LEVERAGE: QUINTESSENCE OF THRIVING BUSINESS SYSTEM

The Global economic recession and the expanding gap between the rich and the poor, made me concerned about it. And, I began digging deep into the matter, searching for 'Why'? After reading various articles, books, magazines, blogs etc. of many successful entrepreneurs, I came across a very common word "LEVERAGE". It would be quite familiar to you if you are a student of Finance. Yet, only just being familiar with it is not enough. Even though it occupies a substantial space in financial jargon, it forms a part of any rapidly expanding field. Finally, what I found that any person no matter of which country or profession may be, who is still doing better in this economy has understood this word and also know the way put it into use.

In the broad definition of the word, the word Leverage simply means the ability to do more with less. It can be broken down into two parts: lever-age, which means the age of getting work done through lever. When it comes to the subject of work, money and leverage, if you want to become rich, you need to work less and earn more. In order to do that, you employ some form of leverage. People who only work hard have limited leverage. If you are working hard physically and not getting ahead financially, then you are probably someone else's leverage.

If you have money sitting in the bank in your saving account or your retirement account, then others are using your money as your leverage. Leverage can be illustrated by a simple diagram below:

Person without leverage:

Person with Leverage:

Human have gained more of an advantage over animals simply because humans naturally seek more and more leverage. In the beginning, animals could run faster than humans, but today humans can travel faster and further than animals because they created tools of leverage, such as bicycles, bikes, cars, trucks, trains, planes etc. In the beginning birds could fly and humans could not. Today, humans fly higher, further and faster than any bird.

Leverage is Power

Animals tend to use their God-given leverage and are generally not capable of gaining any more leverage. That is why animals eventually lost their natural advantages over humans and humans took over the planet. The same thing happens when some humans are more leveraged than others humans. People with leverage have dominance over people with less advantage.

As humans gained advantage over animals by creating leveraged tools, similarly, humans who use these tools of leverage have more power over humans that do not. Boiling down to a single sentence "Leverage is power".

A bird utilizes its God given leverage as its unique leverage. Humans observed birds in flight, and then used their minds to discover how humans could also fly. A person who can fly from Bombay to Dubai has greater leverage over a human who only has a rowboat to get across the Arabian. Average people use fewer leverage tools than exceptional people. If you want to be rich and keep up with the rich, you need to understand the power of leverage.

We are fortunate to have more leveraged tools with an easy access and also at reasonable price, such as computer, internet, mobiles, cameras etc. The humans who can adapt to use these tools of leverage are the humans who are getting ahead. People who are not learning to use more and more tools of leverage are falling behind financially and working harder and harder just to keep up. If you are getting up and going to work only to earn money rather than working to gain some leveraged advantage in life, the chances are you are failing behind today. Never in history of the world have so many tools of leverage been invented in such a short period of time. The people who use these tools get ahead and people who do not fall behind just as the animals did.

People without Leverage work for those with Leverage

Throughout history, the people who have fallen behind are the people who fail to utilize the new tools of leverage created during their lifetime. And the people who fail to use these leveraged tools are the people who work for the people who do, and they physically work harder than the people who use the tools of leverage.

Just as we have more choices when it comes to types of transportation leverage, we have more choices when it comes to types of financial leverages we can use. The people who utilize the more leveraged financial tools get ahead financially. People who use obsolete, out-of-date, or inadequate tools of financial leverage put their financial security and financial future at risk. Today millions of people are utilizing the financial tool known as Mutual Fund to prepare for their retirement. While mutual funds are by no means obsolete, they are not the leveraged financial tools of choice of the more educated investor. If people want to retire young and retire rich then they may need to supplement their mutual funds with faster, safer, and more information-rich tools of financial Leverage.

But, finally remember to most powerful leverage available to human being since the beginning of human race and will last till its end is, Human Brain. It was, is and will be the most powerful lever irrespective of the technological advancement. So, never under estimate the power of your brain, keep adding valuable information to it and never sell it short dealing with trivialities.

Thank You.

CA Chandan Mundhra

India

LEVERAGE: A WORD THAT MADE ME TRILLIONAIRE

You now know the importance of systems and their impact on customer service, staff skills and added value. I described this effect as a kind of leverage. It's important to realize that there are many other forms of leverage, and the word itself is used in many different ways. Financiers, for example, consider leverage to be the use of loan moneys to buy shares in a business, or other assets, that will give a greater return on the money borrowed than the rate of interest charged—thus making a profit. But leverage has a wider meaning when we use it to refer to less obvious assets in a business—such as time, marketing and systems.

How do we use leverage in these areas to become rich? Everybody has the same 24 hours in a day. Yet some people manage to earn an enormous amount and become very rich by using leverage well. They do this by leveraging themselves in every aspect of their lives. They make their time, their money, their marketing and their systems all work for them, so they get more out of each. Leveraging is about duplicating a high-value item or skill at a much lower cost.

Time leveraging

Let me give you a simple example of time leveraging. If you sell your time at, say, Rs. 1,000 per hour and you work 12 hours per day, the maximum you can earn is Rs. 12,000 per day—not bad money. But what if you were able to teach less skilled people to do what you do and pay them Rs. 500 an hour instead of Rs. 1,000? You can do this by providing them with easy systems and procedures you have developed.

Just having one person working your system, you are making Rs.6,000 per day which is less than before. But now you can spend your time—say, 12 hours a day—selling their time. For example, if you sold four of those people's time at Rs. 1,000 per hour (because they are producing Rs. 1,000 per hour worth of work) and still paid them only Rs. 500 per hour, you'd be making Rs. 24,000 profit per day (4 X Rs. 6,000). You have leveraged yourself from earning Rs. 1,000 per hour to Rs. 2,000 per hour, while working the same number of hours.

This is a basic point, but one that's critical if you want to be rich. Selling your own time will never make you rich. You must always develop systems and use someone else's time to produce something you can sell at a higher price.

Marketing leverage

Here's a different example of leverage. If you are running an advertisement in a newspaper and, on average, that advert brings you ten sales at Rs. 1,000 per sale that is Rs. 10,000 in total sales. If, however, you change the appeal of the advertisement with a great USP(Unique Selling Process) headline, and get 18 sales per advertisement, you have leveraged this advert by Rs. 8,000. You are now receiving a much bigger reward for the same cost.

This is an example of marketing leverage. There are many others. For example, if your salespeople are converting one out of five leads into a sale, and through training and systems this increases to two out of five, you double your sales. And that comes with a small additional cost. If you send out direct mail, change your offer and get a 30 per cent better response, this is also a form of marketing leverage you can work on.

Systems leverage

Systems are a great way of leveraging too. As we know, systems are an essential way of making highly skilled or repetitive, high-cost processes easy and simple — allowing you to offer high-value products or services at a much lower cost. This is what a good business allows you to do. What all this means is: the more you refine or work on your manufacturing, production, selling and marketing systems, the more leverage you will have, and the more money you will make in your business.

Take a look at the most successful people and businesses you can find. Dissect how they operate in each and every case. I guarantee that you will find they are highly leveraged in their finances, time, marketing or production processes. Take McDonald's as an example again. What do you find? I don't know about their finances, but everything else they do is about getting the most out of the least effort, from leveraged production to leveraged marketing that they're constantly testing and improving.

FOCUS ON MONEY MAKING ACTIVITIES AND DELEGATE TO OTHERS

As you get to understand Leverage in your business, it will become clearer that you should do the things only you can do. You must rely on your systems to help others do the rest. If a business isn't a success, often it's because owners and managers forget to focus on only doing the things that make the most difference and delegate the rest.

When you own or operate a business, especially a small business, you have many responsibilities and many chores. In this situation the golden rule is: never do anything you can pay someone else less money to do. In business you should never spend your time doing anything other than the highly skilled work of developing and refining your systems, or generating revenue through sales and marketing systems.

Focusing solely on these two activities (sales and marketing) is what will make you the money you are seeking. Why? Because these are the two most highly leveraged things you can do with your time. By doing that you are making your business earn your income, rather than you selling your time. It's financial lunacy to do any work when you can get someone else to do it for less than you can earn elsewhere.

You might think you're saving money by doing some typing or going to the bank, but believe me, it's false economy and it's actually costing you much, much more because you are losing possible profits. It is foolish to think you can't afford it. I know this may be difficult to do, especially when starting out in business, or when finance is tight. But you mustn't get caught in the trap of trying to do it all yourself and thinking you are saving money.

HAVE FREEDOM AND STILL BE IN BUSINESS

Only time, money and marketing leverage will give you the freedom you sought when you first started in business. With leverage you can build your business and then step back and let it run itself. But in doing that, you won't be backing away from the business itself. You must keep an eye on systems, keep an eye on marketing and keep an eye on all the business—but through the work you have done on your systems, you'll have the time to do what you want as well.

PROBLEMS WILL HAPPEN—BUT ONLY ONCE

One of the most important elements of your business systems is how you change them. We've seen how the world, the economy and your customers are changing— your systems have to be able to adapt to match those changes. As part of your systems you should build in a process for updating them. Continuous improvement or constant feedback ensures whenever a system doesn't perform adequately it's recorded, considered and fixed.

It's the same when a problem appears for the first time. If your systems record what the problem was, and why it happened, you can create procedures, or deliver training to make sure it doesn't happen again. That's the sort of thing that makes your service extraordinary.

COMPLAINTS ARE A GOLDMINE

I'm in a superannuation fund that sends me regular reports on my investment. After the first year of receiving reports I couldn't understand, I wrote them a letter explaining that I simply couldn't work out what they were saying. Two days later I got a letter thanking me for my contribution and letting me know they were already redesigning the statement. When I got the new statement a month later, it was great.

What happened here is that this insurance company listened to customer complaints and improved their business. Now I know I wasn't the only complainant. But the fact that they listened meant they had information they didn't have before.

Customer complaints are the perfect way of gathering information. It's cheap, you don't have to search for the information, and it immediately points out where you can do better. All you have to do is set up a system to record and act on those complaints. Tie it in with your continuous improvement system. Display the complaints to all your staff. Even inform your customers in a newsletter of what complaints you've received, and how you fixed them. But never let a complaint go by without responding to it and benefiting from it.