When Entrepreneur sat down on a crisp autumn morning in Johannesburg with world-renowned investor, author and motivational speaker Robert Kiyosaki and his wife and business partner Kim Kiyosaki, we had three goals in mind. Firstly to find out something about them most people don’t know, secondly, to explore the concept of the Cashflow Quadrant and thirdly to highlight the importance of the B-I Triangle in building a successful business.
Robert Kiyosaki developed his unique outlook on economics as a result of his exposure to two very different people: his own highly educated but financially unstable father, and the multimillionaire eighth grade drop-out father of his closest friend.
The lifelong monetary problems experienced by his “poor dad”, whose salary was never quite sufficient to meet family needs, pounded home the counterpoint communicated by his “rich dad” that “the poor and the middle class work for money,” but “the rich have money work for them”.
“At one point five of the six members of our family were in hospital and we were so poor that we could not afford the cost of medical care,” recalls Robert. “At the same time, my father was studying medicine.” Robert himself was suffering from a severe bout of chicken pox that nearly killed him; his mother had rheumatic fever; one sister had developed a serious allergy while the second had a growth in her neck; and a brother had hurt himself badly falling out of a tree.
“Eventually we moved from Honolulu to Hawaii where my dad took on a job at a school district as assistant to the assistant, earning $250 a month. I was seven at that stage, and to me that was a lot of money,” says Robert. As he was the eldest, his mother sat him down one day and explained the family budget to him. He saw that that she did not have money to pay the bills and this affected him profoundly. ”I wanted to protect my mother,” he says frankly. “She was emotionally and financially broken.”
“Many entrepreneurs are people who experience disadvantaged childhoods in the form of paternal loss through death or separation, or paternal inadequacy of some economic or psychological nature.”
It was in Hawaii that Robert met his “rich dad”, the father of his best friend Mike. “My rich dad taught me that he who owns the gold makes the rules,” he says, recounting the story of how his rich dad agreed to pay him and Mike to pick up cigarette butts from the grounds around his hotel and restaurant. “The deal was $5 per gallon can. When we had collected three full cans, we went to claim our money. My rich dad said he would pay us the following week. When we returned, he again said that he would only pay us the week after. This went on for a while until we cried and he asked us if we would accept $5 if he paid us there and then. We agreed. The lesson, he told us was: “If you don’t have money, you will always work for less.”
It was a lesson that has stayed with Robert throughout his life. “The point is that you must never need money,” he says.
In her book Rich Woman, Kim Kiyosaki recounts an early days “year from hell” in which the pair sold everything they had so that they could begin building an education company focused on entrepreneurship in southern California. Despite hitting an all-time low during which they had no money, they resisted the exhortations of friends to get a job while they were building the business. “We knew that if we had to go out there and earn a salary, it would be a step backwards,” Kim says. “We wanted to focus all our efforts on building a business that focused on new and innovative methods of teaching.”
But times were hard. The turning point came when they eventually had their backs against the wall. One night in a cheap and nasty motel, over a bucket of Kentucky Fried Chicken, Robert became angry at himself for having landed up in the same position as his father. “I was not taking care of my sweetheart,” he says. “I was just like my dad.”
The experience of being totally broke turned out to be life-changing. Robert realised the reason they were doing so badly was because of their partners. “You cannot do good business without good partners. If you allow people to beat you up, you will be beaten,” he says, paraphrasing his good friend Donald Trump. “It’s really that simple. I cut the bad partnership immediately, and we found a new associate the same day.”
“This was the beginning of my journey from WIMP (Where is my pay cheque?) to PIMP (Put it in my pocket!)”
Robert’s philosophy focuses largely on the importance of generating passive income by means of investment opportunities, such as real estate and small businesses, with the ultimate goal of being able to support yourself by such investments alone.
He defines assets as “things that generate money”, such as rental properties or businesses, and liabilities as “things that cost money”, such as house payments and cars. He stresses what he calls “financial education” as a means of obtaining wealth.
“Life skills are often best learned through experience. These are important lessons not taught in school. Formal education is really for those seeking to be employees or self-employed individuals. To obtain true financial freedom, you must be either a business owner or an investor, generating passive income.”
The Cashflow Quadrant
“The Cashflow Quadrant is a conceptual tool that aims to describe how all the money in the world is earned,” explains Robert. Depicted in a diagram, this concept entails four groupings, split by two lines, one vertical and one horizontal. In each of the four groups there is a letter representing a way in which an individual may earn income:
- E – Employee: Working for someone else
- S – Self-employed: Where a person owns their own job and is their own boss
- B – Business owner: Where a person owns a “system” of making money, rather than a job to make them money
- I – Investor: Spending money in order to receive a larger payout in return
Those on the left side of the divide, E and S, may never obtain true wealth according to Robert. Those on the right side are following the road to true wealth. The main reason is that the rich use their money to buy assets (such as paper assets, businesses, and real estate) while the poor buy liabilities.
“Very few people in the Cashflow Quadrant make it into B,” he says. That is why the principles of the B-I Triangle are so critical. It demonstrates that an S will never achieve financial freedom because that person is in charge of the whole business. If you are the business, you are essentially owned by your job. That is not the way to generate passive income.”
The B-I Triangle
Working in tandem with the Cashflow Quadrant is the B-I Triangle, a diagram Robert uses to explain the eight aspects that make up a highly successful business.
Leadership, Mission, Team Robert notes that S’s are generally the A students at school, while B’s are the drop-outs. “I hire S’s all day long. They are the lawyers, the accountants, the auditors. That is because, as a B, I know that the B-I Triangle demands that I hire the best team possible.”
The B-I triangle also highlights the fundamental importance of mission. “Mission is the foundation of everything,” says Robert. “If your mission does not align with the true values of the organisation and all who work in it, you will get nowhere.” This is a lesson Robert learned while serving in the Marines as a helicopter gunship pilot, where he earned an Air Medal in Vietnam.
Both he and Donald Trump are military school veterans who know the importance of a crystal clear mission. “In the marines, your mission is to defend and kill. Pure and simple. And military school teaches you that mission comes first, team second and individual third. That is how we run our organisation today.”
On the inside of the B-I Triangle are the skills that are taught at business school. “Lots of S’s lack leadership skills and a strong mission. The result is that you have companies being run by accountants and attorneys who want to control everything.”
Kim agrees. “S’s need to learn the value of having a great team in place. It has taken us a long, long time to get there.” She notes that as a financial education company, their team members are passionate about finance. “They show up at all our workshops; they understand the importance of mission, leadership and team. They understand when we say to them that our job is to empower them to leave the company one day because they no longer need to work.”
So what are the benefits of having a great team in place? At the base of the B-I Triangle, Robert explains, is cash flow. “A great team is all about cash flow, which is the bottom line. It leads to loyal customers and, if you have a truly great company, to a cult following. Think of Harley Davidson, Lamborghini and Apple as examples.
Robert and Kim both emphasise the importance of internal and external communication. “As an entrepreneur I have to understand many different languages so I can talk to all kinds of people,” says Robert. “I have to speak computer language, legal language, product language. None of the speakers of these languages can talk to each other – my role is that of interpreter. Think of doctors – they are so specialised they can’t speak to anyone,” he laughs.
They both note that good communication also paves the way for viral marketing, with customers becoming an organisation’s best sales people. Robert believes that one of the worst things a business can do in tough times is to stop advertising. “When business is slow, advertise and promote. The worst thing you can do is to stop communicating.”
The production line is a key component of the B-I Triangle. Why? Because a business is a system of systems, Robert says. “Think about it. In the human body no system is more important than any other; there isn’t one that you can do without. An entrepreneur must believe in the system of systems.
When one system is malfunctioning, others will suffer. The reason S-owned businesses have a hard time is because the S’s themselves insist on being the system instead of putting together the teams that operate the systems. They think in terms of specialities, not generalities.”
Kim notes that she made a call to their office a few days after arriving in South Africa, and was troubled by the fact that their receptionist did not answer the phone in the same way she always had. “I immediately got on the line to the person in charge of that area of the business to make sure that we fixed the system.”
It is key to have agreements in place, even if they are based on a handshake. “Remember, however,” says Robert, “a contract will not turn a bad partner into a good one. If you cannot trust someone on a handshake, you should not do business with them.”
Product or Service
Surprisingly, Robert sees product as the least important component of the B-I Triangle. Accordingly, it occupies the smallest section. He recalls Henry Ford’s comment: “Thank God for customers. They buy the product when it is not quite ready.” Another Fordism worth remembering on this note is: “A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.”
“S’s focus on product,” says Robert. “Who cares if you have the best product? What you actually want is the best business. Anyone can make a better burger than McDonalds, but few have a better business. The result is a brand loyalty that few companies can emulate.”
Concluding on a controversial note, Robert says his job these days is to disturb people. “I recently wrote an article about how the lottery is a better investment than mutual funds. That is because mutual funds are the biggest rip-off.” Eschewing this investment option because of lack of transparency, ongoing fees and hidden expenses, Robert is a firm believer in real estate. “It’s the only investment for which bankers will lend you as much cash as you want.”
What you don’t learn at school
Robert Kiyosaki retired at age 47. Rich Dad, Poor Dad, written with consultant Sharon L Lechter, lays out the philosophy behind his relationship with money. His book compellingly advocates the type of “financial literacy” that’s never taught in schools. Based on the principle that income-generating assets always provide healthier bottom line results than even the top jobs, he explains how those assets might be acquired so that the jobs can eventually be shed.
In another aside, Robert notes how important it is to not be all things to all people. “I don’t buy Porsche anymore since it introduced the four-seater.”
Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money – That the Poor and Middle Class Do Not! (2000)
The central concept of the book is an anecdotal comparison of his “two fathers.” His “poor dad” was his biological father, who became superintendent of the Hawaii State Department of Education but had very little real net worth. Contrasted with this is his “rich dad,” who became “the richest man in Hawaii” by investing his smaller income into income-producing investments. The book aims to help people rethink their idea of money and especially their concept of themselves as employees who will gain financial rewards from conformity and education.
Cashflow Quadrant: Rich Dad’s Guide to Financial Freedom (2000)
In this book, Robert discusses the cashflow quadrant, a grid consisting of the letters E, S, B, and I. The cashflow quadrant itself is just an illustrative tool to show the difference between Employees, Self Employed/Small Business owners, Business owners (not directly involved in the day-to-day operation of the company), and Investors. Kiyosaki discusses the differences between concepts and ideas characteristic of each quadrant, particularly as they relate to passive income and tax advantages.
Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not! (2000)
Rich Dad’s Guide to Investing gives the reader a roadmap to becoming the Ultimate Investor, one who uses other peoples’ money to create investments that people want to buy into. While the first two books use broad strokes, this one goes into much more detail about actually implementing some of the strategies mentioned in this article.
Rich Kid, Smart Kid (2001)
Rich Kid, Smart Kid is a retelling of Kiyosaki’s views, condensed and clarified to try and help parents better understand and teach their children key financial concepts. It includes a series of activities that a parent can do with their child to make them aware of property, finance and the various ways and places businesses make money.
Rich Dad’s Prophecy (2002)
Rich Dad’s Prophecy predicts that the market will crash around 2010 when the oldest Baby Boomers start cashing out their retirement plans. Individuals whose savings are locked into these plans will suffer because they are not flexible and do not do well in a bear market.
Why We Want You To Be Rich co-authored by Donald Trump (2006)
This book encourages individuals to become financially literate to combat the increasing problems facing the American and global economies; such as the shrinking middle class and the entitlement mentality. It’s an incisive, good read that motivates personal wealth creation.