Cashflow Quadrant

Robert Kiyosaki’s View: Think Big, Think Expansion

I grew up with two dads, and two very different perspectives on money and investing. My poor dad, my real father, was a well-educated, hard-working man who served as the superintendent of education for the state of Hawaii. He was a well-paid employee who ultimately died broke. My rich dad, the father of my best friend Mike, quit school in grade school but used his street smarts and entrepreneurial spirit to become one of the wealthiest men in Hawaii.

My rich dad taught me about “thinking big,” even though he did not talk about it. Instead, the words he often used were leverage and expansion. When he taught his son and me to think about the differences between leverage and expansion, he used the McDonald’s franchise as an example. He would say, “When Ray Kroc bought McDonald’s from the McDonald brothers, he leveraged himself. When he franchised McDonald’s, he expanded his leverage.”
This idea brings me to the concept of the Cashflow Quadrant

The letters in each of the quadrants represent:

E Employee
S Self-employed
B Business owner
I Investor

Each of us resides in at least one of the four sections of the Cashflow Quadrant. Where we are is determined by where our cash comes from--paychecks or passive income.
Though financial freedom can be found in all the quadrants, the skills of a business owner and investor will help you reach your financial goals more quickly.
When Kroc purchased the hamburger stand, he leveraged himself because the burger business could make money with or without him. And this is where most S-quadrant business owners stop: They keep their businesses small. When Kroc developed a franchise system for the small business, he expanded the hamburger business into the B quadrant.

You may notice I used the words franchise system, the key word being system. In my book Before You Quit Your Job, written for entrepreneurs, I write extensively about the B-I Triangle. The B-I Triangle is the diagram my rich dad used to focus my thinking and to teach me about the eight parts that make up a business.
Many entrepreneurs fail simply because one or more of the eight pieces of the B-I Triangle is weak or nonexistent. Whenever I look at a struggling business, I use the B-I Triangle as an analytical reference.

Notice that the word product is used to label the smallest section, and the word mission is one of the largest sections--as well as the foundation for the Triangle. This is because the product is the least important item in the B-I Triangle, and the mission is the most important. The mission is the spirit of the business; it is the heart of the business. Without spirit and heart, most entrepreneurs will not make it, simply because the road ahead is a hard one.
The world is filled with great products that fail. The products fail simply because they do not have the power of the B-I Triangle behind them.

When you study most successful businesses, you will most likely find a complete and vibrant B-I Triangle in action. A great business will have a strong mission, great leadership, a competent team of managers who work well together, excellent cash flow and financing, clear and effective sales and marketing communications, systems that work efficiently, clear and tight legal documents and agreements, and of course, a great product.
Most of us can cook a better hamburger than McDonald’s. But few of us can build a better business system than McDonald’s--which brings us to the word system again. One of the biggest differences between an S-quadrant business owner and a B-quadrant business owner is systems. Typically, the S-quadrant business owner is the system, which is why he or she cannot expand.

Far too many businesses are people-dependent. McDonald’s, on the other hand, is system-dependent. It has well-designed systems. Regardless of where you go in the world, the McDonald’s business is pretty uniform. Most important, the company’s business systems are often run primarily by people with just a high school education. That is how good and how sound the company’s systems are.
I have looked at so many businesses that are top-heavy, staffed by highly educated and highly paid people who are working hard and accomplishing little. In most cases, these types of businesses focus primarily on people and not on developing great systems. A great team of highly paid people will fail without great systems.
What is the difference between an entrepreneur and a CEO? Making it as simple as possible, an entrepreneur is like a person who builds great race cars. A CEO is like the driver of the race car. If you have a great race-car driver but a poorly built race car, the great CEO will lose every race. Rarely will you find entrepreneurs who are great CEOs. Donald Trump is one of those people. So are Bill Gates, Michael Dell and Steve Jobs. These men can build great race cars and drive them.

In The Rich Dad Company--a Scottsdale, Arizona, education business that teaches personal finance and business to people worldwide through books, seminars and educational products--we have three people who are both CEOs and race-car builders: Kim Kiyosaki, my wife and co-founder of the business; Sharon Lechter; and myself. Sharon, also a co-founder, is excellent at both building and driving the race car. Kim and I are better at driving, but we do build parts of the car. I often say that I am the horn of The Rich Dad Company, and Sharon is the engine. I would definitely say Rich Dad is a team enterprise.

I have met many people who have become very rich in the S quadrant. Many are small-business owners who are excellent builders and drivers of small businesses. There are also people in the E and S quadrants who become very rich attaching themselves to B-quadrant businesses. For example, Tiger Woods is an S (and, in his case, S stands for superstar as well as self-employed or specialist), but much of his wealth comes from his endorsements of B-quadrant businesses. The same is true with some movie stars. They are S-quadrant individuals but associate themselves with B-quadrant businesses, such as Sony or Warner Bros.
Donald Trump says “think big,” and he builds giant buildings and megahit television shows. My rich dad said to expand, and he meant expanding the way McDonald’s did. Both are forms of thinking big.