Residual Income Versus Earned Income

On today’s show we’re talking about automating systems in your business so that you the business owner can start to reap the benefits of the business. 

We’re also going to explore the differences between earned income, passive income and residual income. These are words that sound remarkably similar. But their meanings are very different. 

Businesses are all active businesses. There is no such thing as a passive business. Even though your local tax authority might classify income from an apartment building as a passive income, there is nothing passive about owning investment property. In an active business, the cash produced by that business is paid out to cover expenses, debt service, any preferred equity holders, and then finally the business owners. That final piece is called the residual cash, or the cash flow from the business. 

When we’re talking about passive versus active, we need to distinguish the amount of involvement in time required to earn that cash. Too much effort, it starts to look like an earned income situation. 

If there is too much owner intervention required in running a business, then it ceases to be a true business. 

A business must meet one very important criteria in order to be worthy of that name. You have to be able to remove the business owner from the business and for a period of time, the business can run autonomously without their involvement.