Why Having A Profitable Business Doesn’t Mean You Are Financially Free!

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Every entrepreneur is in business because they want to make money from the products/services they sell. The money they make is regarded as profit and many entrepreneurs who make profit from their businesses erroneously think they are financially free.

All their money problems seem solved since they are owners of a profitable business. But contrary to what many think, owning a profitable business doesn’t mean you’ve achieved financial independence.

I know this will be very disturbing to read, but no one ever said truth is easy to swallow. The truth is always a bitter pill to swallow. And here it is —being financially free is not the same thing as having a profitable business.  

Profitability and financial independence are two different things and this is what I hope to explain through this article.

What Is Profitability?

Profitability is the excess money gotten when you deduct the cost price from the selling price. It is the additional amount you added on top of the cost incurred to provide a product/service. Your business can be profitable but you the entrepreneur is not free financially.

What Is Financial Freedom?

Financial freedom is when your total income exceeds your total living expenses without your direct physical involvement. This is a state of generating a consistent flow of income from your assets. These assets could be a business or investment.

The point here is that it is income earned enough to meet your living expenses without you working. You know as an entrepreneur that you are financially free when you have time freedom. When you don’t have to bother about work or business or money.

From Profitability To Financial Freedom

A profitable business is the joy of entrepreneurs, but not all profitable businesses lead to financial freedom. For example, a highly paid lawyer makes money on an hourly basis from his/her legal expertise. It is sufficient to say that they have a profitable business. But can they continue to earn this level of income when old age sets in and they can no longer work the same hours again?

This is the question I hope to help many entrepreneurs answer through this article. Not all entrepreneurs even though they have profitable businesses are financially free. Entrepreneurs build profitable businesses especially during their prime years.

But not all entrepreneurs achieve financial freedom before their prime years are over. Not all entrepreneurs continue to make money without working. Not all entrepreneurs build businesses that can help them retire young and retire rich!

The real question here is this; will Your Profitable Business take you to Financial Freedom?

Now is the time to begin to structure your business to not only be profitable, but to last so that it can cater for you without you having to work. Building a business is like raising a child; you don’t want to raise a child that will not be able to stand by his/herself. You want to raise independent children that can stand on their own. That is what building a business for financial freedom is. It is about earning residual rather than linear income.

Two Kinds of Income: Which one are you working for?

In the world of business, there are two kinds of income;

  • Linear Income:

Profit from a business that solely depends on how much you work is a linear income. Linear income is income earned from direct labour or work done. When you make profit from a business that involves your active participation, then you are earning a linear income.

All entrepreneurs at some point must earn a linear income. The bottomline is not to get trapped feeling too comfortable in this kind of income for long. The bottomline is knowing that profitability is just the starting point to your financial freedom, but not the end in itself!

  • Residual Income:

This is where you want to be as an entrepreneur through your business. You want to earn income without necessarily having to work. You want your business to be profitably sustained that it can meet your living expenses regardless of the lifestyle you choose.

It is about building a systems-driven business rather than an energy-driven business. A business that is built on innovative products/services delivered by a team of committed people. It is only by doing this that you can guarantee your financial freedom. There is more to financial freedom than profitability. Financial income is about residual income —money made from assets not labour!

To your financial freedom!

Feel free to share your thoughts, disagreements or questions regarding this article in the comment section below. All views are welcomed; this is a collaborative learning community. Don’t just read, contribute!

About the Author

Tito Philips, Jnr., is the founder of DifferentiateOnline – an integrated digital marketing solution and the community leader of a tribe of unusual entrepreneurs at naijapreneur where they raise the bar of entrepreneurship. Connect with him on twitter @iMADphilips

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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