Passive income really is the Holy Grail of many small business owners. Why? Because it’s money you make without trying. Well, not really: you have to try initially, but once you’ve got your passive income stream going, it carries on flowing, whatever else you might be doing.
What is passive income?
Put simply, passive income is money you earn without doing anything for that particular chunk of money. Confused? Let’s look at some examples.
You write a book and sell it through a bookshop or online as an e-book. People can buy it whenever and there is no demand on your time and effort once you’ve produced it and got it ready for sale.
You set up a referral link to Amazon on your website so that every time someone clicks through and buys something from Amazon, you get a percentage back.
You accept advertising on your website. You say OK to requests to place adverts (this is different from having a free blogging or website service that has adverts applied to it unless you pay the provider not to do that) and make the requisite part of your website available: someone else pays you a regular or one-off fee to host that advert.
Get the idea?
How do you start earning passive income?
Most people will do something connected with what they’re doing already. Here are some examples drawn from Libro clients and people who’ve taken part in my small business chat feature:
- An author has created e-books and downloadables on how to publish an e-book, based on her experience publishing her first book
- A hypnotherapist has created CDs of hypnotherapy sessions which people can buy online
- A business advisor has franchised her business, so people pay her to run a similar business under the same brand name
You can see that in all of these cases it’s not magic, effortless income: you have to put some kind of effort in first, be it negotiating with an advertiser or creating a resource or franchising model. But once it’s done, all of these people can get on with their every day life, knowing that their efforts will be bringing in income.
How am I developing a passive income stream?
For my normal run of income, I do some work, whether it’s transcription, editing or proofreading, I charge my client for either the hours I spend or the minutes I transcribe or the words I edit, and I can’t do any other similar work at the same time. One piece of work for one client, one chunk of income at a time. That’s fine, but will only go to a certain point. So I have developed a couple of streams of passive income, and while they’re only trickles at the moment, I hope to expand at least one of them in the future.
- Referral fees. Having checked out their services and assured myself that they do a good job, I recommend self-publishing authors to use a print-on-demand publisher I know (this saves the authors having to pay upfront for millions of boxes of printed books that they have to sell themselves or, hopefully, getting ripped off). I am very clear when I recommend that I will be getting a small referral fee for this – so I’m not duping anyone into going for a service only because I will benefit. I haven’t made much out of this so far, but it’s there and something is better than nothing!
- E-books. I published my first e-book, How I Conquered Cholesterol, a few months ago. It’s selling small numbers steadily – OK, about 20 per month so far. It’s made me around £40 in royalties so far – again, not much, but not nothing. It took me a few hours to write, so I haven’t made back my initial investment in terms of those hours being worth money if I’d “sold” them to other projects – but I did this in down time, I didn’t cancel any bookings to do so, and most importantly, I learned all about publishing e-books on Amazon from the process, which helps me understand what some of my clients need to go through.
For the future, I’m planning another e-book based on this Libro Full Time blog, detailing how I went full time and what it was like. This actually fits better with the rest of my activities than the cholesterol one, and I’ve certainly got more contacts and friends in the small business world than the heart health one, so I’m hoping that one might do a bit better.
Remember to record your passive income in your accounts
Passive income doesn’t come from an invoice. That doesn’t mean that you can leave it off your accounts sheets, not pay tax on it or not record it at all! Here’s what I do …
- I keep paperwork for any passive income that comes in. Amazon sends me a statement when they send my royalties. These come straight into the bank account I registered with them. The publisher, at my request, sends me a statement of which people came to him and how much I am making for each, then transfers the money into my bank account.
- I have a section on my accounts sheet for passive income, so that tots up and makes up part of my turnover and thus profit – and it can then be easily recorded in my bank reconciliation, too.
Have you tried getting a passive income stream going? What have you tried and how has it gone?