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THE 4 FINANCIAL LEVERS FOR RUNNING A BUSINESS

Posted by Percy A Lowe on July 19, 2013 at 6:30 AM

by Frank Coker

There are 4 basic financial levers that business owners and entrepreneurs have to work with. Most owners and managers are aware of these, but rarely are they thought about as the “4 pillars” that need to be balanced in order to give their business a solid footing. Getting these right will not guarantee that your business will thrive, but getting one of these wrong will almost certainly pull you down or bring you to a halt.

 

The basic financial levers are:

 

Revenue

Operating Costs

Financing

Investment/divestment

When you drill into these topics, there are mountains of theories, analytical processes and management techniques to consider. The drill-down can be an endless process. The real challenge for business owners and business leaders is to make sure that all 4 of these levers are getting the right amount of attention such that they work together to support a successful business – not pull the business apart.

 

For example, in the past week I have looked at several businesses that are using debt financing to keep their business going when the real issue is that their cost structure is simply too high. They are pulling the wrong lever and will not get onto a solid footing until they address their costs. Another example was a company that has priced their products and services incorrectly. On the surface it looked like they were making a good margin and all they needed to do was increase volume. But the sinister truth was that they were not making an adequate margin. They were not including all their direct costs in the margin calculation. As a result, growth was very damaging to the business. For them, growth drained cash, caused them to go heavily into debt and depleted the equity value of their company. There are countless variations on these themes, but in the end, the 4 levers must be on the right setting or the business engine will burn out.

 

Of course these levers do not live in a vacuum. They live inside a bigger picture made up of less measurable but highly important items such as vision, mission, philosophy, markets, and perceptions. But here again, if the financial levers are not being managed correctly, all the other parts of the picture will fall apart or just simply go nowhere, no matter how cool, important or valuable they are.

 

I will be drilling further into these topics in future blogs and in my upcoming book titled: PULSE: Managing the Heartbeat of a Business. The goal of the blog and the book is not to answer all the questions surrounding these topics, but rather to provide a meaningful framework for the 4 Financial Levers within the bigger picture. Getting clarity on the big picture can make it much easier to see how the parts work together to build a successful outcome.

Categories: Small Business Managment

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