If you are a business owner or an employee who is working hard to become financially free in the nearest future; you have to create passive income for yourself. When creating passive income for yourself either through franchising, paper assets, real estate, network marketing or intellectual property, you should focus your attention on both capital gain and cash flow.
What is capital gain? It is a profit from the sale of property or an investment. It is the difference between what you paid for an investment and what is received when you sold that same investment. It is the profit that you get from selling off a capital asset such as stock, bond and real estate. The amount you get from selling it must exceed the actual amount you purchased it. Capital gain can be classified into long or short terms depending on how long you hold the investment before you sell it. If you hold it for more than a year, your capital gain is long term; if less than a year, then it is short term.
For example, if you buy a piece of land for as low as three hundred thousand naira in a remote area, an area void of industrialization or commercialization. If after seven years, the piece of land increased in commercial value or appreciates in value and you decided to sell it for a million naira, you have gained a profit of seven hundred thousand naira from selling your piece of land. This is definitely over two hundred percent profit. This is a typical example of a long term capital gain. If you decided to sell it within nine months, it is referred to as short term capital gain. However, like there are two sides to a coin, the other side of capital gain is called capital loss.
Capital loss is making a loss from the sale of property or investment due to bad financial decision or circumstance. It is simply selling off a capital asset for a price lower than how much it was purchased. For example, the last global financial crisis that started in 2007, led some investors and business owners to take some bad decisions which eventually resulted in capital loss. Situation like this requires that you possess the number one virtue of every successful investor—patience. Also, it requires that your source of income is not solely dependent on capital gains, but also cash flow.
What is cash flow? It is the movement of money in and out of a business, project or financial product. This is usually measured within a specific period of time. Cash flow can be referred to as the movement of cash in and out of a firm in the form of payments to suppliers and collections from customers. It usually arises from three sources, which include operations, investing and financing.
So, when it comes to becoming financially free or rich in the future, your focus should be on both cash flow and capital gain. But you must know how to use both to your advantage. Cash flow must be your major source of income while capital gain must be utilize when you foresee that an investment might go sour in the nearest future. To know when an investment will go sour or turn out to be bad and that the only option is to sell it off requires that you have investment skills, which is one of the three skills that every successful and rich person must possess.