#6: 3 Things Every Entrepreneur Needs to Understand about Money

In the episode of the 'Better Than Success Podcast", Nikki Purvy talks about the Three Things Every Entrepreneur Needs to Understand about Money. She uses her experience with working with hundreds of small businesses and startups to hone in on the three most invaluable lessons that most new businesses need to grasp to help their business flourish.

The lessons as recorded in this podcast episode are as follows:

1) Money is a tool Nothing more. Nothing less.

Money is not real. It has no real value. Its a tool. Its not a thing to love because its not lovable. Its not a thing to praise, its not even a thing to rap about in songs. Once you understand that its a tool just like a wrench or a hammer then you will make better money decisions for your business

Here are some uses for this tool.

• Use it to make time and freedom
• Use it to buy cash flows (and wealth)

2) Know the Difference between speculating and investing

In Benjamin Gram’s book “intelligent investor”, the author differentiates the difference between speculating and and investing as:

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

Investopedia differentiates as:

“Typically, high-risk trades that are almost akin to gambling fall under the umbrella of speculation, whereas lower-risk investments based on fundamentals and analysis fall into the category of investing. Investors seek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk. On the other hand, speculators are seeking to make abnormally high returns from bets that can go one way or the other. It should be noted that speculation is not exactly like gambling because speculators do try to make an educated decision on the direction of the trade, but the risk inherent in the trade tends to be significantly above average.”

What I want you to gather from this is that unless you have done research and analysis about your business and industry then you are speculating. I am very much so not in the business of speculating when it comes to my livelihood or my business and I don’t suggest that you do that either. I want to point out that in the intelligent investor the author points out that anyone has the right to speculate but never comingle your speculation operations with your investment operations and never rely on your speculation money.

Even furthermore, because a lot of new business owners don’t know the difference between investing and speculating they accept investing returns for speculation activity. By the Investopedia definition ‘speculation’ can demand higher returns because it’s more risky. Some small businesses think they’re investing when they’re really speculating because they haven’t done the proper research.

Someone said to me that after listening to this podcast, I came off as well read. I don’t know how much I agree or disagree, it’s all relative but I have read a quote a few books by top business leaders and an underlying theme is that they don’t gamble. Andrew Carnegie said this in his autobiography about gambling:

“I have never bought or sold a share of stock speculatively in my life, except one small lot of Pennsylvania Railroad shares that I bought early in life for investment and for which I did not pay at the time because bankers offered to carry it for me at a low rate. Such a course should commend itself to every man in the manufacturing business and to all professional men. For the manufacturing man especially the rule would seem all important. His mind must be kept calm and free if he is to decide wisely the problems which are continually coming before him What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions, which he should arrive at by reason. His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none.”

Now of course we are not talking about individual stocks but this concept can be easily transmuted to running a business because in reality it’s the same thing --- you should steer clear of starting a business that you speculated about rather than taking your time and researching and analyzing. You can get distracted by upswings and downswings and you never “judge the relative values or get the true perspective of things”

This also goes for any sub-investments you make while running your business. Should you buy that new piece of equipment?

Should you spend money on a billboard?

Should you invest in that new software promising to make your business run more efficiently?

Should you hire...