April 1994
Vol 17 No 8
In less than 6 years we'll be living in the 21st century. I've been reading an interesting book called 'The Great Reckoning' written by James Dale Davidson and Lord William Rees-Mogg. In it they make a strong case for a 500 year cycle in which mega-political events have taken place which literally have changed the world.
500 B.C. heralded in the 'golden age of Pericles' and with it the concept of the city state. The Christian era started 500 years later. The Roman Empire's decline and the start of the dark ages can be pegged to 500 A.D. or so. The ultimate weapon, the stirrup was invented around 1000 A.D. This enabled mounted soldiers to fight from horseback whereby a king with small groups of knights could control large areas of land. Around 1500 the gun powder revolution changed the world again. Gun powder concentrated political power making castles and armor obsolete; eventually leading to powerful nations.
Now five hundred years later, on the eve of a new millennium, we're confronting the next mega-political event. The silicon chip has already dramatically started changing our economic and political future. It will determine the way in which we live, educate our kids, run our businesses, build and protect our fortunes. The 'Information Superhighway' is going to affect the way we work, play and are governed as individuals and companies access and exploit new information technology. Government at all levels is going to find it more and more difficult to enforce control over 21st century citizens. Note how computer crime goes on virtually undiscovered and unchecked. For many people, the effects of the silicon chip – good and bad – are already being experienced now.
Telecommuting is already starting. For 20 years Mary started her job at the telephone company at 6 A.M. when she began the 50 mile commute to work into Los Angeles so as to arrive by 8 A.M. 12 hours later she returned home after fighting traffic for 2 hours each way. Even though she spent 12 hours away from home each day, she was only paid for 8. 50% of her working day was spent in non-productive, stressful, unpaid work on the freeways.
A year or so ago, Mary stopped commuting. Her work day now starts and finishes two hours earlier, but she's still doing the same job. How? Her employer paid to have a computer installed in her house. She does her work there now. Her discretionary personal time has been increased by more than 20 hours each week with no loss in pay or benefits. She can do her work on a flex-time schedule that leaves her time to do all the things she formerly had no time for. What about her employer?
By letting Mary work at home, the phone company saves office equipment, space, time, absenteeism. They have a happier, more productive employee, lower costs and higher productivity. They have less need for supervisors because they're beginning to peg pay to production rather than to time spent at work. They're not alone in this work approach. It's going to change everything we do.
A QUIET REVOLUTION HAS BEEN TAKING PLACE . . .
The California earthquake has accelerated the exodus from highway commuting due to the damage to its arterial freeways. Some 20,000 city and county employees are now working from their homes. Not to be left out by ATT, GTE has 150 employees working at makeshift facilities 75 miles away in Lancaster via its computer network. All across America – and in many parts of the world – hundreds of thousands of businesses have begun to operate from homes, electronically. While this has undeniable advantages for certain types of skilled labor and management in information industries, how will it affect our prospects as real estate investors? The tax base of large cities is going to shrink dramatically!
Let's project 10 years down the road. Some 30% of business activity in the USA might be conducted via computers linked by telecommunications. When workers and employers alike have the choice of moving from highly taxed, crime infested, congested cities to attractive low taxed areas that offer good schools and safe environs, who's going to choose to live in the cities? The poor. The unskilled. Government regulators. Manufacturing and retail centers. Those who are trapped by investment or employment who can't relocate. Those who haven't adapted to the information age. Will you be trapped too?
When population begins to disperse to rural areas, what's going to happen to the values of office buildings, warehouses, housing, land, apartments, etc.? What about so called job security? Have you heard of businesses and factories moving out to rural areas? Or of anyone who's lost a job because of it? Do you know anyone who's educating a child at home already with a computer to avoid drugs and crime in public schools? Have you seen any residential or commercial vacancies in inner cities?
Those areas which offer the best business, tax and life style environments are going to capture the new age companies that have a choice of where they operate. Now's the time to begin the process of analyzing the prospects for your job, home and real estate investments while there's still time to make a change. The exodus has already started in many of our major cities. As the ratio of tax-producers drops to tax-consumers, you can expect a fall off of services, deterioration of infrastructure and higher levels of crime. Now's the time to start planning for your own specific future in the information age.
The computer revolution is going to eliminate both executive and labor force jobs everywhere in many kinds of businesses. When customers and employers both leave town, jobs and income are going to leave with them. Are you vulnerable? The recession demonstrates that fired white collar workers rarely are rehired at their former middle class income levels. As companies computerize middle management, white collar workers have glutted the job market. 70% of recent college grads doing dead end work that doesn't require a college degree. Their only hope of being able to pay for a middle class life style will be as entrepreneurs. Let me tell you a little story.
IF YOU WANT JOB SECURITY, BE YOUR OWN BOSS . . .
I worked for other people for 28 years before I started working for myself. I grew accustomed to being paid every other Friday in good times and bad. Then, without warning, I was given 15 minutes to clear out my desk and depart the premises. My job had been eliminated in a corporate downsizing. I didn't have a clue as to what to do for a living. None of my previous high tech, specialized education, qualifications or experience was marketable in light of my opportunities. That was possibly the best thing that ever happened to me. It opened up a whole new world of opportunity and success.
Losing a job can be like a death sentence. I went through denial, resentment and resignation. Unable to find another 'executive' position, I began a brand new career in real estate. I was a neophyte. I didn't even know how to list, sell or manage real estate. I had to educate myself as best I could. I devoured every book and seminar that I could find. I sought out mentors and friends for advice but family support was my mainstay through all the financial sacrifice this change required.
At first, I started into my new business with the same 'employee' attitude I'd had in my job. That didn't last long. Once I realized that my pay depended upon my own productivity, and that I could choose what I did to earn money, I was off and running. Within 6 months, my earnings equalled my old pay scale. Within 2 years, I'd tripled my income. In 5 years I was able to quit, retiring to a life of leisure touring the country in my motorhome. You can do it too if you want to.
What was my secret? I discovered that working for myself released reserves of energy and a spirit I didn't know I had. It's still true even today because I only work at what I enjoy doing. I alone decide what my near and long term objectives are, what my work schedule and priorities are, how, where and when I do things, who I work with. I've observed that people always play harder than they work. Entrepreneurship can be mainly play when you're working for yourself pursuing your own dreams.
Why am I telling you all this? There's a very strong likelihood that you too may wind up being your own boss. It may be because you choose to relocate to flee the deterioration of cities, high taxes, crime and poor school systems. Or the decision may be taken completely out of your hands by NAFTA, mother nature, corporate take-over, Clinton's medicare program, loss of subsidies, etc. If, like me during my career as an employee, you've never contemplated life without a safety net, now might be a good time to give entrepreneurship a serious look.
IT'S A JUNGLE OUT THERE . . .
The first thing a former employee is going to notice is that entrepreneurs virtually do EVERYTHING when it comes to being in business. You'll wear the hats of labor, capital and management when you start out, so you have to know both what needs to be done and how best to do it. If I've learned anything in business, it's that the highest failures in businesses are caused by too little capital, too much inventory and/or too many employees.
The most profitable businesses today are businesses whose inventory lies in the minds of its creators. The least profitable businesses are those with high capital investment, large inventories that have soaked up cash or credit, and high numbers of employees, each with his or her own employee's 'rights' guaranteed by law. Until you're up and running, try to avoid employees. Make do with temporary contract help, family members and friends. If possible, work out of your own home. Use a room you can lock to keep the kids and distractions out.
Beware of incurring a lot of cost 'up front' for furnishings and equipment. You can buy much of what you need from businesses who, having used up their cash buying too much, will be willing to sell it to you at big discounts in order to stay in business. About all you need is a simple FAX machine that will cost from about $150 to $300, a computer with at least a 386 processor and letter quality printer. This shouldn't cost more than $1000 new and perhaps $500 used. You can buy a new copier for about $700, but I had an excellent used machine I paid $200 for. If you've got teenagers, have an extra line run in for them for about $10 per month to free your line for business. A state of the art answer machine will cost less than $50.
I routinely make business appointments in the offices of others. Banks, title and escrow companies, mortgage brokerages, insurance agencies are fair game if you're one of their customers. Because I'm a short distance from the airport, I've joined Delta's Crown Club. I use this to meet out of town customers and to hold day-long business meetings. They usually provide computer terminals, FAX, and sometimes typists.
You'll soon discover that MANAGERIAL and FINANCIAL considerations are going to play a major part in your success as you grow. At first, you can side step these problems by remaining small while you find your niche in the market. Laying out a financial plan in the form of a realistic budget is the best way to hold financial distress to a manageable level.
Try to list every conceivable source and application of funds, then put these into a matrix which shows the category of income and/or expense on the left hand vertical axis with the dollar amounts on the horizontal top line. A simple computer spread sheet does this well if you're already computer literate. If you aren't, start getting your feet wet right away.
'Quicken' is an inexpensive program to use to handle your budgeting. No matter how you do it, each week sit down and sort through all your invoices, checks and deposits and enter the totals on your budget beside the amount budgeted. Then, try to determine why any figure is out of kilter and what you're going to do about it. This is a continuing process that never stops.
Your customers are your lifeline. Keeping them happy is what keeps you in business, and, the key to this is to never make a promise you can't keep. Especially with regard to the cost to them and the time to completion. Being accessible to your customers at THEIR convenience, rather than your own, is important. Even now, after 18 years in the seminar and newsletter business, I still answer my own telephone 7 days a week and 12 to 14 hours a day. Many who don't want to do this are no longer among my competitors.
A 40 hour week is going to be only a nostalgic memory. It will vanish into 70 hour work weeks, cold suppers and infrequent contacts with your family. Of course, to the extent that you can get your family involved in making the business a success, there are multiple benefits. Nothing is so satisfying as to have a family meeting in which profits and success have been earned and shared among members. There are profound estate tax planning advantages in a family business too.
You'll need to build a team composed of an attorney, accountant, banker, insurance agent and possibly a broker upon whom you can rely for technical support on a task by task fee basis. To the extent you have any skills that you can trade, do so. To a certain extent, I've always been able to trade real estate skills for accounting and legal services, thereby building a closer rapport between us to our mutual advantage. You'll be a better client of theirs, and they'll be more effective in serving you if you'll try to learn something about these professional fields.
CREDIT ISN'T TAX FREE INCOME . . .
Unwise use of borrowing power has caused more entrepreneurs to fail than any other thing. It's so provocative – the knowledge that you can acquire money simply by signing your name. Many times, I've seen otherwise intelligent people borrow and spend themselves into bankruptcy and financial ruin. Only use credit when nothing else will suffice. Remember, every dime you borrow must be repaid out of after tax profits. What you borrow and spend today could cost you years of effort. If you must borrow, make certain that the profit these loans produces after taxes will be more than the interest you pay. Try to repay any loans as early as possible out of cash flow.
A small operating line of credit in the form of an overdraft account is a good idea. It's a good idea to take the financial plan we discussed previously in to prove that you're going about things in a businesslike manner. Customarily, the bank will want you to pay back the loan every 6 months or so, but you can gradually increase the line of credit limit each time you repay the loan. This will keep you from having a cash bind so you can pay your bills on time.
As soon as practicable, see if you can't get the people from whom you buy materials or services to more or less give you a line of credit by not requiring payment for 60 days. This will get you out of the bank's clutches and will allow you to earn interest on your surplus funds while saving interest on bank loans. Hopefully, with success as an entrepreneur, you too will be able to keep up on the information superhighway.
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