Leverage: Let’s Rise Up
Where are my Office fans? I love the show, and I’m proud to say that I’ve turned my children into die-hard fans as well. One of my favorite episodes – besides the fact that it’s the one where Michael proposes to Holly – is the garage sale, where Dwight uses is bargaining “prowess” to trade up his red thumbtack – to a telescope (eventually) – and then finally to a package of beans…sorry: Professor Copperfields Miracle Legumes. Up until the legumes, Dwight did GENIOUSLY play each of his colleagues by tapping into what they desired and used that to get what he wanted.
How did he get Kelly to trade her collection of books for a used candle? By convincing her that Ryan would get jealous wondering who she’s been spending romantic evenings with. This my friends, is leverage.
Leverage is using something that you already have in order to achieve something new or better.
Got some inappropriate pictures of your neighbor? That’s your leverage to get them to mow your lawn for the rest of their life – you have something (pictures) that you use to get something (free lawn care). LOL!! It’s hypothetical, I promise ;)
In your business, this might mean using borrowed money to boost your potential profit or revenue.
Let’s say you’ve got a supply order that you can place for $10K. By spending that $10K now, it will mean you’ll be able to earn $40K in sales…good deal, right? You’re LEVERAGING your $10K so you can turn it into $40K.
SIGNS OF BEING OVER-LEVERAGED
As you can see above, using debt to earn money is a good thing and can be very beneficial, but what if your debt is out of control? While a bit of borrowing can be helpful, too much can turn your financial life into a circus act (but not the harmonious and graceful circus that is Cirque du Soleil). Here are some signs you might be over-leveraged:
Struggling to Make Payments: If your debt payments are eating up a big chunk of your income, it's a red flag.
Limited Cash Flow: Are you constantly short on cash for day-to-day expenses? That's a sign that too much of your money could be tied up in debt.
High Debt-to-Income Ratio: Calculate this ratio by dividing your monthly debt payments by your monthly income. If it's more than 40-50%, it's time to reassess.
UNDERSTANDING THE RATIOS
Now, let's talk ratios: DON’T RUN AWAY! These ratios help you see if your leverage is balanced or tipping the scales. All the numbers for these will come from your Financials – your balance sheet or income statement.
Debt-to-Equity Ratio: This ratio compares your borrowed money (debt) to your own money (equity). For creative entrepreneurs, a healthy ratio is around 1:1 or lower. This means you're not relying too heavily on borrowed funds.
Debt-to-Assets Ratio: This one compares your total debt to your total assets. Aim for a ratio below 0.5, indicating that more of your assets are financed by your own funds.
Interest Coverage Ratio: It measures your ability to cover interest payments with your operating income. A ratio above 2 means you're comfortably covering your interest payments.
Debt Service Coverage Ratio (DSCR): It shows if you have enough cash flow to cover your debt payments. A DSCR above 1.25 means you're in a safer zone.
Remember, these ratios aren't set in stone. They vary based on your industry, risk tolerance, and business stage. But as a creative entrepreneur, you want to find that sweet spot where you're using leverage wisely without becoming financially stressed.
WRAP-UP: LEVERAGE LIKE A PRO
Leverage isn't a scary term; it's a powerful tool when used wisely. Keep an eye on those ratios to ensure your financial balance stays intact. Just like crafting a masterpiece, your business's financial health takes time and attention. So, go ahead, leverage your way to financial success – and remember, you've got this! 🌟🚀