Here let me read it to you. Best to listen straight off Spotify though, the browser version is buggy.
Plus a new motto for you
Want to be absolutely loaded, eventually? This week, a simple formula to get you there.
Plus a motto for you: don’t be like Alan Joyce.
There’s a lot being written about Mr Joyce as he prepares to leave the Qantas CEO chair. I’m not suggesting I could do better, and I’m sure he had reasons for all his choices. Running airlines seems like the worst job in the world, basically being a hostage to world fuel prices that are outside your control.
Warren Buffett says: never invest in airlines.
But I do have some experience in a business that owns lots of expensive, depreciating assets. Not on a jet fleet scale, but in the tens of millions. And on that topic, the Alan approach leaves quite a bit to be desired.
Yes, Alan is undoubtedly more loaded than I will ever be. Few people actually get rich from having a job, but he’s done it: he’s been paid around $125M since he took on the CEO job. But he’s built a nightmare set of booby traps for those who come after him.
I don’t travel on Qantas much, but when I do: it’s heaps dirty. Here’s my chair in the Brisbane lounge recently. If you put it on Gumtree or Craiglist, those platforms would get in touch and say “take that dirty thing down”. I kept my arms folded so I didn’t have to touch it too much.
We’ll come back to Qantas, let’s cut to the formula.
Yes, tell us how to get rich
A simple formula to make you rich. Exactly the kind of shonky hustle-bro line that should make you close the browser, clear your cookies and put your device down the Insinkerator so you never see their tips again. Yet … it works.
Just not in the “10x rich by next year” context. This is a long game.
When we first started our business, a sensible accountant friend told me the formula.
“Divide your profit by three. A third goes in tax. A third you should reinvest in the business. And after you’ve been going more than five years, a third you should take out as dividends.”
We’ve been doing it for fifteen years now and it is good advice. Let’s look at each of those.
A third goes in tax
Put it aside and don’t touch it.
Small business people tend to operate in a mental world where there is no tax. It comes as a surprise to them each time. Paying tax is an essential part of your business. Whingeing about it takes a lot of mental energy you should be using on things you can change.
Yes, you need tax advice, but that won’t change your need to put money away each month for tax. Or the tax office will take you down and you’ll have to get a job.
Take out a third in dividends
Because if you don’t do it, what is the point of owning a business? You’d be better off with a job.
Yes, if it’s a hyper-growth business, dividends are hard. You can’t finance enough growth through profits. That means external investors, who bring their own demands and pressure to meet their exit schedules. It’s not the worst thing in the world, but I’m so happy we didn’t choose that path.
Some business owners take that full amount of profit out as dividend, because the law allows you to.
Do it if you want, but know that your business will stay small.
Reinvest a third. At least.
This is vital, unless you’re building an unsustainable house of cards to flip next year.
We’ve been reinvesting a third forever. In heavy growth periods it gets up to 40% or more. In the early years, that meant a lot of lifestyle restraint for us. That’s ok, you can survive living modestly for quite a while.
Year on year, it mounts up slowly. Then quickly. Now, each year we reinvest amounts far bigger than we spend to start the whole business, and it’s no big deal.
The size of the business, and the dividends, have risen on the same scale. Good old compounding. It starts small and boring. Then years later, it suddenly it reaches a point that’s … very satisfactory.
If we’d taken that all that profit money out as dividends ten years ago, we would have spent it on holidays, new phones, Adidas Yeezys and all the other ways your personal cash just flows out the door. And we’d still have a corner-store sized business.
(This applies in your personal finances too, though it’s really hard to set the cash aside now that a trolley of groceries costs about the same as a car. With personal investments like property, share portfolios and so on, the value is not so much the ROI on the thing. It’s the enforced saving: the fact that you didn’t spend that money on alcohol back in the day, and now whatever you bought is worth lots. Apologies, this is starting to feel a bit Barefoot. You want a folksy anecdote about family life on the farm now? No you don’t.)
Business reinvestment isn’t just assets. It’s staff, brand marketing, training and all the other things that may not provide an immediate return but are setting you up to be the bigger, better business you want to be.
Continuous reinvestment allows us to be merciless on old stuff, because our clients notice. Business owners are often blind to old stuff. In their eyes it’s still “perfectly good”. A five year old asset still seems new to them, but it’s on the cusp of its Qantas lounge years. Good businesses move public-facing items on before they become a problem.
The reinvestment Himalayas looms for Qantas
If you want the full Qantas capex starvation story, read the brutal series of Joe Aston stories that caused Qantas to ban the Australian Financial Review from its inflight reading system. It’s harsh, but hard to argue with the reinvestment issue.
Alan Joyce was 11 years into the CEO job before he ordered a new plane. While returning $3 billion to shareholders. The average age of the Qantas fleet is now at an all-time old average of 14.7 years. As a comparison, Singapore Air’s fleet average is 6.5 years.
That’s great for short-term juicing of your profits, in order to boost shareholder returns and hence executive bonuses. Just like last week’s story, short-term bonusing produces a lot of post-bonus problems for others left holding the can.
It’s not just tired-looking planes, you can fix that with internal refits. Old planes have a powerful thirst for fuel compared to new ones, and fuel is 10-12% of operating expenses.
Getting the Qantas fleet back in decent shape is now an unpassable Himalayan range of future investment, which will have a brutal effect on future shareholder returns. Because they didn’t eat the elephant* one bite at a time.
(Sorry about the mixed metaphor, but hey Hannibal crossed the European alps using 37 elephants and maybe his people ate a few on the way.)
Choose a vicious circle or a nice one
There are plenty of small-scale Alans in every sector. By the time you notice it’s a problem in your own business, it’s too big a problem to get out of. Your lack of reinvestment means your product deteriorates and customer won’t pay as much, so your margins are thinner.
With less to reinvest, your product gets even nastier, you have to bring a cost-cut mentality that your staff hate, and the vicious cycle descends into dark places
Compared to that, the pleasant upward journey of reinvestment will eventually generate numbers you wouldn’t have believed when you were starting out.
*Shout out to our friends at the company of the same name. Eat that thing!
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