If I ask you: “what business is McDonald’s in?” Then, I guess most people will say that McDonald’s is in the fast food business; they sell burgers. Well, this is not entirely true.
The most interesting thing I learned last year about finance and business was that a company can have a business that builds cash flows and at the same time, runs a different business (the core business) that drives up the assets and the values of the company.
For the case of McDonald’s, its ‘core business’ is actually real estate business! The founder of McDonald’s knew the finance and banking very well (I have to say) and this is why.
If you are going to run a restaurant, then you will find that the two biggest cost items are labour (people) and shop rental. If you do the numbers (as a banker), then you will also find that it’s better to own the shop, rather than paying rents. People run businesses by owning or renting shops. The difference is whether you eventually own the shop (the asset) or not.
The good thing to own an asset is that you can use that asset to borrow money from a bank. Then, you have money to buy the second shop and run your second store. Overtime, real estates usually appreciate by values, if the location of the asset is good. With a higher asset value, you can borrow more money and open more stores in your fast food chain.
So, what’s the difference by renting the shop? Well, you still earn the profits (assuming you run the business well), but you can’t lower your costs because you always need to pay rents to shop owners. It’s also very hard to borrow money from a bank by using your business cash flow. If you want to open a second shop, then you need to use your hard-earned profits to invest in the second shop. Here, you’ve just lost your Porsche…..
So, McDonald’s run a good fast food business that brings strong cash flows. While owning shops, McDonald’s can collect rents from its franchisees (oh yes!), borrow money with its real estates, and use it to fund future expansions. Cash flows from restaurants can be used to pay back loans. Then more shops, more stores, more cash, and higher asset values. This is such a nice business model!
Can you apply that business model to your life? The answer is yes, and a BIG YES! How?
The business that generates cash flow for you would be the ‘job’ that brings you (fixed) income. Then, what is the business that can ‘add value’ to your life for the long run? This can be different for each individual, depending on what ‘value’ you are after. If you are considering adding value to your retirement savings, then this ‘core business’ will be your investment portfolio building or building a ‘side-business’. If you are considering adding values to your life quality, then this ‘core business’ can be the ‘true job’ that you really want to do.
Once this business model is set for you, then you can device an action plan to execute it. To strengthen your retirement portfolio, you need to improve your investment and finance literacy. Build an investment strategy and execute it. This will gradually add values to your retirement portfolio for the long run. If you have a ‘true job’ you want to do to improve your life quality down the track (e.g. running an online business and live in a remote picturesque place!), then you should spend some time to build your ‘core business’, execute your business plan and let it add value to your life. Meanwhile, do your day job and enjoy the certainty of a fix income (before you switch over to your dream job and life style).
Over time, you will be able to grow your ‘core business’ to an extent that the day ‘job’ you do has become just fun (assuming you like it), because you on longer need the cash flow to support yourself. Well, if you don’t like your day job, then just quit and switch to your ‘core business’. Got the idea? ^_<
There are some many ads online offering courses to run an e-commerce business. The selling point is always like: “You can make money while sleeping.”, or “You can live at this beach resort, while running your business and make tons of money.” Well, if that appears to you, then you need to execute the strategy I just told you, so in 5 or 10 yrs time, you can do exactly that! So, you still need to run your ‘McDonald’s restaurant’ for cash flows. Meanwhile, build your ‘core business’.
This strategy takes time to be successful, so be patient. Life is long and you’ve got the whole life in front of you to be patient. So, enjoy the moment, figure out what you should do, and keep running your own “McDonald’s strategy”.
Dr. C. Richard Wu @ REEAConsulting.com
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