UNDERSTANDING THE LEVERAGE FACTOR – a must for all those committed to getting ahead.

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

Archimedes

In this week’s ‘Coffee with Colm’ 5-minute vlog, I explore the concept of leverage and its importance in terms of you and I getting ahead – to simplify it, I assign a Leverage Factor to each of the 4 Players in the world of business, the Employee, the Self-employed person, the Business Owner and the Investor.

Have a look, see what you think:

The Leverage Factor

“You’d make a fortune in your own little coffee shop.” These words passed regularly for years from friends and family to me based on my obvious talent in the front of house side of the coffee shop industry. Let’s face it, I was good – possibly great. That’s not ego speaking – I had a knack and it showed. So the most obvious thing for people to advise was that I should open my own ‘little’ coffee shop. But I was never tempted and I couldn’t figure out why until I met Robert Kiyosaki, or rather encountered his books. I did actually meet him in Dublin, though I doubt he remembers. 🙂

When he explained to me the difference between the left and right hand sides of the Cashflow Quadrant it was as if a light went on for me, or to quote Mr Kennedy, my old school teacher, the penny dropped! Finally I realized there WAS a difference between being self-employed and being a business owner and the two are worlds apart and for the first time in my life I realized where I wanted to be, not what I wanted to be. I realized I wanted to live life on the right side of the quadrant.

So, the only place to start was from where I was and the first step was to get a clear picture in my mind of the four players in the world of business, so here is what I came up with:

Employees: This is an easy one for most to understand. Work a defined role, get paid by the hour, week, month, PAYE and/or commission, bonus or no bonus, but get paid by someone else whose job it really is, but they decide they want to hire you to help them. Work, get paid, don’t work, don’t get paid. Leave your employment, your pay ceases. The Leverage factor is 1.

Self-employed: Take a window cleaner for example; a man with a ladder and a bucket who is willing to knock on doors can make a living as a self-employed window cleaner no question. He will trade his time for money. If he is not actually washing windows he can’t earn. Everything from bad weather and darkness to vacation time can impact on his earning capacity. The Leverage factor is 1.

Business Owners: A business owner is someone who owns or controls a business system that operates at least in part without the owner. Take Michael O’Leary (Ryanair 8,438 employees in 2012) and Richard Branson (Virgin Group approx 50,000 employees) as examples. Is it a fair assumption that whether they went to the office today or not, they got paid? Yes they did. Are they getting paid as you read this book? Yes they are. Their Leverage Factor is at least in line with the number of employees, circa 8,500 – 50,000! – not to mention potential Financial Leverage.

Investors: Warren Buffet is arguably the Western World’s most famous investor. As we start 2013 he is the world’s 3rd richest man with an estimated fortune of $50bn. How did he do it? Well he bought a company and ‘Leveraged’ it by taking the profits and buying another company and ‘Leveraged’ it by taking the profits and buying another company and ‘Leveraged’ it by taking the profits and buying another company, etc, etc. Can you see where this is going? He owns hundreds of companies, in fact as I write this chapter he has just shelled out $23.2Bn in cash to buy Heinz. His Leverage factor is – well -enormous!

Obviously I’ve simplified the transactions/concepts above, but I hope you get the point.

MORE: If you enjoyed that snippet and would like to watch me teach other business lessons in 5-minute videos click here

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Thanks for thinking with me.

Yours truly,

Colm

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