When I was just starting out in accounting back in the mid-1980s, one of my largest clients was a cable company located near Philadelphia. The company has since been sold to Comcast, but, at the time, its owners were three siblings who seemed to do very little to run the business. It was passive income, right?
Their dad had spent millions in cash and sweat laying down cables and infrastructure in many local areas and now his children were reaping the benefits: monthly checks for cable service that were dutifully mailed in by the company’s tens of thousands of customers, which required no more than a small administrative staff to handle. What a dream! The perfect business, right? Lots of money coming in without so much as lifting a finger. For more financial expertise, take a look at our other articles.
It is a dream, and I envied the owners of that company. Theirs was passive income! Like an author or investment manager or property owner, they could sit back, put up their feet and just let the cash roll in. It’s the goal of everyone who runs a business. What a way to make a living. So easy. Yet, unfortunately, so unrealistic.
That’s because this isn’t real life. Passive income isn’t what you think it is. If you think you’re going to build a business where you can sit back and be passive, then you’re surely fooling yourself. There is no such thing as “passive” income. It’s a myth. Why? For two reasons.
For starters, no business runs itself. Even my cable company client had its share of challenges. New contracts had to be negotiated. Employees came and went. Weather interfered with service. Competing companies offered better deals. Technologies changed and required continuous investments. No one was just sitting around. Both the owners and the managers of this company—even as the checks were “rolling” in—were running to answer questions, deal with complaints, negotiate with politicians, and appease the community. They were grateful for the current cash flow, but worried incessantly about where the cash was going to come from in the future. There was nothing passive about this business.
In fact, there’s nothing passive about any “passive” business. Investors who earn “passive” money from interest and dividends must stay on top of their investments, lest they suffer losses. Authors, playwrights, and actors who earn royalties must ensure that their art is still relevant and that they continue to produce new works in order to keep their prior works in the public eye. Property owners collecting “passive” rents must worry about repairs, maintenance, regulations, and other competing properties that could take away tenants or turn their income-producing asset into a liability. All of this takes work. None of it is as passive as it seems.
Which brings me to my second reason why passive income is a myth: Just about every business owner isn’t putting their feet up and collecting checks. That’s because almost all of the businesses in 21st century America are active businesses. They’re restaurants, shops, gas stations, landscaping companies, and roofers. Their owners are running around every day searching for more work, collecting overdue payments, negotiating better prices, and struggling to find good people to do their jobs.
We all have this vision—this fantasy—of sitting back and doing nothing to earn a living. But life doesn’t work like that, and neither does any profitable, ongoing, sustainable, valuable business. Sure, maybe you’ll make your millions one day and then be able to sit back and be passive while the interest and dividends roll in. I hope you will. But to get those millions, you’ll have to be anything but passive.
To me, passive infers sitting still. Leaders don’t sit still. People who want to get ahead and succeed in their lives and businesses don’t sit still. That’s why passive income is a myth. Nothing in life is passive.
Looking for tools to help your small business succeed?
Subscribe to our weekly Small Biz Ahead Newsletter.