Financial Leverage and Operational Leverage
Financial Leverage and Operational Leverage

In every business, there are two types of leverages available to leaders; financial leverage and operational leverage. Each type of leverage serves a different purpose and providing specific benefits. However, operational leverage is many times an overlooked commodity. Today’s blog comes from a recent Q&A that Taylor and Tommy, COO of Traffic and Funnels jointly participated in recently.

Financial Leverage

First, let’s cover financial leverage. Financial leverage is getting something you didn't pay for. When we go out and buy real estate, a lot of times, what we'll do on the back end is we'll backfill that money back out. So we will get a $150,000 piece of real estate for $30,000. So that's an example of financial leverage. We didn't have to pay for the other $120,000.

Operational Leverage

So what then is operational leverage? Operational leverage is getting something you did not work for. This is where Tommy’s expertise comes in. Tommy is in charge of all operations at T&F. Part of his job is making sure that there's leverage inside of our operations. That means our people, our employees are clear on what their job is. They're clear on how to do their job.

Sometimes if you want to fix things operationally, it's not that things aren't getting done, it's that they're not getting done on time. So in all aspects of the business profit engineering, ensuring we're not overstaffed, in general, all of the things included in running a well-oiled machine, Tommy’s in charge. The idea here is that as the CEO or whatever you want your role to be, you have leveraged inside of the system. To use an analogy, imagine a vehicle going 65mph, that's in sixth gear, you have speed without redlining. Imagine a car going 65mph in second gear that thing's going to blow up. It’s redlining. So the better your operations get the more it allows an organization to move faster without necessarily redlining.

How do I hire my own Tommy?

Financial Leverage and Operational Leverage

I’m going to let Tommy take this one. “It really depends on your industry. I think you're going to be really well-suited if you have somebody that has worked in a lot of different areas. They have to ask good questions. They have to be able to gain an understanding of what problems exist in the multiple parts of the business.”

“This person needs to be able to understand how things are functioning in the marketing team, the sales team, as well as backend operations, finance, hiring, I mean essentially, everything, right? They need to understand the business holistically. Now to be clear: I have no idea how to run ads and how to run a marketing team or do anything related to the sales team. But I need to understand what their problems are because I need to be able to support them.

That’s it really. It's going to be somebody that has, you know, ideally worked in and worked for a lot of these different areas and people either get it or they don't.”

What questions do you ask?

“So when I ask questions for entry-level mid-level or managers, I want to ask things like, “tell me about how a process works.” And I want them to be able to articulate not only the things in their wheelhouse. They need to be able to understand how the different teams interact with them. If they're able to think that way, that's the most important thing. They need to understand that because then we can teach them how our stuff works and we can apply that to our business, but they have to think that way in the first place. And if they don't, it's the wrong person.

Frankly, it doesn’t matter what industry somebody is coming out of. You want somebody that's motivated. Somebody that's intelligent. Someone who wants to help others. They need to be well-spoken and outgoing. Those are very, very strong attributes but really we do not discriminate by industries or companies. We really don't care. I mean, it doesn't matter. It's all about that person and their personality. That they understand those kinds of things.

Preferably you’d like somebody that has been in a smaller organization and a bigger one. That way they can see the different types of problems present in those different types of companies. So having exposure to both is a huge win because they can pull, you know, pros and cons from both of those types of environments. Those are kind of some good starting points.”

Closing thoughts

Getting a firm understanding of how to use the two different types of leverage can be a game-changer. I’d encourage you to take some serious time to think and journal about how utilizing the two types of leverage impact your company.

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In your service,
– T

 

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