Fortune VS Cash Flow

People seems to draw a line between "Fortune" and "Cash Flow". But the real fact is that "Fortune" and "Cash Flow" are only two sides of the same coin. They may exist on the same coin, but the realities of the two aspects are far from equal.

Fortune is often defined as "paper-wealth". In todays world Bill Gates has most of his wealth in Microsoft shares (without them he wouldn't be the third richest man today, that also goes for the now richest man in the world Warren Buffet). And as you know shares are just a paper with a denominated value. It has a value because people accept it has some kind of value. It is not real cash in the bank that you can spend.

Jean Paul Getty ones said (in his Biography) that many people asked him for money. But, he said, what many of those people doesn't seem to understand is that rich people doesn't have all their millions in cash in the bank that they can spend vividly whenever they want to. Most of the rich people have shares in private companies, publicly listed shares, real estate ownership etc. In order for them to spend it, they need to sell their shares and real estate and what have you.

And believe me selling of shares in a privately held company isn't something you do in a day. And you won't be able to purchase milk with one of your shares either. Highly doubt it.

Poor people seem to believe the rich people who is worth $1 Billion are free to spend that $1 Billion because they have it all in cash in the bank. They would be surprised how many millionaires who have become broke because they had very much net-worth (a fortune more or less), but they went broke because their "Cash Flow" was terrible (i e they didn't have a billion dollars in the bank to spend).

And that takes us to the other side of the coin "Cash Flow". In order to survive you need good "Cash Flow" coming in every month. That takes more skill than building a fortune. It takes a lot more finesse and intelligence.

This is how you produce a Fortune in simple terms (how simple it is depends very much on how simple you are):

You form a company around a new idea that produces $100,000 a year in earnings. You sell 5% of this "Cash Flow" for 10 times earnings and get a $1 million valuation. You own 95% of that value after having sold of 5% (on paper you are now worth $950,000). In cash you get $50,000 (Cash Flow) which you pay taxes on. The rest is for you to spend as you please.

That is how you produce a "Fortune". The value you give in order to get wealthier is the earnings you can produce with your new idea.

The next step is how to produce "Cash Flow":

As mentioned above you can produce one sort of "Cash Flow" by selling part of your equity. But in order to get to that level you need to produce revenue and make high earnings first. This is trickier than producing a "Fortune" for in fact producing a higher valuation on your company is something you can do even on your own account. You may have another company that might invest a little bit of cash in the new venture for 5% of the company and voíla, you have a new "Fortune" on paper. You can very much build your way up on paper. But the "Cash Flow" will ultimately drag you down again if you are bad at managing that aspect of the business. "Cash Flow" is the blood and air of the business. Without it, the business dies. No matter how rich you are on paper.

One way of creating "Cash Flow" is by trying to sell something new. See if it sells at the price you want to sell it. If it does, then expand and sell more. And more. And more. Ultimately you will, step by step, create a business that is bankable and sellable to investors. And you may have a management team running the business for you. The key is to focus on the earnings base. Making a revenue isn't enough, you need to have high win margins as well in order to to get as high a valution as possible when selling part of your business.

In conlusion: "Fortune" is what you are worth on paper. And that is easy to manipulate to your advantage. "Cash Flow" is what really separates good companies from bad ones. No earnings usually means shallow contents. The business will probably soon die out.