Rule #1 From The Worlds Greatest Investor
The legendary investor Warren Buffett has made billions of dollars for his investors.
He doesn’t use fancy algorithms and artificial intelligence to determine what stocks or companies to buy, he uses a few extremely simple rules. Having simple rules is just not for Warren Buffett. In fact, it is even more pertinent for you as a Virtual Business Owner (VBO).
Here are Warren Buffett's top two rules for running your business:
- Rule #1 - Never Lose Money
- Rule #2 - Never Forget Rule #1
You may be shaking your head and thinking DUH! Of course that is important. The majority (well over 50% of businesses fail in the first 5 years). But that doesn’t really give you a fair picture.
What's not in those numbers are the businesses, large and small where the owners are borrowing from family and friends just to keep the business alive.
It does not communicate the number of small businesses that rack up their credit cards just to stay in the game.
And the worst, it doesn’t talk about the number of small businesses that have taken out loans - loans that they have to pay back.
Enter The Profit Formula
Yep, Warren Buffett’s First Rule of Business is super important for you as a VBO.
It is why the average VBO is so much more successful than your every day small business.
One of the best business books on the market today is Profit First by Michael Michalowitz. In his book, he argues that accounting as we know it is completely wrong.
And he’s right! This is SO IMPORTANT to understand.
This is one of the foundation strategies behind successful VBOs and what makes us different. Here is Michael’s book summed up in a few paragraphs…
- Traditional accounting goes like this:
- Revenue - Expenses = Profit
- The Profit Formula goes like this:
- Revenue - Profits = Expenses
Essentially the strategy is to take your profits off the table first. There is actually a bit more to it, but I’m just simplifying it to get the point across.
Let’s say you want to make a 20% profit. Every single time money comes in the door, you take 20% of it and drop it in a completely different bank account. You are then forced to live and pay bills with the remaining 80%.
In our VBO Quickstart program, we have an entire lesson that focuses on The Profit Formula Strategy.
If you are interested, I would highly recommend your reading Profit First - I just looked it up on Amazon. Almost 1,300 reviews and a full five-star rating.
It’s funny (or not) how business and our personal lives can sometimes mirror one another.
Think about how things work when you get a paycheck. For some magical reason, there is only enough money to pay the bills - never enough to sock away a few extra bucks in savings.
When you get a raise, it is easy to think “Wow, I am making $500 more a month, I’ll just dump that in savings”.
We all know the reality… You need a new computer. You can finally take that vacation. Your kid needs braces. Bottom-line, that $500 bucks never see the light of day.
The same thing is true with business - I know. I’ve been there. All the sudden you bring in another new client. You have an extra $3,000 coming in every month. It’s amazing how you all of the sudden find more things your business needs. Before you know it, your business has consumed that three grand and there is no profit left.
No profit unless you followed our Profit Formula.
If you would have followed the Profit Formula you would have sliced $600 bucks right off the top and thrown it in another bank account.
Here’s the BONUS.
Let’s say you have three clients and they all pay $3,000 a month, a total of $9,000. Further, let’s say you follow the Profit Formula (as you need to). You would be stashing away $1,800 in profits every month. Part of the Profit Formula is to reward yourself once a quarter (three months) with a bonus equal to 50% of your profits for that period.
In this case, you are sitting down and writing yourself a check for $2,700. This is for vacation, a new kitchen, or anything else the floats your boat. The other 50% is saved in your rainy day fund. We will go over this in much more detail, but I think you get the picture.
This is one of the MOST IMPORTANT traits of a VBO. We are profitable. We reward ourselves. We are not your average small business!