You might have heard of the term “Leverage” in network marketing companies, from a friend or from a financial guru. You might have heard advice from rich people telling you to leverage your time and money to make you rich like them. But what exactly is this thing that they call Leverage? I’ll try to explain it as easy as possible so that anyone, even a young child could understand.
What is LEVERAGE?
LEVERAGE is using other people’s time or money to amplify the outcome of a sale.
There are two types of leverage. Leverage using OPT or “other people’s time” and Leverage using OPM or “other people’s money”.
Here’s an example of OPM or other-people’s-money as leverage;
In a normal deal, Pedro, having one thousand pesos, buys one box of candies and sells it for one thousand five hundred pesos for a five hundred peso profit. This is a good deal.
But using leverage, Pedro can go to a bank and borrow nine thousand pesos more money with 10% interest to build a capital of ten thousand pesos. He then goes to buy ten boxes of candies and sells it all for fifteen thousand pesos. He then goes back to the bank and pays his loan of nine thousand pesos plus nine hundred pesos in interest. Now, removing Pedro’s initial capital of one thousand pesos, he was left with a four thousand one hundred peso profit.
In comparing both scenarios, we can conclude that leverage using OPM in this case, the bank’s money, can turn good deals into great deals and that’s why banks and rich people go crazy with leverage.
The other type of leverage is using OPT or other-people’s-time. Here’s an example;
In a normal business day, Pedro can sell ten boxes of candies worth ten thousand pesos for fifteen thousand pesos thus earning a profit of five thousand pesos. This is good business. But Pedro became so tired at the end of the day.
But using leverage, Pedro then decides to hire ten workers the next day, gave each worker ten boxes of candies to sell and promise to pay them 10% in commissions and decides to stay at home to rest and watch TV. At the end of the business day, Pedro gets one hundred fifty thousand pesos from the sales of the ten workers and pays them fifteen thousand pesos total in commissions. Removing Pedro’s initial capital worth one hundred thousand pesos, he was left with a thirty five thousand peso profit while at home watching TV.
In comparison, we can conclude that leverage using OPT can greatly amplify the work done resulting to more sales and more money while using little of your time. This is a major way network marketing companies grow.
Disadvantage of Leverage
One disadvantage of OPM leverage is when you become “overly leveraged”.
Pedro borrows one thousand pesos with 10% interest, buys a box of candies and found out later on that the demand for candies on the succeeding days are low and that he could only sell the candies for one thousand fifty pesos, So what he did is he sells the box, pays back one thousand one hundred pesos and looses fifty pesos on the process. This overly leveraging happened to Lehman Brothers during the sub-prime mortgage crisis of 2008 which led to their demise. And this is also happening in China today because the local investors used leverage to buy overpriced stocks on margin.
One disadvantage of OPT leverage is when those people stop working for you. This is prevalent in network marketing companies. Earnings will start to decline if sales from your network starts will also start to decline. And declining sales means that the people under your network may have stop working for you.
Is leveraging good or bad?
While leveraging can amplify your gains, it can also amplify your losses. Leveraging is the best way to get rich if you know how to manage the high risks. If you know what you are doing, then do it, If not, I suggest you study more on this topic especially on how rich people apply it into their strategies because leveraging might instead get you in deep hole of debt.