing me to them when I first went out on my own, and having them as a monthly sponsor was invaluable during my first two years launching my own business. It really was a perfect match, as I honestly love their product, and still use it every day to manage all my client accounting and billing.
Here’s the good news:
1) While not the premier sponsor, full disclosure that we’ll still have an affiliate relationship on the blog and I recommend that you check out their free trial, follow that link or view it on my resources page. Have that
2) I may be working with them in other capacities, such as my live events.
3) That means there’s a new opening for a sponsor on the show, so if you want to reach a great audience, contact me.