A growing concern in America these days is the health of the middle class. The wealth gap has continuously been expanding for over a decade, and has been the main topic of political debates for as long as I can recall. This isn’t a post about which side of the isle is right, who should be taxed what, but rather an explanation of why basic statistics allows for people with more money to grow their wealth faster than those with less money.

A famous, yet concerning statistic is that most Americans would not be able to afford an unexpected $400 bill. That’s very concerning considering unexpected bills come up all the time. Flat tires, floods, a terrible war that causes a tremendous rise in gas prices, a global pandemic that shuts down the entire world, and whatnot. Because so many Americans are just $400 away from bankruptcy, that brings us to my first point of how probability makes the rich richer: insurance.

Insurance companies make billions of dollars by utilizing probability. To make things simple, let’s say that you own a car worth $20,000 and you pay a $400 monthly premium. In exchange for your monthly payments, the insurance company will pay to replace your $20,000.00 should it be lost, stollen, or damaged (yes, I’m ignoring plenty other contingencies for simplicity) (and deductibles). If buy this policy and your car is stolen one month later, the insurance policy was well worth it, and a loss for the insurance company. However, the insurance company has predetermined the likelihood of your car being stolen or damaged to be 4% in any given year. For the insurance company to make money on this policy they want you to make it at least 4 years without needing the $20,000 payout ($20,000/$400/12mos=4.1 years). If there is a 4% chance per year that you will need a payout, there is a 16% chance over a 4 year period; that’s pretty good odds for the insurer. Also, the further into your policy you need to make a claim, the less of a loss the insurance company bears (If you crash one month into the term, you’ve only paid them $400 and they need to cough up $20,000, if it’s one year in than you’ve paid them $4,800). Despite the odds being in insurance company’s favor, they have a risk you will crash and they will lose on your policy. The goo thing for them is that you’re not their only customer. The insurers make sure they will be profitable by providing many policies to many people with similar odds. The collection of all these premiums allows them to pay you in the event you smash that car into a tree. I’m not even going to mention the reinsurance industry. That’s right, there are insurance companies that insure insurance companies.

So why should you be paying a policy that only has a 16% chance of being “worth it?” Well, as I just mentioned, most Americans cannot afford an unexpected $400 bill. So we can safely assume wayyy more Americans cannot afford an unexpected $20,000 bill. The idea here is that you’d rather pay $400 each month to avoid a situation that would completely derail your life. You can’t afford the risk.

Let’s replay this scenario but now pretend you’re Warren Buffet (or any billionaire of your choosing). I highly doubt you’d be buying a $20,000 car, but let’s just pretend you are for some weird reason. $20,000 won’t even make a dent in your bank account, so it would actually make sense for you to forego the car insurance (ignoring the fact that it’s required by law) because there is only a 16% chance that it will be worth it, and even if you do end up having to pay $20,000 to replace the car, it will not derail your life. This principle shows that being rich literally affords you to the ability avoid a monthly payment that those with less money need to make. If both you and Warren Buffet bought the same $20,000 car, you essentially have to pay an additional $19,200 over 4 years than for the same car because you cannot afford the risk.

Risk is another way of describing probability. I know what you’re thinking, rich people aren’t getting richer because they’re avoiding insurance premiums. No, but the same principle applies to investment and generating wealth. A core investing concept is that the riskier an investment is the greater the rate of return needs to be. This is due in large part to the fact that there are such things as risk free investments. I can put a dollar into a savings account that pays 1% interest each year with zero risk. Given that fact, I would never make an investment that pays the same 1% rate but also has a 10% chance of failing, because I can make the same amount of money with no risk. Because there is such thing as risk-free rates, risk needs to be compensated when it is taken on.

Let’s say the 10% risky investment will pay off 25% if it is successful. You have a decision to make now: do you want to make a guaranteed $0.01 on your $1 investment or do you want to risk losing that $1 investment for a 90% chance to walk away with $1.25?

We can use simple math to evaluate this: since the risky investment has a 10% of failing, the law of probability tells us that if you make this investment nine times out of ten you end up with $1.25 nine times and nothing one time. Therefore the expected value of the investment is $1.125 ($1.25 x 90% + $0 x 10%). Based on this principle, it makes sense to take on the risk as you have a greater chance to make more money than the mere penny you get from taking on no risk.

But wait! Think back to the insurance dilemma.

You bought the policy, not because you think its a sound investment, but because you want to avoid the situation that will leave you homeless. You, unlike Warren Buffet, cannot afford the risk of foregoing the insurance. Circling back to the investment scenario you can obviously afford to lose $1.00, if not then you should probably stop reading this and file for unemployment. But let’s say the investment was $100,000 instead of $1.00. The same percentages still apply and it still makes sense to make the risky investment from a math standpoint. The expected value is you’ll end up with is now $112,500 compared to the risk free option where you would walk away with $101,000. There’s only a 10% chance you end up with nothing and a 90% chance you make a $25,000 profit. But if that 10% were to happen would you lose your house? Your car? Your spouse? Probably (pun intended). Would Warren Buffet? He probably wouldn’t even notice.

You decide that you can’t pass up the opportunity. Uh oh! The investment backfires! The dreaded 10% outcome happens and you lose $100,000 quicker than you can say “I should’ve just kept my money under my mattress”. Perhaps you still have some savings left, and you convinced your spouse things will be fine. Life is fine… for now.

But now a new opportunity comes your way. This one requires the same $100,000 investment and has the same 10% risk rate, but the potential earning is a whopping 50%! You can make half your loss back! There’s just one problem: you no longer have $100,000 to invest again. You need it to pay for your $20,000 car loan and the $400 insurance premiums. Not to mention your mortgage, daycare, gas, and all your other bills. Unfortunately, you have to pass up the opportunity, and wouldn’t you know it? It’s a winner. Not only did it go up 50% it went up 200%!! You would have made up your loss and then some!

Now imagine you’re Warren Buffet again, you hardly noticed the loss of the original $100,000 so invest in the winner without much thought. Your investment is now worth $300,000! You’re up $100,000 even after losing out on the first investment.

Do you see what I’m getting at?

Risk is a type of probability. The richer you are the more risk you can afford. Warren Buffet can afford to make millions of these $100,000 investments (literally) because he can afford the risk/probability of losing $100,000 a few times and still be able to continue on with his way of life. By being able to invest in many different opportunities the law of probability tells us that he will indeed continue to keep making money in the long run, as the likelihood that every investment with a 10% risk rate failing gets smaller and smaller the more there are.

Another large factor I haven’t brought up yet is that by having more money you have access to more investment opportunities than those with less money. For example many private investment opportunities are only available for very large minimal investment amounts. Warren Buffet can invest $10 Million into a company that wouldn’t even bother with you even if you were willing to invest your entire life savings, despite the percentages being the same.

There’s an old saying that goes something along the lines of “the first million is the hardest to make”. That’s true, to some degree. Of course, most people do have to work hard to generate their initial wealth, but growing that wealth once it exists is a lot easier than building it from scratch. Wealth generation is like inertia; it takes a lot more energy to get started than it does to keep going. Probability tells us that the more investment opportunities you participate it, the more money you will make in the long run. However, opportunities are costly, and you’re risk tolerance (should be) determined by the amount you can afford to lose without derailing your life. Risk tolerance cost money, and the more money you have the more risk you can afford.

Probability keeps the rich rich, and the poor poor. What do you think?

As a small business owner, rapid inflation can be detrimental, but there are some ways to combat some of its negative side effects

Buy In Bulk

In periods when inflation is rapidly rising, the main notion is that something today will be a lot more expensive tomorrow. Therefore, as a business owner, if you are sitting on some free cash, you would be better off buying more supplies or raw materials than you normally would, because they will end up costing more as you continue to wait.

Raise Your Rates

If the price of everything else is rising, your products/services should too. Of course, you want to be wary as you do. Depending on your industry or clientele you may not have the luxury to raise your prices and maintain demand.

Fill Up Your Tank

If you travel by car a lot to conduct business, you want to fill your tank up as much as possible even if it is not empty. Gas prices are continuing to soar, especially with the escalating Russia-Ukraine conflict. By buying gas before you need it you are staving off the more expensive prices that will continue to rise in the near future.

Earn Interest

While it is best not to sit on cash, as rising inflation will continue to lower its value, banks tend to pay more interest on savings accounts when rates are high. Compare your bank account’s APY with other options and make sure you are getting the highest interest reward possible on your idle cash.

Utilize Freelancers

As inflation rises, so does the cost of living. As the cost of living rises, so does the cost for labor. If you are trying to expand but find it too expensive to bring on full time employees with high salary demands too large for your budget, an alternative is utilizing freelancers and independent contractors to fill in the gaps. For example, instead of hiring a full time bookkeeper for $60,000/year you can hire a virtual CFO… like Skyview… for as low as $150/month.

That’s right! As you might be able to tell, I’m an avid writer and have enjoyed using The Skyview Scope as my creative outlet while I navigated not just the launch of my own company, but assisting over a dozen business owners as they set out to start their own companies. While, my business is less than a year old, and I am far from an “expert”, during this short time I have encountered many valuable lessons, spoke with successful entrepreneurs, and watched a lot of business movies and TV shows.

Sky’s the Limit: Navigating a Business Launch is a business help book comprised of tips, instructions, things to consider, and cautionary tales to be mindful of when launching a business. It will be available for purchase on Amazon starting March 1st.

Please fill out this form if you would like to pre-order a signed copy!

No payment necessary until the book is available for purchase.

Once you launch a business, in order to establish a customer base, it is essential to establish credibility. But gaining customers and credibility are akin to the chicken and the egg; without customers you can’t be credible, and without credibility you won’t get customers. So HOW are you supposed to establish credibility with minimal clients during the early stages of your business? I’m glad you asked.…

Invest in a Beautiful website

If you’re reading this article, that means you’ve obviously noticed how professional my website is! Building a website can be very inexpensive, in fact it can even be free. However, unless you are a web designer, if you make a website yourself the odds are it won’t come out looking all that professional. Although building SkyviewCFO.com was one of my larger start up expenses, it was worth every penny, because when you land on it you can feel it’s legitimacy and can afford a beautiful site. If you are trying to get people to buy into you and your business, but they find you on a website that looks like it was put together in a kindergarten computer class, you probably won’t be securing much business. They’ll feel that you probably don’t have a lot of business if you aren’t even able to afford a decent website. There are web designers in all price ranges so you can spend what you are comfortable with, but this is not an area to penny pinch as you want to focus on having the best final product, not the cheapest. If you are in the market, please contact us for recommendations on great web designers.

Ask for Testimonies

When you’re browsing for a movie to watch and you stumble upon something that catches your eye, what’s the first thing you do? I know I go straight to Rotten Tomatoes and check the reviews. Why? Because I don’t want to waste my time watching a terrible movie if people have already suffered through it and know that it sucks! Businesses are no different from movies in this regard; you’re clients are more likely to try out your product or service if they know that people have already had positive experiences. In the early stages, ask anyone you do work for to write a review for you. Don’t be shy! Most people are flattered and love to help out, especially if you did a good job for them. When you get a few solid quotes, put them on your website and other platforms (see below).

Google My Business

Google is the world’s largest search engine, therefore it is your largest lead source by default. Billions of users are at your fingertips, and you want to look legitimate when you pop up on searches. Warning: this isn’t a post about Search Engine Optimization (SEO), which I will address in an upcoming article, so for now let’s focus on how you can simply appear credible on Google.

Have you ever noticed that when you search for a specific business on Google a box on the right appears with basic information about the business? Well, that doesn’t just magically happen, you have to get in touch with Google and have them verify your business in order to do so. The process is called “Google My Business”. Here is a step-by-step process on getting your business’ Google account set up. You’ll be able to include important information such as your website, contact info, address, service are, hours of operation and much more. It’s also another spot for your customers to leave you those reviews.

Establish a Social Media Presence

Now that you have a professional website, a Google profile, and some positive testimonies, your business should be on as many forms of social media as possible, ESPECIALLLY Facebook (or whatever it’s called these days) and Instagram. Facebook owns Instagram so you can post simultaneously on both platforms via Facebook Business Suite to save yourself some time. Not sure what to post? That’s OK! You can hire very inexpensive freelancers on website’s like Fiverr and Upwork to create posts for you that are designed not only to look professional, but to increase your SEO as well. When posting, you want to have a consistent theme in your posts. This helps establish your brand and makes you appear both professional and credible. If you’re very creative, you can put yourself out there on other platforms like Twitter, Tik Tok, Snapchat, and others, but those require some more thought, effort, and creativity. It really depends on your target market, as those platforms have a younger demographic than Facebook.

Looking for more direction? We can help! Contact us.

There are three main financial reports that detail the performance of a business: the profit & loss statement (PNL), the balance sheet, and the statement of cash flows. While the PNL and the balance sheet often get the most attention, it is the statement of cash flows that is often overlooked, yet it provides the most accurate depiction of a business’ health.

Let’s take a step back and think about the typical life span of a human being. Instinctually, we are programmed to grow and reproduce. Ideally, you are born, you grow, you live, you procreate, you get old, and then of course you peacefully die in your sleep with your loved ones by your side. Those loved ones tend to be the offspring that you procreated who are, themselves, following along the same type of path as you: they were born, they grow, and they procreate. Of course, the more offspring there are, the more life spans there are, and the more life spans there are, the more procreation occurs. The more procreation, the more people.

The life span of a dollar entering your business is not so difference than that of your own. Ideally, when a dollar comes in it helps the business grow, procreates more dollars, and then dies peacefully (ideally, by leaving the business for your wallet). The more dollars reaching the point in the life span of procreation means the more life spans of dollars flowing into your business. Successful businesses optimize cash flow, so that their dollars keep on procreating more dollars, which in turn, keeps the cycle… cycling.

But how do you keep a cash flow cycle… cycling? Think of your business like a car and the cash flow as the wheels. The faster the wheels turn, the farther you go. Of course, there are plenty of components in getting a wheel to spin, keeping it spinning, and maintaining the car as a whole. To start spinning, a wheel needs inertia, to keep spinning a wheel needs grease, and to stay spinning the car needs to be operational.

Creating Inertia

To get your car started and the wheels spinning, every business needs a jump start to kick off the inertia that sets it in motion. Whether it’s an investment, a viral marketing campaign, or an exclusive patent, in order to start strong, initial inertia needs to be created. Once the wheels are in motion you can focus on the next, and most important part: keeping them spinning.

Greasing the wheel

To keep your wheels spinning and the car moving, you need to apply grease. Grease can come in many forms in a business sense; it can be more capital, endorsements, advertising, branding, and you get the point. Without any grease, the wheel will rust and be unable to keep going, leading the car to a grinding to a halt.

Be careful! Too much grease is not good for a wheel either. If you spend all your money on grease, there’s nothing else for the rest of the car and the whole thing will break down. Also I’m no mechanic put I’m pretty sure too much grease leads to other complications as well.

Maintenance

Every car needs to be consistently serviced if you want to drive it for a while. Just because you applied some grease to the wheels, doesn’t mean they will keep going forever. If you stop advertising, stop promoting, innovating, delegating, reevaluating, etc. your service light might go on, but it could be too late.

Creating and Maintaining Healthy Cash Flow

Getting your car started is the easy part, but keeping it going is what takes some brain power and constant assessment. In order for you to be able to do this, you must have a great understanding of your cash flow cycle and how to analyze your statement of cash flows.

A statement of cash flow gives a report of the money coming in and out of a business over a specific period of time. It has four main elements: beginning balance, money in, money out, and the ending balance.

The money coming in can be in the form of investments, loans, grants, and revenue, while the money going out can be expenses, capital expenditures, and distributions. If the money going out is consistently more than what’s coming in, the business will veer off the side of the road and smash into a tree. Better hope you have a good insurance policy (we’ll get into that later).

Notice how I didn’t simply say it is solely based on revenue and expenses? There are all of these other components, which is why simply looking at a profit and loss statement doesn’t give you the full picture of you business’ financial health. To grease it up, you need to have expenses and, in most cases, capital expenditures. To pay your rent, you need to take distributions. To maintain the car, you also need those three things. The key is not to stop money from going out, but to keep it at a rate that won’t jeopardize the ability to keep the wheels moving. In other words, keeping the money coming in.

Use your Cash flow history to forecast and avoid mistakes.

If you drive your car down the same road everyday, and you know there’s a pothole at a specific point, you would probably try to avoid the pothole. Right? Right?! Your business drives down many familiar roads each year. Therefore, using past information will help you avoid upcoming potholes.

For instance, if you know that you spend a majority of your expenses during the summer, you would want to make sure your wheels are greased and ready for the trip. Taking out a huge distribution, or spending on a massive capital project would be something to avoid right before you hit a bulk of your predicable expenses, and vice versa. If you know that the majority of your sales come during the winter, and you don’t have too many big expenses on the horizon, that would be the ideal time to take that distribution, or invest in that capital project.

While all of this may seem obvious, the point here is to stress the importance of your business’ cash flow. To keep the wheels turning, you need to keep them greased and the car maintained. And to limit the grease and maintenance you need, understanding your route can ensure a healthy drive.

To understand your route, you need to be able to forecast your cash flow and identify which are the rough roads and which are the freshly paved ones. This requires reliable data, and in order to have reliable data, you need to keep a record of every transaction consistently. If you don’t keep proper records in a consistent manner that makes sense for you, you’re basically getting into your car without a seatbelt and driving with your eyes closed.

So the ultimate question: How are you supposed to maintain consistent records, while also focusing on the road (running your business)?

The answer: Contact us.