Financial Leverage
Written by Admin on February 18th, 2008Financial leverage is so simple, like a theory in physical science. If we want to lift 9 kg of stone, but our power is only 1 kg, so we just need a meter leverage tool. Then we put the stone at the edge of the tool, after that lift it easily!
This financial leverage concept is popular in finance management. If you have a 10,000 US $ capital, then you get debt 90,000 US $ capital, surely You are more confident to run the business. The debt equity ratio in finance is 9, because the comparison of your capital and debt is 9:1. Beside in financial leverage, it is also known a service leverage in marketing.
According to Gary Hamel and CK Prahalad, traditionally, there are 3 elements in strategy:
First, concept of fit, it means that there should be fit relationship between the company or business with the environment. In other word is there should be strategic window between company strength and environmental opportunity.
Secondly, there should be accurate budget investment to business chance.
The third, strategy that related with long-term perspective.
Then, how to do financial leverage? an entrepreneur or company should concentrate to main resources, convergence or focus.
Shortly, If I may take a conclusion to the article, if we want to grow our business, we should do resource leverage in an important small area of business, it means that we do financial leverage to our exist resources, it can be money, technology, human resource, distribution channel and market. As examples, the business of British airline, they want to be the world’s favorite airline company, Kennedy, an American former president wanted to land the first people on the moon, CNN is as the pioneer of live news TV in the world and many others, they are convergence or focus to the dreams. Surely, financial leverage was used by them to grow the business. However, implementing financial leverage must be discussed deeply based on strategic window.
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November 16th, 2008 at 10:51 pm
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