Wealth Principle #3 Understand the 4 Types Of Money: Income, Profit, Flow, Equity

The Book of the Week is Michael Gerber’s “E-Myth”. I like how Michael Gerber breaks down business money into four distinct types:

The Four Kinds of Money

  • Income is the money business owners are paid by their company for doing their job in the company. It’s what they get paid for going to work every day.
  • Profit is what’s left over after a company has done its job effectively and efficiently. If there is no profit, the company is doing something wrong.
  • Flow is what money does in a company, as opposed to what money is.
  1. The First Rule of Flow states that your income statement is static, while the flow is dynamic. Your income statement is a snapshot, while the flow is a moving picture. So, while your income statement is an excellent tool for analyzing your company after the fact, it’s a poor tool for managing it in the heat of the moment.
  2. The Second Rule of Flow states that money seldom moves as you expect it to. But you do have the power to change that, provided you understand the two primary sources of money as it comes in and goes out of your company.
    Equity is the financial value placed on your company by a prospective buyer.
  • Equity The value of your equity is directly proportional to how well your company works. And how well your company works is directly proportional to the effectiveness of the systems you have put into place upon which the operation of your company depends.

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