The latest financial meltdown highlighted the increasing use of leverage in the financial world. However most of what you hear about leverage is painted in a negative light. The type of leverage that is being used in the banking system and other financial institutions is the extreme version of what is essential for any business to grow and succeed. The type of leverage I like to talk about in this article is a leverage of money, technology and manpower to produce more than could ever be produced by one single person. It is leverage that separates a true business from a self employed individual.
There are several types of leverage that can be used in a business. The most visible form of leverage is manpower. It would take months or even years for carpenter to build a house himself. This could reduce his work value to a few dollars per hour. No carpenter could ever stay in business doing this. On the other hand you could use the leverage of manpower to substantially increase your profits. A team of 10 to 15 contractors could easily finish a house in a few months. Although, as a business owner you cannot keep all of your profits from the job due to labor costs, the fact that you can build four or five homes a year will substantially increase your overall profits for that year. This is what it means to leverage.
Another type of leverage is a leverage of technology. This is the type of leverage I most familiar with being a web designer. There many applications, software programs and computer systems that I use on a daily basis to save time and money on my design jobs. I use the program Dreamweaver to save time in designing the coding base for my websites. Rather than using a regular notepad document, the color-coded coding in easy validation that Dreamweaver provides saves me hours of labor, and allows me to design more websites in a shorter period of time. You might have experienced technological leverage in your daily life when going to the supermarket. These days many supermarkets are adding self checkout aisles in order to cut down on labor costs and increase the flow of customers through their store. One type of technological leverage that many people overlook is the good old telephone and in recent years the cell phone. Being able to communicate across vast distances allows you to stay in touch with your employees and your business without having to travel directly to them. We addition of text messaging and multimedia messaging and communicating with your employees has become faster and easier.
The most powerful type of leverage used in business is financial leverage. You might think of real estate when you think of financial leverage, however financial leverage can be used in any type of business. I’ll use my business as an example. I bought a server for $3000 to house designed websites. I never paid cash for that website server. Instead I borrowed $3000 from the bank and pay $160 per month. I currently host over 30 websites on that server. The hosting fees for those websites are able to pay for my loan payment while still having money left over for profit. This server pays for itself. Financial leverage of allows you to pay little or no money for an asset in still reap the benefits of owning the asset.
As with any aspect of business, being successful requires a change in mindset. Many people look at wealthy business owners who leverage the use of employees, financial dealings and technological advancements to earn thousands a day with little or no work and respond with jealousy. Many feel that there is something wrong or evil with earning money at somebody else’s expense. However, the use of employees serves a fundamental purpose in society. Are those who do not want to take the financial risk of starting their own business, and therefore will never reap the rewards of doing so. Instead they would rather live a comfortable lifestyle where they know that they will be getting a paycheck every week.