Book Excerpt: Rich Dad’s Prophecy

An entrepreneur shares some tough lessons from his “Rich Dad” on running a business responsibly and on responsibility to his employees  

Book Excerpt
Rich Dad’s Prophecy
by Robert T. Kiyosaki and Sharon L. Lechter C.P.A.

Chapter 1
A Change in the Law. . .
A Change in the Future

Both my rich dad and my poor dad were very concerned about the overall well-being of their employees. My real dad, as the superintendent of education for the State of Hawaii, had tens of thousands of workers who counted on him to take care of them. My real dad, the man I call my poor dad, was so very concerned about his teachers that when he was no longer the superintendent of education he became the leader of HSTA, which stands for the Hawaii State Teachers Association, a teachers union, again negotiating for the well-being of his teachers.

My rich dad was also very concerned about his employees, and in many ways, he was much more concerned about his employees than my dad. The reason he was more concerned was because my poor dad’s employees had the financial support of the government and the local and national teachers unions. My rich dad’s employees did not have the government support and union protection. He would often say, “I wish I could tell my workers what I know and what I see coming in the future. I wish I could but I am afraid I would frighten them too much. Besides, the main problem is that most of them lack the basic financial education first to understand what I am saying and secondly to be able to take corrective action. How do I tell my loyal hardworking employees that today, being loyal and hardworking is not enough? How do I explain to them that long-term job security does not insure long- term financial security? How do I tell them about a change in a law that has changed their future forever? How do I tell them without frightening or depressing them? How do I tell people about what I think might happen, but I am not certain will happen?”

As I said, both my poor dad and my rich dad were very concerned about their workers. The difference was that my poor dad had the power of the government and the teachers unions to help his workers. My rich dad knew that his workers were at a disadvantage and this concerned him greatly. In 1974 there was a major law change in America that was reportedly designed to help workers who worked for people like my rich dad. While many people thought the intent behind the new law was a great idea, rich dad could see its inherent flaws. He knew that in many ways, most of his workers would not be better off in the long run and he could see a growing threat of financial disaster looming in the future. . . a financial disaster caused by the passage of this act into law.

In 1979, I was thirty-two years old and struggling to keep my business above water. My nylon and Velcro surfer wallet business had taken off faster than expected. In only a few years, we were a big company with a sales force of over 380 independent sales reps in the United States alone. Worldwide, we never really did figure out how many salespeople we had selling for us. The problem was that we had a worldwide product but we were a small-time company with a young incompetent management team. When success and incompetence meet, disaster is not far away.

It has been said “You cannot learn to swim from a textbook.” I would also add, “You cannot learn business from a textbook or from business school.” My partners and I had limited textbook knowledge and very little real-life business experience. At an early age, we were learning some simple yet tough lessons about business, lessons that can only be learned from front line experience. Besides the lesson that success can kill you, some of the other lessons I was learning were:

1. Friends do not always make good business partners.

2. A company can be profitable and still be in serious financial trouble.

3. It’s the little things, like not having enough thread, that can stop the whole business.

4. People do not always pay their bills, which means you cannot always pay your bills. People do not like you when you do not pay them.

5. Patents and trademarks are important aspects of a successful business.

6. Loyalty can be fleeting.

7. It is essential to have accurate financial records and accounting.

8. You need a strong management team and a strong team of professional consultants such as lawyers and accountants.

9. It costs a lot of money to build a business.

10. It’s not the lack of money that kills a business. It’s more the lack of business experience and lack of personal integrity.

The actual list of lessons is much longer. The experience of worldwide success and worldwide failure was priceless. I went through such experiences not once, but twice. And although I do not want to go through it all again, I am ready to. . . because the lessons are priceless, if you are willing and humble enough to learn from your mistakes. Each business failure showed me what I did not know and what I needed to learn. . . and that learning experience led to the next success.

In 1979, I was up to my ears in learning experiences. I was over my head in mistakes, buried by my own personal incompetence, and I did not want to learn anything more. I had more than enough stupidity to learn from, yet rich dad had more to point out to me. In the spring of 1979, I walked into his office for our regular meeting and showed him my company’s financial statement. Looking over the statement, rich dad shook his head and said, “Your company has financial cancer. . . and I’m afraid it’s terminal. You boys have mismanaged what could have grown into a rich and powerful company.” Mike, rich dad’s son, was not a partner in my business, yet he did sit in on most of the mentoring meetings I had with his dad, the man I call my rich dad. Mike and I had been best friends all through high school, but after I returned from college and the Vietnam War, it was difficult maintaining a close friendship since we were in completely different business and financial leagues. In 1979, Mike was in the process of taking over his father’s multimillion- dollar empire and I was in the process of losing a multimillion-dollar business. As Mike looked over my company’s financials, I felt shame and embarrassment when Mike also shook his head.

“What is this?” asked rich dad, pointing to a section of my financial statement.

Looking at where he was pointing, I said, “It’s the amounts we owe the employees and the government for the employees’ payroll and payroll taxes.” “Now look at your cash position, there isn’t any money there,” said rich dad sternly. “How are you going to make payroll, and pay the taxes?” I sat there quietly saying nothing. “Well . . .” I began feebly, “well, when we collect on some of our back accounts receivables we’ll have enough to pay them.”

“Oh come on,” said rich dad. “Don’t give me that jive. I’m not your college professor. I can see from your financials that much of your accounts receivables are over 120 days delinquent. You and I know that these people you have sold product to are never going to pay you. Tell me the truth. Tell yourself the truth. You’re broke. You’re broke and now you’re about to default on paying your employees and their taxes. You’re using your employees’ money to keep your company afloat.”

“But it is only a short-term credit problem. We have money coming in. We have sales coming in from all over the U.S. and the world,” I replied in my defense.

“Yes, but what good are sales if you cannot build product and cannot deliver on those sales? I can see from these financial statements that people owe you money and you owe money. You owe money to the people that supply you the materials to produce your products. What makes you think that your suppliers will give you any more credit?”

“Well—” I began but was cut off again by an angry rich dad. “Your suppliers won’t give you any more credit. Why should they?” “Well, I’ll go talk to them again.”

“Good luck,” said rich dad. “Look, why don’t you face the truth? You and the three clowns you call partners have mismanaged your business. . . you don’t know what you’re doing. . . you’re incompetent . . . and worst of all, you don’t have the guts to admit any of this. You guys are pretending to look like businesspeople. . . but when I look at your financials, you boys are either crooks or clowns. I hope you’re clowns. . . but if you don’t make some changes, you clowns will become crooks.” Rich dad said this pursing his lips and slowly moving his head from side to side. “Borrowing money from your employees is bad enough. Just look at the back taxes you owe. How are you going to pay them?”

Rich dad had been my teacher since I was nine years old. He was a very loving and caring man, but when he was angry. . . he was not a polite man. This particularly heated lesson in business management went on for hours. Finally, I agreed to shut the business down, liquidate the remaining assets, and use the money to pay the taxes and the employees.

“There is nothing wrong with admitting you’re incompetent,” said rich dad. “But there is plenty wrong with lying and pretending you know what you’re doing. Lying and pretending you know what you are doing is a bad habit. . . and I want you to stop that habit now. If you want to be rich and successful, you need to learn to tell the truth quicker, ask for help quicker, and be more humble. The world is filled with arrogant poor people, educated and uneducated. . . people who cannot admit they do not know something. The world is filled with people who go through life pretending they are smart. . . and that makes them stupid. If you want to learn quickly, the first step is to admit quickly you do not know something.

“Remember the lesson from Sunday school, the lesson that goes, ‘Blessed are the meek for they shall inherit’? The passage does not go blessed are the weak or blessed are the arrogant, or blessed are the well educated. It says blessed are the meek for the meek shall learn and if you learn you shall inherit the abundance of life that God or nature has placed in front of us. You boys are arrogant, conceited, cocky, and ignorant. . . not meek. You think that just because your product is a success you are also a success. You boys are not yet businessmen. You boys got lucky but you do not have the skill and experience to turn your luck into a business. No one becomes a successful businessperson overnight. You have a lot more to learn. And the lesson you must learn today is that if you owe money, pay the bill. People hate people who do not pay their bills. Friends, families, and businesses have broken apart because money owed was not repaid. From your company’s financial statements, I can see that you owe money to the government, your suppliers, your landlord, and most importantly to your employees. Pay those bills and pay them now. Don’t do anything else until those bills are paid. Don’t come back here until you’ve paid your taxes and all your employees. You’re becoming a sloppy businessman and sloppy businesspeople do not become rich and successful businesspeople. Now get out of here and don’t come back until you have done what I have just told you to do.”

As I said, rich dad had chewed me out many times over the years, but this lesson from rich dad was especially memorable. As I closed the door behind me, I could feel this particular lesson sinking into my soul . . . becoming a lesson I would never forget. Although I hurt, I knew that the lesson was an important lesson. . . for if it was not important, rich dad would not have gotten so angry or so brutally forthright. Being thirty-two years old, I was old enough to take this strong, emotionally charged lesson and wise enough to know that I had something important to learn.

Over the years, rich dad had a lesson on truth and honesty he repeatedly taught. He often said to his son and me, “Many people ask young people, ‘What do you want to be when you grow up?’ When they ask that question, they are usually asking what profession the child wants to pursue. Personally, I don’t care what you do when you grow up. I don’t care if you become a doctor, movie star, or janitor. But as you grow up, I do care that you grow up to become more and more truthful and more honest. Too many people grow up becoming more polite, but not necessarily more truthful, or worse, they tell lies as kids and become bigger liars as adults.” As I walked down the street to where my car was parked, I knew it was again time for me to become more truthful. . . more honest with myself, my partners, and my employees. Climbing into my car, I could hear rich dad saying, “Any coward can tell a lie. Telling the truth takes courage. As you boys grow up, grow up to become people who have more and more courage to tell the truth quicker. . . even if the truth hurts. . . even if being honest makes you look bad. It is better to look bad telling the truth than to be a good-looking lying coward. The world is filled with good-looking lying cowards.” As the engine came to life and I put my car into gear, I felt terrible and I knew that I probably looked as bad as my financial statements. Driving away, I also knew that I had two choices. One was to continue lying to myself and never see rich dad again. The other was to begin finding the courage to face the truth, to clean up the mess I made, and then look forward to seeing rich dad again.

At thirty-two, I realized I still had a lot of growing up to do. I knew that if I wanted to become a richer, more successful person and a better human being, I had to be able to hear a more refined truth, even if it was a little tougher truth. As part of my growing up, I also had to be able to tell the truth better. As I pulled up into my company’s parking lot, I knew the time to begin telling that truth was now. . . and it would begin with my partners, the partners rich dad called clowns.

Approximately four months later, I returned to rich dad’s office with a new set of financial statements in hand. Rich dad and Mike looked them over for what seemed to be an extra long period of silence. Finally rich dad said, “So all your back taxes and your employees are paid?” “That is correct,” I said. “If you notice, I also cleaned up a lot of my old accounts receivables.”

“You got them to pay?” asked rich dad. “Either they paid or I took them off the financial statement and sent a collection agency after them.”

“That’s good,” said Mike. “A customer who does not pay is not a customer. A customer who does not pay is a thief.” “I understand that now,” I replied. “But I was doing the same thing.” Rich dad looked up at me. . . paused, and then slowly nodded and quietly said, “Thanks for admitting that.”

“It wasn’t easy,” I replied. “I had this image of myself as a successful person, and in reality, I owed a lot of people a lot of money.” Mike and rich dad sat silently, ever so slightly nodding. Finally rich dad said, “The truth does set you free. . . and hopefully now you are free . . . free to clean up your mess and begin building your next business on more solid ground. So many people attempt to build their financial empire upon a mess of lies. . . and lies never seem to support much of an empire.”

Now it was my turn to sit silently and just let the crystal-clear silence fill the room. After a long pause, Mike asked, “So what condition is your company in? Your financial statement is a lot more honest but a financial statement can never tell the whole story.”

“The company is finished,” I replied. “We still have sales and the actual business is strong, but the four of us who started this business are finished. We’ll probably never be partners or friends again. Truthfully, the truth tore us apart.”

“So when you returned to your company, you had a heart-to-heart?” “Well, it started out as a heart-to-heart but it soon became face-to-face. We almost came to blows but thankfully that did not happen. It has not been pleasant at work, but I do give my partners credit for being willing to stick it out and clean up the mess, as you suggested.”

“Now what happens?” asked Mike. “Well, we are turning over the remains of the company to one of our suppliers and we are all going our separate ways. We will soon begin letting our employees go, and they will have all the money we owe them. Our investors will get some but not all of their money back, but we have talked to them and they understand the risk they took. Several have said they would invest with me again. And our taxes are paid.”

Mike and rich dad just sat silently. It was like being at a funeral . . . a lot of emotion but little to say. The winding down of a business is like the ending of anything. Good or bad, there are parts of the experience that had forever changed our lives, our future, and who we would become. I was dreading turning out the lights and closing the office door for the last time, even though I was also glad it was going to soon close. Finally rich dad broke the silence and said, “Well, I’m proud of the way you handled the loss of your business. I know it isn’t pleasant and I know you could have handled it differently. You could have taken the remaining money and run. . . but you chose a better way of ending things. That will give your next venture a little better ground to start from. Have you learned a lot?”

“Massive learning,” I said. “I’m still digesting the lessons.” “You will for years,” said rich dad. “But someday this experience and the mistakes and experiences yet to come will become the basis for your success and fortune. Most people avoid mistakes. Most people spend their lives playing it safe. . . avoiding such lessons. . . and that lack of life’s experience limits their future financial success. Always remember that business experience can never be gained from a textbook or a classroom. Although painful, because of the way you chose to handle this business failure, this painful short period of time will someday become the basis of your long-term financial wealth. If you had run and lied, your financial future would probably be a coward’s future. . . because if you had run you would have been letting the coward in you determine your future.”

I simply sat quietly and nodded. There was not much to say. I had heard this talk and this lesson before . . . but on this day, this simple lesson had much more meaning and a deeper impact. Rich dad often said to his son and me that inside each of us is a cast of characters. Inside each of us is a kind person, a mean person, a greedy person, a rich person, a poor person, a coward, a crook, a hero, a liar, a cheapskate, a lover, a loser, and more. He constantly reminded us that growing up was a process of choosing which person we wanted to become. . . which person we wanted to draw out of all the cast of characters available. As stated earlier, when he asked us what we wanted to be when we grew up, he was asking which character we were choosing to become. . . not if we were going to be a doctor, lawyer, or fire- fighter. To rich dad, a person’s choice of character was far more important than a person’s choice of profession.

“When it comes to money, the world is filled with cowards,” said rich dad. “Money has a way of bringing out the coward. . . more than the hero . . .and that may be why there are so few truly rich people. Money also has a way of bringing out the cheat and the crook in some people. . . and that is why our jails keep filling up. Money also has a way of bringing out the betrayer . . .the person who will steal from those that love and trust them. . . and when you ‘borrowed’ from your employees, that is the character you were choosing to become. . . and that is why I was especially tough on you. Crooks and cowards are one thing. . . but becoming a person who betrays those that trust you is one of the most despicable of all characters available to all of us. . . and you were choosing that character.”

There was not much for me to say. The internal pain was intense. Truth and honesty are not always pleasant and this dose of truth and honesty was very unpleasant. . . yet necessary. I realized that in my desperation to save my company, I had chosen to betray those that trusted me.

“Have you gotten your lesson?” asked rich dad. “Have you gotten the lesson in character choices?”

I just nodded my head again. I had understood the lesson. . . a deep, painful lesson, a lesson I would always remember. I had always thought of myself as a good, honest person. . . yet under pressure, the character that emerged was the person who betrayed those that trusted me.

“Good,” said rich dad. “A lesson in character is far more important than a lesson in reading a financial statement. . . yet the financial statement did reflect your character. Your financial statement told me the story of the betrayer in you taking over your business. That is another lesson in the importance of accounting, accountability, and the importance of being able to read financial statements. The numbers tell me a story. . . a story of which character is in charge of the money. When you and your partners started your business, you started off as gamblers, you got lucky and became clowns thinking your luck was skill, when the money came pouring in you became fools buying Porsches and Mercedes sports cars, and when you got into financial trouble you became people who betrayed your suppliers, your government, and your workers. Your financial statements tell a better story than most novels.”

“That’s enough, Dad,” Mike said as he jumped in to protect me from any more of the lesson. “I think you have made your point.” “Okay,” said rich dad. Turning to me he then asked, “Have you got the lesson?”

“Right between the eyes,” I replied. “Good. Let’s go get some lunch,” said rich dad. “There is a far more important lesson I want you to learn. . . a very important lesson. . . a lesson that begins with the question, ‘Why did your employees not know what you were doing with their money?'”

When the elevator finally arrived, we found it crowded with people also going to lunch. Packing into the elevator, rich dad said, “Sometime in the future, long after I am gone, millions of hardworking people will find out that clowns like you and your partners have been playing games with their money. . . their retirement money. . . their financial future. . . their financial security. The government has made changes in the law. . . changes to protect workers, but I do not think this law change will solve the problem. In fact, I think the law change will make things worse for many people. I am afraid something terrible is going to happen.”