How to Actually Use Leverage in Your Business

You talked about labor leverage, and there’s, like, a nose of communication. Each person has, like, an exponential complexity, right?

Yeah.

Have you noticed through your own experience, like, there’s, like, a certain number of people that typically works best under that, like, option?
Yeah. So it’s pretty set in stone to know when you’re going to reach certain levels of operational complexity within a business. The business is going to grow really quickly until you get to about your first five or six hires, and then it’s going to start to slow down. And the reason it starts to slow down is that only every individual should only ever have five direct reports. You can only keep your fingers on the poles of five different people simultaneously and coach them up within the business. So as soon as you get outside of that fifth hire, you get to the 6th, 7th, 8th, you’re in this gray land where now that person needs to report to somebody else on the team. So you’ve just introduced your first, your second layer of hierarchy. So you have you at the top.
You have their first five hires underneath of you. Now, those people underneath that are reporting to that person. And if you math this out, then you say, okay, so each of those five could have five direct reports underneath that. That tells us at about 20 to 25 hires, that next level is going to have people reporting to them. So you just graph this out, and you go, okay, so one to five is going to be quick. Five to 25 gets messy. 25 to 100 is the next level. And this corresponds, in a lot of cases with profitability.
So, like, zero to five is usually the entrepreneur who’s doing somewhere between, say, $100,000 a year and maybe, like, 3 million. At about 3 million, you probably have around 20 ish employees. So getting to that 9 million mark where you’re tripling everything seems to happen in triples and in quintuples. So, like, every time you want a five x, the hiring that’s gonna lead to a three x. On the revenue side, that’s ballpark, but that’s generally where you’re going to see the operational complexity come in.
Okay, got it. And then, so should a person work on. There’s four of them, but it seems like a few of them are complementary. Like, I noticed when you explained capital leverage, which also is, like, passive, but requires reputation and media leverage, which is. It’s not passive. You have to put a lot of effort, build a consistency, but it’s kind of also based on that overtime reputation. Is it good to work on, like, some of these leverages simultaneously, or should you pick one?
Yeah, absolutely. I mean, absolutely. It’s not an either or. It’s not, hey, I’m just going to go labor leverage or capital leverage. It’s usually like using them concurrently and in a complimentary way so simultaneously that you’re building your labor leverage and going out there and doing the work, knocking on doors. You should also be using media leverage. And media leverage isn’t just putting out content to the world that’s going to attract leads into your business. It could also be creating the sops and the systems within your business, standardizing it.
So you create the SOP once you bring people in, and that becomes a training onboarding process. Right. So you should be learning that skill concurrently, because a lot of what makes you successful in media is communication and organization of information. And then how do you actually, you know, communicate that effectively to somebody else? And that’s going to help you on the labor side, which is how do I bring somebody into the team? How do I communicate the ideas, ideals of the project and get everybody rowing in the same direction, same with capital. As you start getting capital, you have to figure out, how do I manage this? The mistake that people typically make, though, let’s say you started a window washing company like me. You start to make your first little bit of money, and you start thinking, I need to go make my money work for me harder than I work for it, right? And, you know, I need to start investing. So then you start looking up real estate, start looking up stocks and bonds and all these other things, when the reality is you need to learn how to allocate your capital to the place that’s going to give you the most yield. And in the early days, that’s going to either be back into yourself, back into your resources, or back into your network, right? And until you’ve maxed out your skills, your resources and your network, you shouldn’t even worry about looking for passive investment opportunities.
You shouldn’t worry about the stock market, shouldn’t worry about real estate, because your dollar, your $10,000, sure, you put in the stock market, and over the next ten years it might double, but you could take that $10,000, reinvest it into learning a skill that you could then deploy in your business. That takes your business from making $100,000 a year to $500,000 a year. You five extra earning potential, right? And so that’s the game right there. When it comes to capital, leverage is learning where is the highest yield, the most effective yield to be gotten. And typically, it’s not in passive opportunities, it’s right back into your business.
Okay, okay, okay. And then technology leverage, you mentioned this last question for technology. Technology leverage. You mentioned that it’s like more specifically coding. So while you can kind of work on that simultaneously, let’s, let’s say like hiring a CS guy with an idea that you can work for.
Yeah.
If you are like, would it be wise for someone to actually just primarily focus on technology if they want to go on that route? Because it seems like.
Well, not necessarily. Yeah. If you’re going to focus on technology as like software as a service, you’re going to be a coder programmer. You need to focus hard on that, but you’re also going to need other programmers. So you’re going to learn how to do labor leverage. But in the case of a window washing company, I didn’t need to learn how to code. I needed to learn how to use no code automation tools. Right.

Because your goal in your business is to automate or delegate as much as possible. And so you need to learn how to use the technology to give you more leverage within your business. And that’s great. That’s fantastic. You’re not going to take that software and go sell it yourself, but you’re going to use that software within your business to give you more leverage. That’s the other side of technology leverage. But it can be a big waste too, in the sense that you can take all the time and energy learning this new software, learning how to automate this process. And then you spent all your time just like mentally masturbating, creating this beautiful process that is, it’s over engineered, it’s not necessary.

And so you just ended up procrastinating by creating this overly complicated system, which we can easily get sucked into that trap with tools like notion and Asana, like, oh, it can do anything and everything, and then you spend like a whole afternoon on that and not spending the afternoon actually focusing on things that would move your business forward.