As an IT manager you are going to want to be able to show some leadership and be able to have intelligent conversations with the people who are running your company. More often than not, those people are either going to be working in the company's finance department or they are going to have a finance background. This all means that your management is going to be using big words like "leverage" that you're going to have to understand. Let's do something about that right now.
What Is "Leverage"?
If you've watched any movie in the past few years that dealt with a business or money, then undoubtedly you've heard the actors use the phrase "... he's highly leveraged... " This leads to the question: what are they talking about? In the world of business, financial leverage refers to the act of borrowing money so that you can acquire an asset. When somebody (or some company) is highly leveraged, then they've acquired an asset using more of someone else's money than their own.
You don't want to get this kind of leverage confused with another type: operating leverage. Operating leverage is talking about the extent to which a company's operating costs are fixed versus variable.
How Do Companies Use Leverage?
Borrowing money is a bad idea, right? Isn't this what all of our parents told us as we were growing up? Well, it turns out that when used correctly, leverage is a very powerful business tool that can help your IT dream team do more projects.
Let's say that your company wanted to implement an IT program that was going to cost $1,000,000. Your company contributes $200,000 and borrows $800,000 to fund the project. A year goes by after the project has been implemented and your company has generated an extra $2,000,000 in profits because of the project. Ignore the cost of borrowing the money and assume that the company repays the borrowed $800,000. This leaves the company with $1,800,000 in profits after they repay themselves for funding the project. Clearly using leverage really paid off in this situation.
What Does All Of This Mean For You?
Financial leverage is a technique that companies use in order to implement projects that they don't currently have enough funding to do by themselves. This is a powerful technique that comes with some risks.
Firms borrow money, leverage, and combine it with their own money to fund activities that they want to perform. Assuming that the value of the activity increases, then the firm can repay the borrowed funds and will emerge with more funds than they had when they began. If the activity decreases in value, then the firm will end up losing money.
Using leverage can allow a firm to perform more IT projects and to start them sooner than if they didn't. However, the use of leverage puts the entire firm at risk of not being able to repay its loans. IT managers need to understand how this powerful financing technique works and what they need to keep an eye on when it's being used.
Dr. Jim Anderson
http://www.blueelephantconsulting.com/
Your Source For Real World IT Management Skills™
Dr. Jim Anderson understands what it is like to both work in an IT department as an employee as well as a manager. Dr. Anderson is willing to share with you his 20+ years of experience in order to explain how to attract, motivate, and retain top IT staff.
If you want to follow Dr. Anderson on Twitter, he can be found at: http://twitter.com/drjimanderson
What Is "Leverage"?
If you've watched any movie in the past few years that dealt with a business or money, then undoubtedly you've heard the actors use the phrase "... he's highly leveraged... " This leads to the question: what are they talking about? In the world of business, financial leverage refers to the act of borrowing money so that you can acquire an asset. When somebody (or some company) is highly leveraged, then they've acquired an asset using more of someone else's money than their own.
You don't want to get this kind of leverage confused with another type: operating leverage. Operating leverage is talking about the extent to which a company's operating costs are fixed versus variable.
How Do Companies Use Leverage?
Borrowing money is a bad idea, right? Isn't this what all of our parents told us as we were growing up? Well, it turns out that when used correctly, leverage is a very powerful business tool that can help your IT dream team do more projects.
Let's say that your company wanted to implement an IT program that was going to cost $1,000,000. Your company contributes $200,000 and borrows $800,000 to fund the project. A year goes by after the project has been implemented and your company has generated an extra $2,000,000 in profits because of the project. Ignore the cost of borrowing the money and assume that the company repays the borrowed $800,000. This leaves the company with $1,800,000 in profits after they repay themselves for funding the project. Clearly using leverage really paid off in this situation.
What Does All Of This Mean For You?
Financial leverage is a technique that companies use in order to implement projects that they don't currently have enough funding to do by themselves. This is a powerful technique that comes with some risks.
Firms borrow money, leverage, and combine it with their own money to fund activities that they want to perform. Assuming that the value of the activity increases, then the firm can repay the borrowed funds and will emerge with more funds than they had when they began. If the activity decreases in value, then the firm will end up losing money.
Using leverage can allow a firm to perform more IT projects and to start them sooner than if they didn't. However, the use of leverage puts the entire firm at risk of not being able to repay its loans. IT managers need to understand how this powerful financing technique works and what they need to keep an eye on when it's being used.
Dr. Jim Anderson
http://www.blueelephantconsulting.com/
Your Source For Real World IT Management Skills™
Dr. Jim Anderson understands what it is like to both work in an IT department as an employee as well as a manager. Dr. Anderson is willing to share with you his 20+ years of experience in order to explain how to attract, motivate, and retain top IT staff.
If you want to follow Dr. Anderson on Twitter, he can be found at: http://twitter.com/drjimanderson
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