There is a principle that is widely used amongst successful entrepreneurs, and especially those with the aim of making money. This principle is called the OTOM principle: Other people’s Time and Other people’s Money.
Leverage
The first thing you have to understand about the OTOM principle, is the principle of leverage. In very simple terms, leverage means that you use less to achieve more. The term comes from mechanics, but is very easily explained by a simple picture:
You can achieve more with less, by using leverage. In this case, the 50 lbs weight tips the scale in its favor, even though the 400 lbs weight is obviously heavier. This is exactly what leverage does.
Other People’s Money – Financial Leverage
Leverage in financial terms means to use debt to supplement investment. But it can be explained simpler than that. You borrow money at a certain expense (interest) to earn more money than you have to pay in interest.
There is a great example which will immediately show you the power of using Other people’s Money to yield higher percentage returns on your investment.
Let’s assume we are buying a property at the cost of $100.000,-. If we buy this property with our own money, we have nothing to pay in interest. If we sell this property after a year for $120.000,- we have made a whopping $20.000,- profit (we won’t take into account any rental income you could have earned for the sake of simplicity). This comes down to a 20% return on investment ($20.000 / $100.000).
Not bad, considering the bank gives you about 3-5% return on investment per year (interest on your savings account) currently!
But now consider this. Instead of pouring in $100.000,- of your own hard earned cash, you only pay $10.000,- and borrow the other $90.000,- against 10% interest at a bank (current interest rates are actually much lower). This means if you sell the house after a year you have not earned $20.000,- but only $11.000,- because you have to pay $9.000,- (10% of $90.000,-) interest. But after paying back the loan and paying the interest, you have made $11.000,- by investing $10.000,- which equals a whopping 110% return on investment ($11.000 / $10.000)!
Here’s an overview of the numbers:
| Your Own Money | Other People’s Money | |
| Downpayment | $100.000,00 | $10.000,00 |
| Loan | $0,00 | $90.000,00 |
| Interest Payment (10%) | $0,00 | $9.000,00 |
| Gross Profit * | $20.000 | $20.000 |
| Profit (Gross Profit – Interest) | $20.000 | $11.000 |
| Return on Investment (Profit / Downpayment) | 20% | 110% |
* Based on selling the property for $120.000,- after 1 year
This means that you could do 10 investments by using the Other People’s Money principle, than you could with the Your Own Money principle, if you had $100.000,- to invest with. This would mean that you could make $110.000 in a year with the Other People’s Money principle, whereas with the Your Own Money principle you would only make $20.000!
Other People’s Time – Time Leverage
Using other people’s time is a form of leveraging the time you have to spend. Let’s face it, here we are all equals, we all live NOW and none of us really knows how much time there is for us on this world. Or more philosophically speaking: time is your most valuable asset, and you’re running out of it at a steady pace.
Basically Other People’s Time can be explained along the lines of an investment as well. Let’s say you have a project which would mean you’d earn $100.000,-. The project would cost you 10 weeks working full time to do by yourself, so this means you earn $1000,- per week.
The Other People’s Time solution to this problem would be to hire someone else to do the work for you, for example, an employee or a third party company. The trick is to find a cheaper way to do this, for example a company or person that can do it in the same amount of time for $80.000,-.
Your income would suffer, because the Other People’s Time solution would only mean $20.000,- in your pocket. While the Your Own Time solution would yield $100.000,-. But the big advantage is that you’ll spend far less time on searching a company or person to handle the work (let’s say 1 week) which means your weekly rate is much higher!
Here’s how the numbers work:
| Your Own Time | Other People’s Time | |
| Turnover | $100.000,00 | $100.000,00 |
| Third Party Costs | $0,00 | $80.000,00 |
| Your Share | $100.000,00 | $20.000,00 |
| Time Spent (weeks) | 10 | 1 |
| Weekly Rate (Your Share / Time Spent) | $10.000,00 | $20.000,00 |
As you can see, using Time Leverage can mean increasing your weekly rate with 100%!
Combining Other People’s Time and Other People’s Money
I hope that this article will lead you to understand the reason why people borrow money to build businesses. The borrowing money part is Other People’s Money, which is then used to hire people, the Other People’s Time part. This combination greatly increases your money making ability and is key to building a successful business.
Wed, May 19, 2010
Becoming Successful, Entrepreneurship