If you’ve ever wanted to crawl inside the minds of some of the world’s most successful entrepreneurs, then the one thing certainly common amongst all is “all of them have capitalised the power of leverage “- Says Hirav Shah, Business Coach, Adviser, Strategist and Astrologer.
Concept Of Leverage
The concept of leverage is all about achieving ever more with ever less. Getting your people to achieve more with less effort, getting your advertising to return more sales with fewer dollars. Getting better results with less and less
effort, time after time.
The concept of leverage in business is related to a principle in physics where it refers to the use of a lever that gives the user a mechanical advantage in moving or lifting objects. Without leverage, such a task might not be accomplished.
Leverage involves using capital (assets), usually cash from loans to fund company growth and development in a similar way, through the purchase of assets. Such growth could not be accomplished without the benefit of additional funds gained through leverage.
Is Leverage a Good Thing?
Leverage can be a good thing provided that the business doesn’t take on too much debt and is unable to pay it all back.
Operating and financial leverage affect your business differently.Leverage from operating liabilities typically levers profitability more than financing leverage and has a higher frequency of favorable effects.
That makes sense because when you borrow from suppliers, it’s typically in smaller amounts and paid back faster, while loans are typically for a longer time at higher amounts.
Power Of Leverage in Business
Businesses use leverage to launch new projects, finance the purchase of inventory and expand their operations.
For many businesses, borrowing money can be more advantageous than using equity or selling assets to finance transactions. When a business uses leverage—by issuing bonds or taking out loans—there’s no need to give up ownership stakes in the company, as there is when a company takes on new investors or issues more stock.
Leverage can be especially useful for small businesses and startups that may not have a lot of capital or assets. By using small business loans or business credit cards, you can finance business operations and get your company off the ground until you start earning profits. When you take out a loan or a line of credit, the interest payments are tax-deductible, making the use of leverage even more beneficial.
When evaluating businesses, investors consider a company’s financial leverage and operating leverage.
Financial leverage signifies how much debt a company has in relation to the amount of money its shareholders invested in it, also known as its equity. This is an important figure because it indicates if a company would be able to repay all of its debts through the funds it’s raised. A company with a high debt-to-equity ratio is generally considered a riskier investment than a company with a low debt-to-equity ratio.
Operating leverage, on the other hand, doesn’t take into account borrowed money. Rather, it’s a company’s ratio of fixed costs to variable costs. Companies with high ongoing expenses, such as manufacturing firms, have high operating leverage. High operating leverages indicate that if a company were to run into trouble, it would find it more difficult to turn a profit because the company’s fixed costs are relatively high.
On that note, Hirav Shah outlines various ways of using leverage in Business for unparalleled success.
1.Leverage Through Customers
In a business, profits are built on past customers. As you build a company, new customers are important but its the repeat business that builds in profit. Customer experience is a revenue issue that can influence the financial health of a company and thus deserves the attention of the business leaders and entrepreneurs.
2. Leverage The Power Of Teams
As the operating environment of business becomes increasingly complex, companies are looking more to leveraging the power of teams to move and react faster. After all, business performance isn’t based upon the individual efforts of a few as it is the collective inputs of many ; of the clusters of teams that comprise each business unit. The performance of each product team, marketing team, sales team and corporate team are what drive better business performance.
3. Leverage Through Finance
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. So, the basic thing here is “If You Can Use Other People’s Money, Why Use Your Own“. This is an area where people very successfully leverage, usually.
4. Leverage Through Connections
There’s an adage that almost everyone is aware of, no matter what industry they work in: “It’s not what you know, it’s who you know“. While you certainly can’t overstate the importance of experience, skills, and hard work, there’s a lot of truth to this saying. Fostering relationships with people throughout your industry can help you build a network of connections that you can turn to when needed.With leverage, meaning you’re making full use of all your resources, you’re cultivating relationships instead of forcing them. It’s about respect and collaboration, not manipulation. Connections are a valuable component of leverage in business, since they help to widen your knowledge base and skills as well.
These are just a few of the kinds of leverages available to you as an entrepreneur. The possibilities are pretty much endless. All you have to do is recognize, cultivate, and activate!
Growth in business is never by mere chance,it is the result of forces working together.Using leverage is certainly one of the vital forces, Hirav Shah Concludes…