WEALTH CAPSULE 18
CONVERSATION WITH MY BILLIONAIRE FRIEND
Every week, I look forward to learning from my Billionaire Friend. Our conversations are rich in wisdom and practical insights to help anyone build and sustain a successful financial life. If you have missed a part of the series, head on to thisdaylive.com and catch up on it. Every conversation missed is like a treasure thrown into the ocean.
This week, I met my Billionaire Friend in our usual meeting place. He started the conversation with a surprise question: “Ayo, why do you think some people end up becoming poor, after amassing wealth?”
“Well, I think it’s because they mismanage their wealth, with the false assumption that the size of their wealth guarantees them against ever becoming poor again.”
“You are not wrong.”
It was at this moment I rightly suspected that our conversation would paddle around Managing Wealth for Sustainability. And rightly so. We settled down on this topic for the week:
WEALTH SUSTENANCE REQUIRES CONSISTENT COST CONTROL AND GOOD MANAGEMENT OF INCOME-EARNING ASSETS.
My friend started on the subject matter without wasting time:
“Wealth in itself is the abundance of valuable possessions which may include money. It indicates a measurement of the value of net assets owned by wealth owners. Wealth is classified into financial, time, social and health wealth. However, for the purpose of this discussion, we would focus on the sustenance of financial wealth.”
“The sustenance of financial wealth of wealth builders includes, growing wealth consistently in the following ways: Management of their financial net worth, increase in the earning capacity of their assets, consistent wise investments and the continuous management, coordination and control of the net asset of wealth owners for preservation. It includes sound wealth planning and the creation of trusts, for the estate of wealth owners”.
“In achieving good sustenance of wealth, some habits are required of wealth owners to ensure that their wealth is sustained and preserved over their entire lifetime. These habits include: setting and keeping to set goals, making consistent savings, controlling impulsive spending and evaluating all expenses for frugal living. It includes making investments for the future, keeping family wealth secure, optimising the utilisation of debts, paying bills promptly as at when due and putting in place some sound accounting system. Also, as has been previously canvassed in this conversation series severally, wealth sustenance requires the consistent habit of proper management and maintenance of annual budgets. It includes dealing with creditors on a fair basis by servicing credits promptly and ensuring full payment of debts, developing and maintaining contingency funds, and saving for the future”.
All these are sine qua non habits for sustaining the wealth and the lifestyle of wealth owners. For sustaining wealth, owners must consistently track their wealth diligently, by:
● benchmarking their businesses against those of others in their industry,
● diligently managing their variable costs
●investing in technology,
● offering incentives to staff from time to time to ensure their motivation for producing good results
● getting tough on fixed assets to ensure optimum returns on them and disposing of obsolete ones
● refusing to keep holding onto fixed assets that do not generate significant earnings.
“All of these habits help wealth builders reduce their costs, optimise returns, grow and sustain their wealth. There is a general tendency for people to falsely assume that a very wealthy person cannot go broke or declare bankruptcy. Famous wealthy individuals are known to have fallen from being stupendously wealthy into poverty, and in some cases declared bankruptcy. These include world celebrities, such as Donald Trump. This ex-president of the United States of America, declared bankruptcy no fewer than six times between 1991 and 2009, after having inherited the wealthy family business from his father, Fred Trump. Donald Trump’s father was a successful New York City builder and landlord who died wealthy. However, Donald still declared bankruptcy after having inherited six owned businesses, by filing for Chapter 11 bankruptcy in the years before his presidency. He lost some $3 billion in the process.”
“Another well-known multi-millionaire, in this class, is Mike Tyson. He earned hundreds of millions of dollars in his boxing career but still ended up declaring bankruptcy. At the time of filing for bankruptcy, Mike Tyson was also still pursuing a $100 million lawsuit against boxing promoter Don King, who Tyson claimed skimmed him out of millions of dollars in revenue. Another well-known billionaire celebrity is Michael Vick. Michael Vick was a gifted quarterback player in the USA, who made a whopping sum of over $40 million annually at the peak of his career but went on to still declare for bankruptcy”
“Curt Schilling is another example. He was a former Red Sox ace, whose on and off-field antics divided his fan base long before his financial troubles. After helping the Red Sox to win the 2004 World Series and erasing the team’s 86-year championship drought, Schilling didn’t simply whittle away his baseball fortune, he also whittled away about $75-million-dollar in wealth”.
“50 cent also comes to mind. When he burst into the hip hop scene in the early 2000s, Curtis James Jackson III was loved for his crossover appeal and obvious talent. His personal story was captivating, to say the least. He sold drugs as a teenager and took nine bullets. He ended up selling about 30 million albums and earned dozens of music awards including a Grammy and many billboard awards. He was particularly famous for his, “get rich or die trying” album. He, however, still ended up declaring bankruptcy after losing millions of dollars”.
“Another wealth owner who later declared bankruptcy is Cyan Queen. He was once the richest man in Ireland before he lost it all. He lost it all because of bad investments in an Irish bank. Queen was forced to turn over most of his £2.8 billion fortune in the settlement of debts. It was so bad, that in 2011 Queen ended up claiming that his total assets were less than 50,000 pounds as at filing for bankruptcy”.
“Bernand Bernie Madoff once had humongous wealth but also ended up accumulating losses of about $65 billion. Madoff ended up being charged with 11 counts of fraud, money laundering and theft. He received a maximum sentence of 150 years in federal prison. Others famously wealthy include Elizabeth Holmes who was once a Silicon Valley star, whose net worth was about $5 billion, yet ended up in penury”.
“I can go on and on to prove with examples that owning humongous wealth does not protect wealth owners from bankruptcy”.
WHAT THEN PROTECTS WEALTH OWNERS?
“What protects wealth owners is good and effective cost control put in place to protect wealth and ensure that income-earning assets are properly managed to continuously increase the wealth position of the wealth owners. The good management of income-earning assets includes intentionally influencing the process of wealth creation for optimum gains and creating activities to improve the financial position of wealth builders for generating wealth consistently for them, from their well-managed income-earning assets”.
“Effective management of income-earning assets involves the deliberate use of the financial skills of experts to improve the wealth position of wealth owners, through optimising the income accruable from their income-earning assets. It is the reasonable but legal action taken for achieving stable and predictable future financial results by wealth owners. This process of managing income-earning assets should therefore not be confused with illegal activities of manipulating financial positions which do not reflect economic realities. The major patterns of the management of income-earning assets include regular auditing of financial statements by experts, income optimisation and the smoothing of all income-earning assets.
“Some earnings management techniques practised by wealth owners, include cutting prices towards the end of the year to accelerate sales, boosting net revenues for optimising end year results, selling fixed assets to improve financial positions and the earning capacity of the existing assets of wealth builders. Earnings management, however, must not involve acquiring earnings which would distort financial information, as to make financial statements less helpful in predicting future cash flows”.
HOW DOES COST CONTROL MANAGEMENT SUSTAIN WEALTH?
“Cost control includes all wealth management measures for resource planning, cost estimation and budgeting. Cost management is the process of controlling and managing all costs that are associated with running and sustaining the wealth of wealth owners. It includes collecting, analysing and reporting information for effective budgeting, forecasting and monitoring of wealth owners’ costs. It is a very complicated process, which entails knowledge of project management for resource planning, cost estimation, cost budgeting and strategic cost management. Strategic cost management in itself is the process of reducing total costs while improving the strategic financial position of wealth owners for the growth and sustenance of their wealth. This is accomplished by understanding those costs which support wealth-builders’ position and which costs either weakens their wealth position or may have no impact on their wealth.”
“Effective cost control and management, include the major cost control measures of getting everyone involved in wealth owners’ businesses for challenging employees throughout the organisation, to identify ways that wealth owners business can save time, materials and money. It also involves working with professionals to control costs and manage costs. Cost control measures; include challenging the accounting and finance staff of wealth builders to reduce expenses at all times. It entails making plans for the continuous evaluation of wealth builders’ business, to find out areas into which attention needs to be focused for minimising avoidable business costs”.
PAY ATTENTION TO THIS
“I must add that while trying to reduce costs, such cost reduction decisions should not be made at the expense of slowing the down business operations and investment opportunities and/or reducing the capacity of the assets and personnel of wealth builders to optimise and take advantage of available business opportunities for the growth, profitability and sustenance of the wealth of wealth owners”.
“As a strategy for sustaining wealth, assets that offer the opportunities of earning the best available incomes should be invested in, and such assets should include those with minimum risk exposures. Strategies for sustaining wealth must include ensuring that assets are protected against future avoidable losses and foreseeable risks. Such foreseeable risks include making provisions for and taking up insurance policies to protect the assets of wealth builders against such foreseeable risks. This is to ensure that losses that may arise from these risks exposure are adequately minimised and the assets of wealth owners are protected against unforeseen risks, such as fire, burglary, fidelity, etc. The strategy of sustaining wealth includes employing the best quality personnel and experts to ensure that wealth-builders are given quality advice for minimising costs, controlling costs and optimising incomes for enhancing the wealth position of wealth builders and protecting them against avoidable losses. It also includes ensuring that legal, accounting and the expertise of other professionals are engaged to advise wealth owners. This helps improve the quality of their decision making, sustain their wealth and optimise the income-earning capacity of their assets at minimum costs.”
DOES THIS MEAN THAT ONE HAS TO FOCUS SIMULTANEOUSLY ON MANAGING COSTS AND ENHANCING THE EARNINGS OF ASSETS?
“Of course, these are Siamese-twins requirements for sustaining wealth. Wealth builders must simultaneously manage their costs and optimise the income-earning capacity of their assets, to optimally position their wealth for future sustainability. These two elements of earnings management and cost control go hand in hand such that one can not exist in isolation from the other. Hence, wealth-builders cannot concentrate on one and ignore the other.”
“To wrap up, the sustenance of wealth entails the necessary need for wealth owners to consistently audit the earning capacity of their assets and control their costs, for the optimisation of the income capacity of their wealth. They must continually invest in future assets for improving their income-earning capacity and sustain their wealth at minimum costs, without affecting the health of their business operations and sustenance of their wealth. As mentioned earlier on, wealth owners must be conscious that bankruptcies do occur, no matter how humongous the net worth of wealth owners may be. The sustainability of wealth largely depends on how well wealth owners manage the twin relationship between controlling costs, without affecting the operational velocity of their operations and managing their income-earning assets for optimum returns, growth and income-earning capacity of their wealth-generating assets consistently.”
So far…can’t wait to catch up with you next week
There is a general tendency for people to falsely assume that a very wealthy person cannot go broke or declare bankruptcy. Famous wealthy individuals are known to have fallen from being stupendously wealthy into poverty, and in some cases declared bankruptcy. These include world celebrities, such as Donald Trump. This ex-president of the United States of America, declared bankruptcy no fewer than six times between 1991 and 2009
I must add that while trying to reduce costs, such cost reduction decisions should not be made at the expense of slowing the down business operations and investment opportunities and/or reducing the capacity of the assets and personnel of wealth builders to optimise and take advantage of available business opportunities for the growth, profitability and sustenance of the wealth of wealth owners”.