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Business is Leverage

25 Mar, 2023

If you want to simplify business into one specific thing, it's this - how much leverage do you have? Leverage is the ratio of input to output. If you're input is 100 and your output is 50, your ratio of input : output is 1:0.5. If your input is 100 and your output matches, your leverage is 1:1. This is great if your goal is to break even. However, any profitable business has a 1:1x leverage because the amount of money they receive is greater than the amount of money they give.

So if you want to build a business, figure out the cost of selling to 100 customers, and set the price such that the revenue from those 100 customers (over whatever period of time you can afford) is greater than the cost.

If I were to analyze just one metric for a business, it would be this: what is the leverage? Is it generating more than it is requiring. And the greater the leverage the better.