4 Focuses to make $200+/hour after-tax

Even without fast food or a salon, you can still make $200+/hour AFTER-TAX as a middleman.

What do you sell?

You either sell software (including SaaS), equipment (industrial/medical/data center), houses, vehicles, or something scalable online.

After processing over $2.8 billion in transactions over 10 years, four definitive conclusions is that you need to focus 1) your inventory and 2) your market while optimizing 3) alternatives for your customers and 4) your outsourcing.

 

  1. INVENTORY MANAGEMENT: LESS VARIETY MORE FOCUS

Marginal cost bisects average cost at the minima of the average cost.  If you can reduce inventory you will improve your profit by maximizing your output variables.  Inventory turns, is a measure of how many times inventory turns over in a year. The higher the number of inventory turns-or the lower the inventory days–the tighter your
management of inventory and the better your cash position. As long as you have enough inventory on hand to meet customer demands, the more efficient you can be.

Inventory is “frozen cash” the faster you can get it out of the door, the better off you will be. The longer you keep inventory, the more money you lose in opportunity cost. Low inventories will also mean you can afford to sell your product at comparatively low prices. You would be able to sell your product cheaper because you would be able to sell them more quickly.

Everything in life operates on first and second order derivatives. The second order derivative shows that with each added different item in your inventory, the curve in relation to the cost will get steeper as your costs increase but not pro rata with the different items you add. Each different item/product line takes time and effort to sell (the most expensive things), so trying to sell more different items is like trying to fill many pools with 1 garden hose. Its easier to fill 1 pool rather than 2. The solution is to sell less variety but to make more money off of each product line. Consequently rather than spending $100,000 on X different categories of inventory, you can spend the same money on half the variety.

2. ONLY 2 MARKETS: WOMEN AND RICH PEOPLE

  1. Women
  2. Rich people (people who earn over $137,790 per year in Edmonton) – they control 70% of Alberta’s wealth.

What about men who earn less than $137,790 per year in Edmonton? They simply don’t count – their women control their money – if you’re not selling houses over $500,000 or vehicles over $50,000 then sell what women want.

It’s important to choose your market and your customer. You have to know what the ideal customer wants. Everyone can get want they need, but you will earn more if you can give the customer what they want. When someone wants something they
will pay higher margins compared to when they need something.

3. GIVE YOUR CUSTOMERS ALTERNATIVES 

Not having any reasonably similar alternatives will mean you lose customers.

Brand your company with a compelling and focused mission that leverages your combined special skills. People get rich by adding value to other people’s lives, rather than just acting as a middleman/retailer.

The path to success is not as clear as the path to failure. So by doing the opposite of 90% of your competitors, it will ensure you will succeed. There is always a choice between status and money. Most people choose status and have more variety rather than being content with a smaller presence and more money.

4. OUTSOURCE WHEN APPROPRIATE

Now that you make over $200/hour AFTER-TAX (calculated by taking your after-tax income and dividing into the hours you work. ) you know should enforce it. Like Naval Ravikant iterates in his famous tweet storm, “If fixing a problem will save less than your hourly rate, ignore it.  If outsourcing a task will cost less than your hourly rate, outsource it.”

If your problem is business related than you can use your pre-tax hourly rate since business expenses are paid with pre-tax dollars, while residential repairs and maintenance are paid for with after-tax dollars.

  1. Build scalable brand leveraging algorithms and/or employees.
  2. Invest in real estate
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3 reasons why I started a business in Edmonton

I run an Accounting Sofware-as-a-Service business based in Edmonton. Accountants are all about cost-cutting, but the truth is that it’s all worthless compared to the big 3: taxes, housing, and payroll. Our mission is to reduce costs by 15-25% for businesses with recurring revenue. Please reach out to us at help@christianthut.com

1. Taxes

Combined, the corporate and personal taxes in Alberta amount to only 15% of earnings for $300,000 in income (compared to 20% in Switzerland and 45% in Germany). In Alberta, you can earn more than $20,000 per month after-taxes and become a multi-millionaire within a short time. Making more money has a bigger impact on your financials than reducing your spending since there is a ceiling to cutting costs, you can not go below 0 while there is no ceiling to earning.

2. Housing

Until you have the cash to optimize your taxes and your mortgage interest you should be keeping your cash flow down by renting. It is a common mistake to think that buying a house saves you money. Buying an asset with debt is merely renting money you don’t have.  In addition to the interest, buying a house has more costs:  property taxes, home maintenance, repairs, upgrades.  A $700,000 house can be rented for $2,550 CAD, so the price-to-rent (P/R ratio) is 23 (700k/ (2550*12)). You should only buy if the P/R ratio is less than 15  unless you are optimizing your opportunity cost of other assets (a scalable business).  Focus on delivering value, and you’ll see the priorities in building a scalable business since real estate does not normally add comparable value except in gentrification during times of shortage.

3. Conflict

Conflict is the raw material of natural selection and pushes evolution forward toughness, heroism, and social utility. Canada is big enough and diverse enough that without learning to scale on an international scale, there is enough opportunity to inject small amounts of stress in your life to push yourself to self-improvement all the while avoiding stress from real problems like feeding yourself.

Only through conflict do humans force themselves to be the best version of themselves.  As the Roman statesman said, “Comfort leads to waste.” Hostile and diverse surroundings (both climate and humans) challenge us both physically and mentally every day, forcing us to get stronger and smarter.

1 Thing Switzerland does better than Canada

In Canada, we have a socialist system where the cost of health care is built into our taxes and dependant on our income and not on our risk optimization like in Switzerland.

In Switzerland, you can pay out of pocket for everything under your deductible. Costs above your deductible are taken care of by your insurance policy to which you pay a monthly premium.  You can reduce your monthly premiums by reducing your deductible.  The Swiss system is more sustainable since there is less asymmetry (where the largest cost to the Canadian health care system is also the smallest contributor).

If you want to maximize your life, read on. I run an Accounting Software-as-a-Service (SaaS) company based in Edmonton.  Accountants are all about cost-cutting, but the truth is that it’s all worthless compared to the big 3: taxes, housing, and payroll. Our mission is to reduce costs by 15-25% for businesses with recurring revenue. Please reach out to us at help@christianthut.com If you like this article, you might like:

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  • Part 2: Get Big, Stay Lean: A How-To Guide For Clean Bulkers  Before looking to grow you need to get lean first.  Once you have downsized until the marginal costs of outsourcing exceed the cost of doing it internally, you are ready to get big. Contrary to popular belief, you can get big without becoming inefficient. Here’s how to get the best results from your bulking plan! Spend more! Most people focus […]
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We are focused on the following 3 customer groups:

  1. E-commerce
  2. Fast food
  3. Nail salons

Part 2: Get Big, Stay Lean: A How-To Guide For Clean Bulkers

Before looking to grow you need to get lean first.  Once you have downsized until the marginal costs of outsourcing exceed the cost of doing it internally, you are ready to get big.

Contrary to popular belief, you can get big without becoming inefficient. Here’s how to get the best results from your bulking plan!

Spend more!

Most people focus on cutting costs, but since most people are unsuccessful, logically you should do the opposite.  In the case of a scalable business, spending more money should result in you earning more money.  Proper scale dictates your earnings increase exponentially as you increase your spending anything that saves you time (employees & outsourcing everything where you don’t have the greatest competitive advantage).

Other than payroll, the only other costs that are worth your brain cells is optimizing your taxes and mortgage interest with your corporate draws.

Target 1 or 2 niche markets and hit it hard!

Spend more specifically targeting paid advertising to dominate niche markets.

  1. Influencers
  2. Word of mouth – referral program
  3. Facebook/Instagram
  4. Google

Choose similar markets 

It is important that when you scale to adjacent sectors, that you are “selling” to the same type of customer you dominated earlier.  Our biggest mistake in business was at the onset of Alberta’s downturn we aggressively marketed our high-end service to the mass market customer.  Mediocre customers are looking for motivation and a magic pill to cure their predicament rather than dealing with the cold truth – that they alone are responsible for their situation. Similarly, our clients that have had success selling to the masses would not be able to upmarket their product with the same marketing and pricing.

Both our new target sectors, together with the first 3 sectors we dominated, have the ability to scale to more employees and more capital assets.  Scaling compounds in favour of these 5 segments since the fixed costs of creating the output are being spread over higher and higher revenues to yield increasing pricing advantages for their inputs, which leads to the same elite customer:

  1. Disciplined and definite people that do the single best valuable thing they can focus on rather than being a “Jack of all trades, master of none”.
  2. A compelling and focused mission that leverages proprietary skills/equipment too hard for average people to acquire or learn from youtube.
  3. Minimum 20% pre-tax margins on annual revenues in excess of $400K.
  4. $1M valuation based on a 2.5x-5x earnings multiple

All easily accomplished with

  1. E-commerce
  2. Fast food
  3. Salons

 

 

 

Part 1: Get Lean before Bulking

What happened to THUT? At its height, we employed 6. Today, with more and larger customers, there is only 1 employee.  In order to grow, older companies (4+ years) need to get lean first: downsize until the marginal costs of outsourcing exceed the cost of doing it internally.

  1. Staying lean is key to operational efficiency.  For a company with healthy revenues, the fastest way to increased profits is to cut costs.  You’ll need to eliminate product lines/customers that are responsible for a disproportionately small part of your revenue.
  2. Getting lean first sets your company up for better scale. Efficiency compounds so you will grow exponentially faster if you get lean first and improve your margins.

For us getting lean, meant realizing no one has ever gotten rich doing everything for everyone: In 2016 we cut down our contacts because it made no sense to corrupt our Dunbar’s # when half the people we dealt with only generated 10% of our revenue.  2017 we have improved where  14.67% of our revenue comes from 37% of our customers.  But it clearly makes more sense to give up $115,000 of revenue (14.67%) if we can save 37% of our time, hence we have eliminated even more.

Now in 2018, we slashed product lines to focus on being the best platform designed to meet the needs of recurring revenue. The best being defined as precision, ease of use and comprehensiveness.  Now, we are a fully integrated blockchain solution that brings together payroll, bookkeeping, accounting, corporate taxes, personal taxes, banking and wealth management.

Lessons in staying lean:

  1. Business plans, financial projections, budgets are all a waste of time – simply reframe your focuses as a function of time and get better every day.   Prioritize maximum effort and make sure taxes, payroll and housing are planned for – no other cost-cutting matters compared to those big 3.
  2. 80% of your time should be in delivering your product and only 20% on support and marketing.

Check out the archive and like us on Facebook to continue our journey to financial freedom in an increasingly complex world.

 

Math to Escape the Middle Class

Being part of a certain profession, or earning a certain amount of money does not ensure your exit from the middle-class.  Most people are stuck there because of math.

We focus on the only 3 sources of negative cash flow that matter: taxes, housing and in the case of a scalable business – payroll.  Even the highest earners stay middle-class if they don’t focus on taxes and housing.

Taxes: Everything you pay for really costs you 1.5x-1.8x more since you would be paying for it with after-tax dollars rather than pre-tax dollars. The only expenditures exempt from this rule are business assets and expenditures bought inside a corporation.

Housing: In combination with the taxes above, depending on your tax bracket, your mortgage and your interest rate, a $1 million house will cost you at least $1.5 million (no mortgage and extremely low level of living requirements) and as much as $4 million of gross earnings.

Now Here’s the Math

Regression To The Mean & Bimodal Extremes:  How is that so many high-earners are trapped into the middle-class mediocrity of trading their limited time for money?  In any group, people of high-value/high net worth/high IQ are dragged down by people of lower-value/lower net worth/lower IQ due to osmosis.  If you take advice tailored to the middle-class, by a middle-class advisor, you should not be surprised if you end up middle-class. You need to find someone who is living a life that you want and take guidance from there.  So in short, ignore anything average, and advice from/for average people are to be avoided at all costs. The solution is bimodal approaches from the extremes.  90% safe investments + 10% high-risk investments vs. a mediocre portfolio with limited upside and a possible unlimited downside.  Or mediocre jogging vs. extreme high-intensity training. Other bimodal strategies with exponential benefits: intermittent fasting. The framework to pursue bimodal extremes involves ranking your options in descending order of optionality and open-endedness of pay-offs.

Dunbar’s Number & Via Negativa: The solution to this is to be mindful of the upper limit to how many interpersonal relationships your brain can process (150).  I can never have more than 150 contacts (this does not apply to mass-market businesses, but something so sensitive as advisory to HNWIs can never be mass-market). Most problems are better addressed with subtraction (Via Negativa – Nassim Taleb) To keep negative osmosis from happening in my life, I removed the bottom 50% of people from my life and doubled-down my time on the top 50%. I repeated this process many times until I was down from 1000+ to 150 contacts.  Everyone in my life is either moving up or moving out of my life.  This eliminates the negative osmosis that would otherwise cloud my thoughts with middle-class thinking.

Chaos Theory Feedback Loops: Its nearly impossible to remain middle-class if you focus your actions on receiving a recurring benefit. The best way to start is to reframe all your problems as a function of time and improve year over year (YoY). This means you will get richer due to superior/scalable abilities and your riches will beget more riches. This will result in a knee in the curve non-linearity compared to the linearity of the middle-class.  All decisions compound (both for and against you), and this makes money eventually become perpetual so the path is clear: prioritize the maximum effort to get compounding on your side (make sure your inflows compound more than your outflows).

Chaos Theory and Dynamics: The middle-class think in simple terms of cause and effect, when the reality is that the outcome in sensitively depending on initial conditions, so the cause will result in empirically complex 2nd, 3rd, 4th, …. nth steps. It’s better to fix systems  Via Negativa – Nassim Taleb, since the middle-class solution to add more things to their life make things worst.

Inversion: A famous problem-solving technique in mathematics can be easily used to re-frame everyday problems.  Whatever question you ask yourself – ask yourself the inverse question. The path to success is not as clear as the path to failure. So by doing the opposite of the path of failure ensures you survive, and as Taleb reminds us you first must survive in order to succeed.

Pareto’s principle: The majority of a given effect is due to a minority of the possible causes.  You have a limited store of attention and time, so to create the aforementioned feedback loop you need to prioritize high-impact activities. Maximize the results by minimizing the stuff that doesn’t count: don’t check your e-mail more than 3 times a day, stop watching TV, surfing the net,  playing video games, and taking unnecessary vacations.  Make your own life great instead of engaging in escapism.  Make your life so good you don’t need a vacation. The more you shift your attention/time to high-impact activities the higher your overall benefit due to the compounding.

Game Theory and the Prisoner’s Dilemma: Will allow you to recognize and exploit the irrational decisions of others.

Calculus: Marginal cost bisects average cost at the minima of the average cost. The optimal point of production in terms of profit by maximizing your output variables can be determined by cost and revenue functions.

Here are some more math hacks for your scalable business.

 

 

 

 

 

 

 

 

 

Customer is King

The most important things in valuing a business are detailed financial records, well-documented operations (SOPs) and customer metrics: the long-term value of the customer, the cost of acquiring customers, revenue, and lost customers.

Last week a dozen of our customers were listed as 2018 Golden Fork winners so we will start with the fast food group: Customers on average visit a particular fast food place once or twice a month (we will use the conservative mid-point of 1.5x/month).  This customer will patronize the fast food place on average for 3 years.

For a nail salon, your customer comes on average twice per month but will patronize your salon on average for 5 years.

The long-term value of customer = Average Monthly Revenue per customer x Average years a customer will patronize your business.

Cost of acquiring customer (CAC) = Advertising expenses / # of new customers added

The long-term value of the customer: Cost of acquiring the customer.

This ratio will indicate if you are spending too much or what we found more often is that you spend too little and are missing out on growth opportunities.

In a fast food example, a customer spends $20 x 1.5/month x 36 months = long-term value is $1,080.

In a nail salon example, a customer that spends $50 x 2 /month x 60 months = long-term value is $6,000.

This should also serve as a reminder to value your customer for their long-term value and not just their $50 refill or $8 Pho Bowl.  The math also reminds you that it is better to have one ideal long-term customer than it is to have more but poorer quality customers.

There will come a point in every business owner’s life that money comes perpetually, like living off a 3% return on $3 million, and you will have to decide if you want to sell your business. You can get a multiple between 2.5 – 4 on the seller’s discretionary cash flow. Internet businesses can even reach 5x multiples.

Your multiple will be the average of the four results sensitive to these 4 metrics:

  1. The longer you have operated the business and have solid financial records the higher your multiple.
  2. The more time and technical skills the owner uses to run the business will decrease your multiple.
  3. Increasing revenue and/or profit trends will increase your multiple, while 0 revenue growth will only command a 2.5 multiple.
  4. The more loyal your customer base the higher your multiple.

If you operated your business for 10+years, work 25 hours per week in your business, have a flat revenue, but a loyal customer base, you could be looking at a valuation of $1M based on an annual discretionary cash flow of $300,000.

The advantage of internet businesses is even more clear when it comes to selling your business. The smaller your city, the less likely it is you will get your worth when selling your business so the alternative would be just to keep it but reduce your income by 30-50% by outsourcing or hiring.

Money is only a mathematical measure of value, so the key is you should always focus on delivering that value, the money is a by-product. Focusing on making money will only ruin your long-term gains.