The operating leverage force is calculated as a ratio. Operating lever. Methodology for calculating the effect of financial leverage and its practical application

• Gurfova Svetlana Adalbievna, Candidate of Sciences, Associate Professor, Associate Professor
• Kabardino-Balkarian State Agrarian University named after V.I. V.M. Kokova

• OPERATING LEVER POWER
• OPERATING LEVER
• VARIABLE COSTS
• OPERATIONAL ANALYSIS
• FIXED COSTS

The ratio "Volume - Costs - Profit" allows you to quantify changes in profit depending on sales volume based on the mechanism of operating leverage. The operation of this mechanism is based on the fact that profit always changes faster than any change in the volume of production, due to the presence of fixed costs as part of operating costs. In the article with an example industrial enterprise the magnitude of the operating leverage and the strength of its impact are calculated and analyzed.

• Characteristics of approaches to the definition of the concept of "financial support of the organization"
• Financial and economic state of Kabarda and Balkaria in the post-war period
• Features of the nationalization of industrial and commercial enterprises in Kabardino-Balkaria
• Influence of the sustainability of agricultural formations on the development of rural areas

One of the most effective methods financial analysis for the purpose of operational and strategic planning, an operational analysis is used, which characterizes the relationship between financial performance and costs, production volumes and prices. It helps to identify the optimal proportions between variable and fixed costs, price and sales volume, minimizing entrepreneurial risk. Operational analysis, being an integral part management accounting, helps the financiers of the enterprise to get answers to many of the most important questions that arise before them at almost all the main stages of the organization's cash flow. Its results may be trade secret enterprises.

The main elements of operational analysis are:

• operating lever (leverage);
• profitability threshold;
• stock of financial strength of the enterprise.

Operating leverage is defined as the ratio of the rate of change in sales profit to the rate of change in sales revenue. It is measured in times, shows how many times the numerator is greater than the denominator, that is, it answers the question of how many times the rate of change in profit exceeds the rate of change in revenue.

Let's calculate the amount of operating leverage based on the data of the analyzed enterprise - JSC "NZVA" (Table 1).

Table 1. Calculation of the operating leverage at OJSC NZVA

Calculations show that in 2013. the rate of change in profit was approximately 3.2 times higher than the rate of change in revenue. In fact, both revenue and profit changed upwards: revenue - by 1.24 times, and profit - by 2.62 times compared to the level of 2012. At the same time, 1.24< 2,62 в 2,1 раза. В 2014г. прибыль уменьшилась на 8,3%, темп ее изменения (снижения) значительно меньше темпа изменения выручки, который тоже невелик – всего 0,02.

For each specific enterprise and each specific planning period, there is its own level of operating leverage.

When a financial manager aims to maximize the rate of profit growth, he can influence not only variable costs, but also fixed costs by applying increment or decrement procedures. Depending on this, he calculates how the profit has changed - increased or decreased - and the magnitude of this change as a percentage. In practice, to determine the strength of operating leverage, a ratio is used in which the numerator is sales revenue minus variable costs (gross margin), and the denominator is profit. This figure is often referred to as the coverage amount. It is necessary to strive to ensure that the gross margin covers not only fixed costs, but also forms a profit from sales.

To assess the impact of a change in sales revenue on profit, expressed as a percentage, the percentage of revenue growth is multiplied by the strength of the impact of operating leverage (COR). Let's determine the SVOR at the assessed enterprise. The results are presented in the form of table 2.

Table 2. Calculation of the force of the impact of the operating lever on JSC "NZVA"

As the data in Table 2 show, the value variable costs increased steadily over the period under review. Yes, in 2013. it amounted to 138.9 percent compared to the level of 2012, and in 2014. - 124.2% compared to the level of 2013. and 172.5% to the level of 2012. The share of variable costs in the total costs for the analyzed period is also steadily increasing. Share of variable costs in 2013 increased compared to 2012. from 48.3% to 56%, and in 2014. - another 9 percentage points compared to the previous year. The force with which the operating lever acts steadily decreases. In 2014 it decreased by more than 2 times compared with the beginning of the analyzed period.

From the point of view of the financial management of the organization's activities, net profit is a value dependent on the level rational use financial resources enterprises, i.e. the direction of investment of these resources and the structure of sources of funds are very important. In this regard, the volume and composition of fixed and working capital, as well as the effectiveness of their use, are being studied. Therefore, the change in the level of strength of the operating leverage was also influenced by the change in the structure of the assets of NZVA OJSC. In 2012 the share of non-current assets in the total assets amounted to 76.5%, and in 2013. it increased to 92%. The share of fixed assets accounted for 74.2% and 75.2%, respectively. In 2014 specific gravity non-current assets decreased (up to 89.7%), but the share of fixed assets increased to 88.7%.

It is obvious that the greater the share of fixed costs in the total volume of costs, the greater the force of the production lever and vice versa. This is true when sales revenue increases. And if sales revenue decreases, then the force of production leverage, regardless of the share of fixed costs, increases even faster.

Thus, we can conclude that:

• the structure of the organization's assets, the share of non-current assets, has a significant impact on the SVOR. With the growth of the cost of fixed assets, the proportion of fixed costs increases;
• a high proportion of fixed costs limits the ability to increase the flexibility of current cost management;
• with the increase in the force of the impact of the production lever, the entrepreneurial risk increases.

The SVOP formula helps answer the question of how sensitive the gross margin is. Later, by progressively transforming this formula, we will be able to determine the strength with which operating leverage operates, based on the price and magnitude of variable costs per unit of goods, and the total amount of fixed costs.

The strength of the impact of operating leverage, as a rule, is calculated for a known volume of sales, for a given specific sales proceeds. With a change in sales revenue, the strength of the impact of operating leverage also changes. SIDS is largely determined by the influence of the average industry level of capital intensity as an objective factor: with the growth in the cost of fixed assets, fixed costs increase.

However, the effect of production leverage can still be controlled using the dependence of the SVOP on the amount of fixed costs: with an increase in fixed costs and a decrease in profit, the effect of the operating lever increases, and vice versa. This can be seen from the transformed formula for the force of the operating lever:

VM / P \u003d (Z post + P) / P, (1)

where VM– gross margin; P- profit; Z post- fixed costs.

The strength of operating leverage increases with an increase in the share of fixed costs in the gross margin. At the analyzed enterprise in 2013. the share of fixed costs decreased (since the share of variable costs increased) by 7.7%. Operating leverage decreased from 17.09 to 7.23. In 2014 - the share of fixed costs decreased (with an increase in the share of variable costs) by another 11%. Operating leverage also decreased from 7.23 to 6.21.

With a decrease in sales revenue, an increase in SVOR occurs. Each percentage decrease in revenue causes an increasing decrease in profits. This reflects the strength of the operating leverage.

If, on the other hand, sales revenue increases, but the break-even point has already been passed, then the operating leverage decreases, and faster and faster with each percentage increase in revenue. At a small distance from the threshold of profitability, the SRR will be maximum, then it will again begin to decrease until the next jump in fixed costs with the passage of a new point of cost recovery.

All these points can be used in the process of forecasting income tax payments when optimizing tax planning, as well as in developing detailed components of the company's commercial policy. If the expected dynamics of sales revenue is sufficiently pessimistic, then fixed costs cannot be increased, since the decrease in profit from each percentage decrease in sales revenue can become many times greater as a result of the cumulative effect caused by the influence of large operating leverage. However, if an organization assumes an increase in demand for its goods (works, services) in the long term, then it can afford not to save heavily on fixed costs, since a large share of them is quite capable of providing a higher increase in profits.

In circumstances that contribute to a decrease in the income of the enterprise, it is very difficult to reduce fixed costs. In other words, a high proportion of fixed costs in their total amount indicates that the enterprise has become less flexible, and, therefore, more weakened. Organizations often feel the need to move from one area of ​​activity to another. Of course, the possibility of diversification is at the same time a tempting idea, but also very difficult in terms of organization, and especially in terms of finding financial resources. The higher the cost of tangible fixed assets, the more reasons the company has to stay in its current market niche.

In addition, the state of the enterprise with a high share of fixed costs significantly increases the effect of operating leverage. In such conditions, a decrease in business activity means for the organization a multiplied loss of profit. However, if the revenue is growing at a sufficiently high rate, and the company has a strong operating leverage, then it will be able not only to pay the necessary amounts of income tax, but also to provide good dividends and adequate funding for its development.

SVOR indicates the degree of entrepreneurial risk associated with a given business entity: the greater it is, the higher the entrepreneurial risk.

In the presence of a favorable market situation, an enterprise characterized by a greater strength of the operating leverage (high capital intensity) receives an additional financial gain. However, capital intensity should be increased only in the case when an increase in the volume of sales of products is really expected, i.e. with great care.

Thus, by changing the growth rate of sales volume, it is possible to determine how the amount of profit will change with the force of operating leverage that has developed at the enterprise. The effects achieved at enterprises will vary depending on variations in the ratio of fixed and variable costs.

We have considered the mechanism of operation of the operating lever. Its understanding allows for targeted management of the ratio of fixed and variable costs and, as a result, to improve the efficiency of the current activities of the enterprise, which actually involves the use of changes in the value of the strength of the operating lever under various trends in the commodity market and different stages cycle of functioning of an economic entity.

When product market conditions are not favorable, and the company is in the early stages of its life cycle, its policy should identify possible measures that will help reduce the strength of operating leverage by saving fixed costs. With favorable market conditions and when the enterprise is characterized by a certain margin of safety, the work on saving fixed costs can be significantly weakened. During such periods, the enterprise may be recommended to expand the volume of real investments on the basis of the comprehensive modernization of fixed production assets. Fixed costs are much more difficult to change, so enterprises with greater operating leverage are no longer flexible enough, which negatively affects the effectiveness of the cost management process.

The SIDS, as already noted, is significantly affected by the relative value of fixed costs. For enterprises with heavy fixed assets, high values ​​of the operating leverage indicator are very dangerous. In the process of an unstable economy, when customers are characterized by low effective demand, when the strongest inflation takes place, every percent reduction in sales revenue entails a catastrophic wide-ranging drop in profits. The company is in the loss zone. Management seems to be blocked, that is, the financial manager cannot use most of the options for choosing the most effective and productive managerial and financial decisions.

The introduction of automated systems relatively weighs down fixed costs in the unit cost of production. Indicators react differently to this circumstance: gross margin ratio, profitability threshold and other elements of operational analysis. Automation, with all its advantages, contributes to the growth of entrepreneurial risk. And the reason for this is the tilt of the cost structure towards fixed costs. When an enterprise implements automation, it should carefully weigh the accepted investment decisions. It is necessary to have a well-thought-out long-term strategy for the organization. Automated production, having, as a rule, a relatively low level of variable costs, increases operating leverage as a measure of the involvement of fixed costs. And because of the higher profitability threshold, the margin of financial safety is usually lower. Therefore, the overall level of risk caused by production and economic activities is higher with the intensification of capital than with the intensification of direct labor.

However, automated production offers great opportunities for effective management cost structure than when using predominantly manual labor of workers. If there is a wide choice, the business entity must independently determine what is more profitable to have: high variable costs and low fixed costs, or vice versa. It is not possible to unequivocally answer this question, since any option is characterized by both advantages and disadvantages. The final choice will depend on the initial position of the analyzed enterprise, what financial goals it intends to achieve, what are the circumstances and features of its functioning.

Bibliography

1. Blank, I.A. Encyclopedia of financial manager. T.2. Management of assets and capital of the enterprise / I.A. Form. - M .: Publishing house "Omega-L", 2008. - 448 p.
2. Gurfova, S.A. - 2015. - V. 1. - No. 39. - P. 179-183.
3. Kozlovsky, V.A. Production and operational management / V.A. Kozlovsky, T.V. Markina, V.M. Makarov. - St. Petersburg: Special Literature, 1998. - 336 p.
4. Lebedev, V. G. Cost management at the enterprise / V. G. Lebedev, T. G. Drozdova, V. P. Kustarev. - St. Petersburg: Peter, 2012. - 592 p.

The idea of ​​operating leverage is the same as that of financial leverage. ( financial leverage is the economic return on equity). IN financial management there are concepts of constant capital (own funds - SS) and variable capital (borrowed funds - SL).

With an increase / decrease in production volumes, it is difficult to quickly change the value of the constant, but you can easily change the amount of borrowed capital and bring the amount of capital used and the new output into line. The resulting financial leverage - the ratio between the AP and the CC - directly affects the profitability equity. The operation of the operating lever is based on the fact that there are fixed costs that do not change even with a significant change in production volumes, and variable costs that are directly proportional to this volume. Therefore, when increasing / decreasing production volumes

changing the relationship between the variables and fixed costs(operating leverage) and as a result, profit increases/decreases disproportionately to the change in the volume of activity. An important object of analysis is the price of products set by the market, in which the enterprise needs to fit in with its costs and still make a profit. If the direct costs per unit of output (the cost of materials, the wages of workers, electricity, etc.) exceed the price, then such a technology is not viable, production should be stopped. This will be the only management decision. The problem arises in a normal situation where the direct costs are less than the market price. In this case, with small volumes of production, the proceeds from the sale of products are too small to stop the fixed costs associated with the operation of the enterprise, and it becomes unprofitable. As production volumes grow, revenue grows and, at a certain amount, will cover all the costs of production and sales of products, but still does not make a profit. This is the so-called critical point. Further growth in production leads to higher profits. THEN. the main idea of ​​the analysis is to compare three variables: "Costs - Production - Profit" key concepts: fixed costs- depreciation, remuneration of management personnel, administrative expenses, interest on loans, etc., which do not change with changes in production volume. variable costs- the cost of raw materials and materials, the wages of workers, power electricity, transportation costs, trade and commission costs, etc., which vary in direct proportion to the volume of production. There are three ways to divide total costs into fixed and variable - maximum and minimum point method, graphical and least squares method. Gross margin- (fr. - difference, edge) - the difference between sales revenue and variable costs, or the sum of fixed costs and profits. Profit- the difference between gross margin and fixed costs or between sales revenue and the sum of fixed and variable costs.

COP (operating leverage) = (VR - PrI) / Profit. In Qkr, the influence of Psi is very large

As the strength of operating leverage increases, entrepreneurial risk increases. A good ratio of PRI / PsI = 70/30.

Operating lever(production leverage) is a potential opportunity to influence the company's profit by changing the cost structure and production volume.

Operating leverage effect manifests itself in the fact that any change in sales revenue always leads to a stronger change in profit. This effect is caused by varying degrees of influence of the dynamics of variable costs and fixed costs on financial results when the volume of output changes. By influencing the value of not only variable, but also fixed costs, you can determine by how many percentage points the profit will increase.

The level or strength of the impact of the operating leverage (Degree operating leverage, DOL) is calculated by the formula:

DOL = MP/EBIT = ((p-v)*Q)/((p-v)*Q-FC)

where MP - marginal profit;

EBIT - earnings before interest;

FC - semi-fixed production costs;

Q is the volume of production in natural terms;

p - price per unit of production;

v - variable costs per unit of output.

Level operating lever allows you to calculate the percentage change in profit depending on the dynamics of sales by one percentage point. In this case, the change in EBIT will be DOL%.

The greater the share of the company's fixed costs in the cost structure, the higher the level of operating leverage, and hence the greater the business (production) risk.

As revenue moves away from the break-even point, the impact of operating leverage decreases, and the organization's financial strength, on the contrary, grows. This feedback is associated with a relative decrease in the fixed costs of the enterprise.

Since many enterprises produce a wide range of products, it is more convenient to calculate the level of operating leverage using the formula:

DOL = (S-VC)/(S-VC-FC) = (EBIT+FC)/EBIT

where S - sales proceeds; VC - variable costs.

Level operating lever is not a constant value and depends on a certain, basic value of the implementation. For example, with a breakeven volume of sales, the level of operating leverage will tend to infinity. The level of operating leverage is greatest at a point just above the breakeven point. In this case, even a slight change in sales leads to a significant relative change in EBIT. The change from zero profit to any profit represents an infinite percentage increase.

In practice, those companies that have a large share of fixed assets and intangible assets (intangible assets) in the balance sheet structure and large management expenses have a large operating leverage. Conversely, the minimum level of operating leverage is inherent in companies that have a large share of variable costs.

Thus, understanding the mechanism of operation of production leverage allows you to effectively manage the ratio of fixed and variable costs in order to increase the profitability of the company's operations.

The ratio of costs for a given volume of sales, one of the options for measuring which is the ratio of marginal income to profit, is called operating leverage. . This indicator is “quantified by the ratio between fixed and variable costs in their total amount and the variability of the indicator “earnings before interest and taxes” . It is higher in those companies in which the ratio of fixed costs to variables is higher, and accordingly lower in the opposite case.

The operating leverage indicator allows you to quickly (without preparing a full income statement) to determine how changes in sales volume will affect the company's profit. Multiply the percentage change in sales by the level of operating leverage to determine the percentage change in profit.

One of the main tasks of the analysis of the ratio "costs - volume - profit" is the selection of the most profitable combinations of variable and fixed costs, sales prices and sales volumes. The value of marginal income (both gross and specific) and the value of the marginal income ratio are key in making decisions related to the costs and income of companies. Moreover, the adoption of these decisions does not require the preparation of a new income statement, since only an analysis of the growth of those items that are supposed to be changed can be used.

When using the analysis, you should be clear about the following:

• - Firstly, a change in fixed costs changes the position of the break-even point, but does not change the size of marginal income.
• - secondly, a change in variable costs per unit of production changes the value of the marginal income indicator and the location of the break-even point.
• - thirdly, the simultaneous change in fixed and variable costs in the same direction causes a strong shift in the breakeven point.
• - Fourthly, a change in the sale price changes the marginal income and the location of the break-even point.

In practical calculations, to determine the strength of the impact of operating leverage, the ratio of gross margin to profit is used:

Operating leverage measures the percentage change in earnings for a one percent change in revenue. Thus, by setting a certain rate of growth in the volume of sales (revenue), it is possible to determine the extent to which the amount of profit will increase with the strength of the operating leverage prevailing at the enterprise. Differences in the effect achieved at different enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to improve the efficiency of the current activities of the enterprise. This management is reduced to changing the value of the strength of the operating lever under various trends in the commodity market and stages of the life cycle of the enterprise.

In case of unfavorable commodity market conditions, as well as in the early stages of the life cycle of an enterprise, its policy should be aimed at reducing the strength of the operating lever by saving on fixed costs. With favorable market conditions and with a certain margin of safety, the requirement for the implementation of a fixed cost savings regime can be significantly weakened. During such periods, an enterprise can expand the volume of real investments by modernizing fixed production assets. It should be noted that fixed costs are less amenable to rapid change, so enterprises with greater operating leverage lose flexibility in managing their costs. As for variable costs, the basic principle of managing variable costs is to ensure their constant savings.

The margin of financial strength is the edge of the enterprise's safety. The calculation of this indicator allows us to assess the possibility of an additional reduction in revenue from sales of products within the break-even point. Therefore, the financial safety margin is nothing more than the difference between the sales proceeds and the profitability threshold. The margin of financial strength is measured either in monetary terms or as a percentage of the proceeds from product sales:

So, the strength of the operating lever depends on the share of fixed costs in their total amount and determines the degree of flexibility of the enterprise. All this taken together generates entrepreneurial risk.

One of the factors that “weight” fixed costs is the increase in the effect of “financial leverage” with an increase in interest on a loan in the capital structure. In turn, operating leverage generates stronger earnings growth than sales growth (revenues), increasing earnings per share, and thereby enhancing financial leverage. Thus, financial and operational levers are closely linked, mutually reinforcing each other.

Operating leverage (or, as it is also called, operating leverage) is one of the main economic indicators. It not only makes it possible to assess the current situation, but is also actively used in forecasting. Perhaps the most important operational leverage is in the context of determining economic risks in a particular period.

Operating Lever - Definition

There are many different criteria by which you can determine the economic condition of the enterprise. Thus, the operating leverage is an indicator that demonstrates the dependence of the dynamics of changes in the rate of profit on revenue. An important role here is played by such a concept as the break-even point, which denotes the minimum amount of revenue that covers all production costs. It is also worth considering the factors that affect the dynamics of the second indicator. It can be both price fluctuations and changes in the volume of demand.

The concept of operating leverage is inextricably linked with the share of fixed costs in total production costs. This is what determines the sensitivity of profit to revenue. The lower the fixed costs, the more active the dynamics of the first value in relation to the second.

Operating Lever Features

Such an indicator as an operating lever is characterized by a number of distinctive features. Among them, it is worth highlighting the following:

• It will be appropriate to determine the effect of operating leverage only when the organization has stepped over the break-even point in its activities. This can be explained by the fact that, regardless of the amount of income received, the company is obliged to repay the costs that are fixed.
• As the volume of product sales increases, and, accordingly, revenue, the significance of the operating lever gradually decreases. Since the company has already overcome the zero (break-even) level, profit will also continuously increase with income growth. And vice versa.
• The relationship between profit and operating leverage is inverse. Thus, we can say that this indicator somehow equalizes the values ​​of profitability and risk.
• The effect of operating leverage is only fair for the short term. This can be explained by the fact that fixed costs gradually change due to fluctuations in tariffs and other factors.

Techniques for reducing fixed costs

In order to reduce the share of fixed costs in their total amount, the following techniques can be used:

• reducing the cost of maintaining the administrative apparatus;
• sale or lease of equipment that is idle in order to reduce depreciation and maintenance costs;
• in order not to burden the budget with a large number of expenses, you can lease production machines;
• saving resources and reducing utility bills.

How to save on variable costs

Since variable costs also affect the final operating leverage, it is worth taking some measures in production to reduce them:

• reducing the number of personnel by automating all processes or increasing labor productivity in other ways;
• rationalization of warehousing by reducing stocks, which will reduce the cost of their storage and maintenance;
• revision of the logistics system in favor of more profitable delivery methods.

Operating leverage calculation

It makes it possible to evaluate the change in profit as a percentage with fluctuations in costs and revenues such an indicator as operating leverage. Its formula is the ratio of marginal profit to the profit that was received before deducting the corresponding interest payments. We can say that this is a characteristic of the change in profit for each percentage point of increase in the level of sales.

There is another way in which operating leverage can be calculated. The formula will be valid for those enterprises that produce a wide range of product names. So, this indicator is calculated as the ratio between:

• the difference between revenue and variable costs;
• the difference between revenue, variable costs and semi-fixed costs.

If the head of the enterprise fully understands the mechanism of action of this indicator, then he has the opportunity to manipulate costs in order to increase the value of the profit indicator.

Operating lever properties

This indicator has the following properties:

• the impact and size of the operating leverage are directly proportional to fixed costs and inversely proportional to variables;
• the highest indicator of operating leverage is when the sales volume is close to the break-even point (this indicates a high level of risk);
• despite the fact that the low value of operating leverage is characterized by low risk, it is worth noting that in this case one should not count on significant profit either.

Lever force

The strength of the impact of operating leverage depends on the proportion of fixed costs in the total costs of the enterprise. This is one of the most important indicators according to which the level of risk can be determined. entrepreneurial activity. It reflects fluctuations in earnings depending on sales volume and income. To determine this indicator, you must first calculate the marginal income.

The strength of the operating leverage is determined based on the specific quantity of products produced. So, you can determine the risk of losing profits due to fluctuations in sales volumes. We can say that the strength of the operating leverage and the probability of incurring losses are directly proportional.

The calculation of the operating leverage indicator is an objective necessity for conducting a qualitative analysis of the enterprise. It will allow timely identification of all risks and shortcomings in the marketing organization in order to minimize the likelihood of financial losses and bankruptcy.

Operating lever options

There are several options according to which this indicator can be calculated. So the operating leverage is:

• the ratio of fixed and variable costs, which significantly affects the profitability of the enterprise;
• the ratio of the rate of change in retained earnings to the volume of sales of marketable products;
• the ratio of profit to a fixed category of expenses.

It should be noted that the increase in the assets of the enterprise due to the receipt of any additional funds always provokes an increase in the indicator of operating leverage.

How does the operating lever work?

The impact of operating leverage reflects entrepreneurial risk. In the case when this indicator is high, for each percentage decrease in the amount of revenue, there is a significant decrease in profit. it is also important to take into account the influence of the size of fixed costs. So, in the event that the operating leverage is high enough for large enterprises, they should be careful. With the slightest fluctuation in the economy, the solvency of customers will drop sharply, while the level of fixed costs will remain at the same level or even increase.

The impact of operating leverage needs to be assessed at all stages of a product's life cycle. This will allow timely response to changes in the economy. Thus, management will be able to manipulate fixed and variable costs in order to bring operating leverage to the optimum level.

Calculation of the effect of operating leverage

The basis of this indicator is the ratio of fixed and variable costs in relation to the size of the financial result. It should be noted that profit and revenue change differently due to the presence of mandatory payments for public services, depreciation and so on. It can be said that the financial result will be the more dependent on the level of income, the higher the fixed costs.

In relation to all of the above, operating leverage is equal to the ratio of profit growth to revenue growth. The indicator calculated in this way helps to predict the financial result, depending on fluctuations in the amount of income and fixed costs.

Economic sustainability of the enterprise

Any effective manager must be familiar with the methods of calculating the operating leverage in order to be able to assess the economic sustainability of the enterprise and influence it in time. This technique allows you to assess the situation accurately and quickly without compiling detailed reports. There is an opportunity to adjust sales volumes and the level of costs in order to maximize profits. In this context, the following factors must be taken into account:

• despite the fact that fixed costs can shift the break-even point, their change does not have any effect on marginal profit;
• variable costs do not just change the break-even value, but can also have a significant impact on profit;
• if a change in various types of costs occurs at the same time, then the zero level will shift significantly on the break-even chart;
• pricing policy has a significant impact on marginal profit.

Key Assumptions

The following key assumptions are used in calculating operating leverage, as well as in carrying out the corresponding analysis of production:

• all costs of the enterprise can be clearly divided into fixed and variable (in some cases, managers resort to an approximate classification);
• the company is engaged in the production of one type of product (if the products are produced in assortment, then it should not change throughout the reporting period);
• both costs and revenues should directly depend on the volume of products produced;
• no inventory left at the end of the reporting period finished products(it must be implemented in full);
• all indicators, except for the scale of production, must remain constant, or their spread in their values ​​over time must be insignificant (this applies to the price level, labor productivity, assortment component, and so on);
• operational analysis is applicable only for a short-term period (no more than a year), during which fixed costs do not change significantly.

What does the indicator reflect?

The operating lever gives an idea of ​​the following points in the activities of the enterprise:

• level economic efficiency for a specific sales indicator (in this regard, it is possible to plan the volume of sales that allows you to achieve the desired marginal profit);
• determination of sales volumes that will ensure full coverage of all production costs (meaning the achievement of a break-even level);
• formation of financial strength reserves in accordance with the economic risk indicator;
• the impact of each individual indicator of the enterprise on the final level of profit.

A full-fledged operational analysis allows a deeper study of the features of the functioning of the enterprise. In addition, it makes it possible to quickly respond to changes in the internal and external environment in order to reduce the risk of economic losses.

Main conclusions

The role of financial leverage in performance analysis cannot be underestimated manufacturing enterprise. This indicator helps to establish a clear relationship between profit and income, as well as the main types of costs. This helps management to quickly respond to certain changes in the internal or external environment to avoid significant financial losses. Another important point in calculating the operating leverage is its relationship with the level of economic risk. It will be the higher, the more significant the leverage. Typically, the maximum value is observed in cases where the sale of products is approximately equal to the break-even level.

With an increase in sales revenue. It occurs under the influence of fixed costs for manufacturing process and sale. At the same time, these costs remain unchanged, while revenues grow.

The strength of the operating leverage shows how many percent there will be a change in profit with an increase (decrease) in revenue by 1%. The higher the share of costs (fixed) used in production and sales, the more powerful the leverage. The formula for determining it is the difference between revenue and cost/profit.

The definition of "lever" is used in various sciences. This is a special device that allows you to increase the impact on a particular object. In economics, fixed costs act as such a mechanism. The operating lever reveals how much the company depends on the costs included in this indicator. This indicator characterizes business risk.

The effect of operating leverage is observed in the fact that even a small change in revenue leads to a stronger increase or decrease in profits. Suppose that the share of fixed costs in the cost of production is large, then the firm has a very high level production lever. Therefore, the business risk is significant. If such an enterprise changes even slightly the volume of sales, it will receive a significant fluctuation in profits.

Every organization has a break-even point. In it, the level of operating leverage tends to infinity. But with a slight deviation from this point, a quite significant change in profitability occurs. And the greater the deviation from the breakeven point, the less revenue the company receives. It should be borne in mind that almost all firms are engaged in the production or sale of several types of products. Therefore, the effect of operating leverage must be considered in terms of total sales proceeds and for each product (service) separately.

In the case when there is an increase in fixed costs, it is necessary to choose a strategy aimed at increasing sales volumes. In this case, even a decrease in the level does not matter. Only fixed costs affect the effect of operating leverage. Its analysis is important for financial managers. The study of operating leverage helps to choose the right strategy in managing profits, costs and business risk.

There are several factors that affect the level of production leverage:

The price at which the product is sold;

Volume of sales;

Costs are mostly fixed.

If the market has developed an unfavorable conjuncture, then this leads to a decrease in sales. Typically, this situation develops at the first stage of the product life cycle. Then the break-even point has not yet been overcome. And this requires a significant reduction in fixed costs, the calculation of financial leverage. Conversely, when market conditions are favorable, cost control can be relaxed a little. A similar period can be used to modernize fixed assets, invest in new projects, purchase assets, etc.

The sectoral affiliation of the enterprise dictates certain requirements for the amount of capital investments, labor automation, for the qualifications of specialists, etc. If the organization works in the field of mechanical engineering, heavy industry, then the management of the operating lever is difficult. This comes with high fixed costs. But if the firm is engaged in the provision of services, then the regulation of operating leverage is quite simple.

Purposeful management of variable and fixed costs, changing them depending on the current market situation will reduce business risk and increase

The effect of operating leverage is based on the division of costs into fixed and variable, as well as on the comparison of revenue with these costs. The action of production leverage is manifested in the fact that any change in revenue leads to a change in profit, and profit always changes more than revenue.

The higher the share of fixed costs, the higher the production leverage and entrepreneurial risk. To reduce the level of operating leverage, it is necessary to seek to convert fixed costs into variables. For example, workers employed in production can be transferred to piecework wages. Also, to reduce depreciation costs, production equipment can be leased.

Methodology for calculating the operating leverage

The effect of operating leverage can be determined by the formula:

Let's consider the effect of production leverage on a practical example. Let's assume that in the current period the revenue amounted to 15 million rubles. , variable costs amounted to 12.3 million rubles, and fixed costs - 1.58 million rubles. Next year, the company wants to increase revenue by 9.1%. Determine how much profit will increase using the force of operating leverage.

Using the formula, calculate the gross margin and profit:

Gross margin \u003d Revenue - Variable costs \u003d 15 - 12.3 \u003d 2.7 million rubles.

Profit \u003d Gross Margin - Fixed Costs \u003d 2.7 - 1.58 \u003d 1.12 million rubles.

Then the effect of operating leverage will be:

Operating leverage = Gross margin / Profit = 2.7 / 1.12 = 2.41

The operating leverage effect measures the percentage increase or decrease in earnings for a one percent change in revenue. Therefore, if revenue increases by 9.1%, then profit will increase by 9.1% * 2.41 = 21.9%.

Let's check the result and calculate how much the profit will change in the traditional way (without using operating leverage).

When revenue increases, only variable costs change, while fixed costs remain unchanged. Let's present the data in an analytical table.

Thus, profit will increase by:

1365,7 * 100%/1120 – 1 = 21,9%