Archimedes once said, "Give me a lever long enough, and a fulcrum on which to place it, and I will move the world."
Leverage is a powerful concept. It's the fundamental difference between being a freelancer and being an entrepreneur: being paid for your time vs. making money off the efforts of others or your own past efforts.
Passive income is that concept carried to its logical conclusion: maximizing your income with a minimal amount of effort by yourself or your employees. There's no such thing as 100 percent passive income—even putting money in the bank takes a little bit of effort. And there's no specific cutoff point at which active income becomes passive income, i.e., there are degrees of passivity.
For example, taking orders online and having the product drop-shipped from the manufacturer is highly passive, yet it still requires maintaining the site, engaging in marketing, etc. Taking orders by phone is slightly less passive, since it requires having employees to answer the phones.
But if the profit from the sale is significantly disproportionate to the cost of the order-taker's time, it's still passive. If, on the other hand, your sales process requires an actual salesperson to call on prospects, possibly multiple times, it's not passive income.
Now that we have a better picture of what passive income is, why is it important for every entrepreneur? Let's consider five ways in which passive income can be incorporated into your business strategy.
1. Cash Flow Stabilization
Entrepreneurship is a rollercoaster ride. In bootstrapped companies, cash flow is even more important than sales. When the cash stops flowing, your business is dead. By investing early in creating passive income streams, you can ease the pain of the cash flow shortages that will almost surely come.
The first time those few hundred or few thousand dollars of passive income help you meet payroll, pay rent, or keep you from overcharging your credit cards, you'll be glad you spent the time to set it up.
2. Revenue Maximization
Passive income is all about making more money with your available resources. Isn't that actually one of the main goals of every business? Passive income strategies will improve your bottom line, period.
3. Exit Strategy
So long as you are personally involved in the day-to-day operations and generation of revenue, you can't retire, or move on to your next venture, or spend the summer on a round-the-world cruise. You'll also be locked in to being an employee of the company for a period of time if you ever sell it.
4. Employee Benefits
Your employees are locked in just like you are. The more you can apply passive income principles in the business, the more you can give your staff freedom of time and location, and pay them based on the value they create, rather than just for the hours they work.
5. Self-supporting Marketing
Many forms of passive income also serve as marketing for your core business: books, white papers, special reports, videos, etc. And the beauty of it is that once you have it going, that marketing channel pays for itself, at least partially.
There are many different models for passive income. While some businesses may lend themselves to it more readily, nearly every business can figure out some kind of passive income stream that's related to their core business in some way.
Passive income can generally be broken down into two categories:
Residual income, which is received over time from a one-time initial effort, e.g.:
- A consulting firm that creates and sells a collection of special reports and white papers
- A yoga studio that produces a video and sells it, both in their own shop and online
- A CEO who publishes a book related to the company's core business
- A local tour company that takes photos of the city's landmarks, makes them available on stock photography sites, and receives a royalty when they're sold
- An innovative product company that licenses its patent to other companies to build similar products. You can make money from your competition!
Leveraged income is money you make from the efforts of other people, particularly those who don't represent a fixed overhead for you, e.g.:
- An online retailer selling through affiliates
- A real estate broker, who makes money from the efforts of individual agents
- Direct sales as a distribution channel
- Franchising your business (the ultimate leverage of your business model)
How can you apply these principles in your business? Can you create an information product of some kind? Do you have intellectual property that you could license to other companies? Who can you get to sell your product for you on a commission-only basis? Is there a product you can sell that can be drop-shipped from the manufacturer? Are there other companies with complementary products that you could sign up as an affiliate with and promote their product?
No matter what your business, you can apply the concepts of passive income as a key part of your financial strategy. Master them, and maybe we'll see each other on that round-the-world cruise!
Scott “Social Media” Allen is a 25-year veteran technology entrepreneur, executive and consultant. He’s coauthor of The Virtual Handshake: Opening Doors and Closing Deals Online, the first book on the business use of social media, and The Emergence of The Relationship Economy. His latest venture, NFN8 Media, maintains a growing portfolio of niche content and community sites. He enjoys working with entrepreneurs and serves on the advisory board of several startups.