Leverage for Higher Profits

We often highlight how most business owners work long hours in their business for insufficient reward.    They think that working hard is the key to success.  But they couldn’t be more wrong.

That’s because there is no more important key to success than the use of leverage.

I often speak to business owners who are working hard to achieve success.  But even though they work hard, they will never truly achieve success because when they stop working, their achievements begin to be eroded.  When your success relies purely on your own efforts you will always be limited in what you can achieve, because there is only so much one person can do.  In this article I will explain why working harder is detrimental to success and why you must focus on increasing your leverage to achieve real success.

What is Leverage?

The principle of leverage has been applied to physical work for several millenia, while the mathematics of leverage were discovered by Archimedes in the third century AD.  So leverage is not a new concept.  Yet while we so readily apply the principle of leverage to work, it seems that business owners are often reluctant to apply the same principle to developing their businesses.  This is despite the fact that the most successful businesses are built specifically through the use of leverage.

Wikipedia defines leverage as a factor by which a lever multiplies a force.  The use of leverage then means that by using a factor that assists the effort (force) we exert, we can multiply the results we would otherwise achieve. That’s another way of saying it is better to work smarter rather than work harder.

Leverage is often also used to describe the use of borrowed funds to improve financial returns.  This is often how the rich get richer, not through the use of their own resources themselves, but by utilising other people’s money to multiply the returns on their own funds.  It has often been said that the poor and middle classes work for their money, while the rich make their money work for them. In the same way, we see that struggling business owners work hard for their businesses while the successful entrepreneurs have a business that works for them.  

Here is the first important principle to learn from this article.

If you want to be more successful, don’t think about working harder to make more money.  This will only achieve a short term boost to your cashflow at best and more than likely, the use of the effort required to achieve this short term result will actually detract from your ability to produce better results in the future.

Unfortunately, this is what I see most business owners who are striving for greater success do.  They are working hard for their business instead of finding out how to use leverage to improve their results.  You must work primarily to build the leverage that will create sustainable and ever growing increases in performance and results, rather than focus on short term results.

Michael Gerber, in his book “The E Myth,” coined the phrase “work on your business, not in your business.”  This is the same principle.  When you work “in” your business you do work that makes money today.  When you stop that work, you stop the income stream.  When you work “on” your business you work on systems or projects that build capability in your business which may not bring immediate reward or income, but provides greater capacity to increase and sustain high levels of output and income in the future.  This is building leverage.

Abraham Lincoln once said that if he was given 8 hours to chop down a tree he would spend the first seven hours sharpening the axe.  This is exactly what building leverage is all about.  The temptation for most of us when given a task is to immediately jump into the work and put a lot of effort into getting the job done.  The smarter approach however, is to take your time to get organised and ensure you have the right tools and systems in place to make the job easy when you tackle it.

Now in business, you can’t spend all your time working on the business.  You eventually need to take the axe to the tree.  But in my experience, business owners tend to spend far longer working in the business rather than working on it.  The important point to see here is that every hour you spend working in the business, even though it may be helping to get that day’s work done, is also damaging your capacity to improve performance and makes it harder to achieve better results in the future.  This is the same as using the axe.  When you use the axe you make inroads into the tree, but at the same time you are making the axe blunt with every stroke.  Your work IN the business reduces the capacity of the business rather than increasing it.  

This aspect is counter intuitive, as it would seem that by adding your labour to that of your employees you would increase capacity.  However, the reality is that your effort only increases capacity while you keep working in the business.  This is working for your business.  Much better use of your time is made by working on the business to build future capacity so the business can work better for you.

The second important aspect in the use of leverage is this.

The more effort you put into increasing the capacity and capability of your business in the short term, the quicker it will be to get to the point where the business works for you. 

The stronger you make the lever, the more force it will impart.  You will achieve much more success in a shorter space of time if you can focus more of your attention to working “on” the business.  This obviously has to be balanced with your needs for short term survival, so don’t totally neglect what’s happening now because you are building for the future.  However, if your days are totally consumed with survival and you have no time for investing in the future to build your leverage, something is very wrong with your business and should seek help to find out what it is that is threatening your survival and get it sorted out as soon as possible.   Your role as the leader in the business is to add value to an already successful operation, not to prop up an ailing system that is barely able to survive without you.

Your business is the lever that will assist you to achieve the success you want.  You have a choice about whether to put the majority of your time into creating a strong lever that works for you or to put your efforts into doing the work of the business.  You could work hard forever in the business and never achieve the success you want.  Or you could work really hard for a while to build your lever and enable your business to do the work so you eventually don’t have to work at all if you don’t want to.  Then you can achieve any level of success that you want.

I hope you are able to see how important this aspect of leverage is to your success.  Ask yourself how much time you are working in your business to help it survive compared to how much time you spend working on the business to increase its leverage.  If you are spending more than one eighth of your time working in the business you are probably working more on survival instead of increasing your capability to succeed in the long term.  That means you are limiting your success and lengthening the time it should take until your business works so well that you don’t have to.  In the end it’s up to you to work hard or work smart.  What are you going to choose?