The concept of operational and financial leverage, the definition of the strength of its impact. Determination of the level of the associated effect of production and financial leverage, its application. Operating lever. Balance calculation formula. Example in Excel Basic steps about

02.08.2021

The concept of "leverage" comes from the English "leverage - the action of the leverage", and means the ratio of one value to another, with a slight change in which the associated indicators greatly change.

Most common the following types leverage:

Production (operational) leverage.
Financial leverage.

All companies use financial leverage to some extent. The whole question is what is the reasonable ratio between equity and borrowed capital.

Financial Leverage Ratio(leverage) is defined as the ratio of debt to equity. It is most correct to calculate it by the market valuation of assets.

The effect of financial leverage is also calculated:

EFR = (1 - Kn) * (ROA - Tszk) * ZK / SK.

where ROA is the return on total capital before taxes (the ratio of gross profit to average asset value),%;
SK - the average annual amount of equity capital;
Кн - taxation coefficient, in the form of a decimal fraction;
Цзк - weighted average price of borrowed capital,%;
ЗК - the average annual amount of borrowed capital.

The formula for calculating the effect of financial leverage contains three factors:

(1 - Kn) - does not depend on the enterprise.

(ROA - Czk) - the difference between the return on assets and the interest rate for a loan. It is called the differential (D).

(ZK / SK) - financial leverage (FR).

You can write the formula for the effect of financial leverage in a shorter way:

EFR = (1 - Kn)? D? FR.

The effect of financial leverage shows how much the return on equity increases by attracting borrowed money... The effect of financial leverage arises from the difference between the return on assets and the cost of borrowed funds. The recommended EGF value is 0.33 - 0.5.

The resulting effect of financial leverage is that the use of the debt load, all other things being equal, leads to the fact that the growth of corporate earnings before interest and taxes leads to a stronger increase in earnings per share.

The effect of financial leverage is also calculated taking into account the effect of inflation (debts and interest on them are not indexed). With an increase in the level of inflation, the payment for the use of borrowed funds becomes lower (interest rates are fixed) and the result from their use is higher. However, if interest rates are high or the return on assets is low, financial leverage begins to work against the owners.

Leverage is a very risky business for those businesses whose activities are cyclical. As a result, several consecutive years of low sales can lead to high leverage businesses going bankrupt.

For a more detailed analysis of the change in the value of the financial leverage ratio and the factors that influenced this, the methodology of the 5-factor financial leverage ratio is used.

Thus, financial leverage reflects the degree of dependence of the company on creditors, that is, the magnitude of the risk of loss of solvency. In addition, the company gets the opportunity to take advantage of the "tax shield", since, unlike dividends on shares, the amount of interest on a loan is deducted from the total amount of taxable profit.

Operating lever(operating leverage) shows how many times the rate of change in profit from sales exceeds the rate of change in revenue from sales. Knowing the operating leverage, you can predict the change in profit when the revenue changes.

This is the ratio of fixed and variable costs of the company and the effect of this ratio on earnings before interest and taxes (operating income). The operating leverage shows how much the profit will change if there is a 1% change in revenue.

The operating price leverage is calculated using the formula:

Rts = (P + Zper + Zpost) / P = 1 + Zper / P + Zpost / P

where: B - sales revenue.

P - profit from sales.

Zper - variable costs.

Zpost - fixed costs.

Рц - price operating lever.

PH is a natural operating lever.

The natural operating leverage is calculated using the formula:

Rn = (B-Zper) / P

Considering that B = P + Zper + Zpost, we can write:

Rn = (P + Zpost) / P = 1 + Zpost / P

Operational leverage is used by managers to balance different types of costs and increase revenue accordingly. Operating leverage makes it possible to increase profits while changing the ratio of variable and fixed costs.

The assumption that fixed costs remain unchanged when the volume of production changes, and variables - linearly increase, makes it possible to significantly simplify the analysis of the operating leverage. But real dependencies are known to be more complex.

With an increase in production, variable costs per unit of output can both decrease (use of progressive technological processes, improve the organization of production and labor) and increase (increase in waste losses, decrease in labor productivity, etc.). Revenue growth rates are slowing down due to lower prices for goods as the market becomes saturated.

Financial leverage and operational leverage are similar methods. As with operating leverage, financial leverage raises fixed costs in the form of high interest payments on the loan, but since lenders are not involved in the distribution of the company's earnings, variable costs are reduced. Accordingly, increased financial leverage also has a twofold effect: more operating income is required to cover fixed financial costs, but when cost recovery is achieved, profits begin to grow faster for each unit of additional operating income.

The combined effect of operating and financial leverage is known as the effect common leverage and represents their work:

Common Leverage = OL x FL

This indicator gives an idea of how the change in sales will affect the change in the company's net profit and earnings per share. In other words, it will allow you to determine by what percentage the net profit will change when the volume of sales changes by 1%.

Therefore, production and financial risks are multiplied and form the total risk of the enterprise.

Thus, both financial and operational leverage, both potentially effective, can be very dangerous because of the risks they involve. The trick, or rather skillful financial management, is to balance these two elements.

Best regards Young analyst

Operating leverage is a mechanism for managing the profit of an organization based on optimizing the ratio of fixed and variable costs.

With its help, you can predict the change in profit depending on the change in sales.

The effect of operating leverage is manifested in the fact that any change in revenue from sales of products always hits a stronger change in profit.

Example:

Profit always grows faster if the proportions between constant and variable are maintained.

If fixed costs increase by only 5%, then the rate of profit growth will be 34%.

Solving the problem of maximizing the rate of profit growth, it is possible to control the increase or decrease not only in variable but also in fixed costs and, depending on this, calculate by how many% the profit will increase.

In practical calculations, the indicator is the effect of operating leverage (the force of the operating leverage). ERM is a quantitative assessment of the change in profit depending on the change in the volume of sales. It shows how much% the profit will change when the revenue changes by 1%. Or it shows how many times the rate of profit growth is higher than the rate of revenue growth.

The leverage effect is related to the level of entrepreneurial risk. The higher it is, the higher the risk. Since when it increases, the critical volume of sales increases and the margin of financial strength decreases.

EOR = = = = 8.5 (times)

EOR = = = 8.5 (% /%)

Using the concept of operating leverage to compare cost allocation options.

Sometimes it is possible to transfer some of the variable costs into the category of fixed ones (i.e. change the structure) and vice versa. In this case, it is necessary to determine how the redistribution of costs within the constant amount of total costs will be reflected on financial indicators for the purpose of risk assessment.

ZFP = (Vf- Vcr) / Vf

Operating Leverage Effect

Entrepreneurial activity is associated with many factors. All of them can be divided into two groups. The first group of factors is related to profit maximization. Another group of factors is associated with identifying critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, dividing costs into variable and fixed. The effect of operating leverage is that any change in sales revenue always generates a larger change in profit.

V modern conditions on Russian enterprises issues of mass regulation and profit dynamics come to one of the first places in the management of financial resources. The solution of these issues is included in the framework of operational (production) financial management.

The basis of financial management is financial economic analysis, within which the analysis of the cost structure comes to the fore.

It is known that entrepreneurial activity associated with many factors affecting its outcome. All of them can be divided into two groups. The first group of factors is associated with maximizing profits through supply and demand, pricing policy, product profitability, and its competitiveness. Another group of factors is associated with identifying critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, dividing costs into variable and fixed.

Variable costs that change from changes in the volume of production include raw materials and supplies, fuel and energy for technological purposes, purchased products and semi-finished products, the main wage main production workers, the development of new types of products, etc. Permanent (general company) costs - depreciation charges, rent, wages of the administrative and managerial staff, interest on loans, travel expenses, advertising costs, etc.

Analysis of production costs allows us to determine their impact on the volume of profit from sales, but if we take a deeper look at these problems, we find out the following:

- such a division helps to solve the problem of increasing the mass of profit due to the relative reduction of certain costs;

- allows you to search for the most optimal combination of variable and fixed costs that provide an increase in profit;

- allows you to judge the cost recovery and financial stability in the event of a deterioration in the economic situation.

The following indicators can serve as the criterion for choosing the most profitable products:

- gross margin per unit of production;

- the share of the gross margin in the unit price;

- gross margin per unit of limited factor.

Considering the behavior of variable and fixed costs, one should analyze the composition and structure of unit costs in a certain period of time and for a certain number of sales. This is how the behavior of variable and fixed costs is characterized when the volume of production (sales) changes.

Table 16 - Behavior of variable and fixed costs when changing the volume of production (sales)

The cost structure is not so much a quantitative relationship as a qualitative one. Nevertheless, the influence of the dynamics of variable and fixed costs on the formation of financial results when the volume of production changes is very significant. It is with the cost structure that operating leverage is closely related.

The effect of operating leverage is that any change in sales revenue always generates a larger change in profit.

A variety of indicators are used to calculate the effect or strength of a lever. This requires the division of costs into variables and fixed costs using an intermediate result. This value is usually called gross margin, coverage amount, contribution.

These indicators include:

gross margin = profit from sales + fixed costs;

contribution (coverage amount) = sales revenue - variable costs;

leverage effect = (revenue from sales - variable costs) / profit from sales.

If we interpret the effect of operating leverage as a change in the gross margin, then its calculation will answer the question of how much the profit changes from an increase in the volume (production, sales) of products.

Revenue changes, leverage changes. For example, if the leverage is 8.5, and the revenue growth is planned by 3%, then the profit will grow by: 8.5 x 3% = 25.5%. If the revenue falls by 10%, then the profit decreases by: 8.5 x 10% = 85%.

However, with each increase in sales revenue, the strength of the leverage changes, and the profit increases.

Let's move on to the next indicator that follows from the operational analysis - the threshold of profitability (or break-even point).

The profitability threshold is calculated as the ratio of fixed costs to the gross margin ratio:

Gross margin = gross margin / sales revenue

profitability threshold = fixed costs / gross margin

The next indicator is a margin of financial strength:

Financial strength margin = sales revenue - profitability threshold.

The size of financial strength shows that the company has a margin of financial stability, and hence profit. But the lower the difference between revenue and the threshold of profitability, the greater the risk of incurring losses. So:

the strength of the operating leverage depends on the relative magnitude of fixed costs;

the strength of the influence of the operating leverage is directly related to the growth in sales;

the force of influence of the operating leverage is the higher, the closer the enterprise is to the threshold of profitability;

the strength of the impact of the operating leverage depends on the level of capital intensity;

the force of influence of the operating leverage is the stronger, the lower the profit and the higher the fixed costs.

Calculation example

Initial data:

Revenue from product sales - 10,000 thous.

Variable costs - 8300 thousand rubles,

Fixed costs - 1,500 thousand rubles.

Profit - 200 thousand rubles.

1. Let's calculate the force of influence of the operating lever.

Coverage amount = 1500 thousand rubles. + 200 thousand rubles. = 1700 thousand rubles.

Force of action of the operating lever = 1700/200 = 8.5 times,

Suppose that sales are forecast to grow by 12% for the next year. We can calculate by what percentage the profit will increase:

12% * 8,5 =102%.

10,000 * 112% / 100 = 11,200 thousand rubles

8300 * 112% / 100 = 9296 thousand rubles.

11200 - 9296 = 1904 thousand rubles.

1904 - 1500 = 404 thousand rubles.

Lever force = (1500 + 404) / 404 = 4.7 times.

Hence the profit increases by 102%:

404 — 200 = 204; 204 * 100 / 200 = 102%.

Let's define the threshold of profitability for this example. For these purposes, the gross margin ratio should be calculated. It is calculated as the ratio of gross margin to sales revenue:

1904 / 11200 = 0,17.

Knowing the gross margin ratio - 0.17, we calculate the profitability threshold.

Profitability threshold = 1500 / 0.17 = 8823.5 rubles.

Analysis of the value structure allows you to choose a strategy for market behavior. There is a rule when choosing profitable assortment policy options - the “50:50” rule.

Cost management due to the use of the effect of operating leverage allows a quick and comprehensive approach to the use of enterprise finances. To do this, you can use the "50/50" rule

All types of products are divided into two groups depending on the proportion of variable costs. If it is more than 50%, then it is more profitable for the submitted types of products to work on reducing costs. If the share of variable costs is less than 50%, then it is better for the company to increase sales volumes - this will give more gross margin.

Having mastered the cost management system, the company receives the following benefits:

- the ability to increase the competitiveness of products (services) by reducing costs and increasing profitability;

- to develop a flexible pricing policy, on its basis to increase turnover and oust competitors;

- to save material and financial resources of the enterprise, to obtain additional working capital;

- to evaluate the efficiency of the company's divisions, staff motivation.

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

The effect of operating leverage is that any change in sales revenue always leads to a larger change in profit. This effect is caused by the different degree of influence of the dynamics of variable costs and fixed costs on the financial result when the volume of output changes. By influencing the value of not only variable, but also fixed costs, it is possible to determine by how many percentage points the profit will increase.

Degree operating leverage (DOL) is calculated using the formula:

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

MP - margin profit;

EBIT - profit before interest;

FC - conditionally fixed production costs;

Q is the volume of production in physical terms;

p is the price per unit of production;

v - variable costs per unit of output.

The level of operating leverage allows you to calculate the amount of percentage change in profit depending on the dynamics of sales by one percentage point. The change in EBIT will amount to DOL%.

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

As revenue moves away from the break-even point, the force of the operating leverage decreases, while the financial strength of the organization, on the contrary, grows. This feedback is associated with a relative decrease in 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 is the sales proceeds; VC - variable costs.

The level of operating leverage is not constant and depends on a certain, baseline value of the implementation. For example, with a break-even sales volume, the level of operating leverage will tend to infinity. The level of operating leverage is greatest at a point slightly 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 value is 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 administrative expenses have a large operating leverage. Conversely, the minimum level of operating leverage is inherent in companies with a large share of variable costs.

Thus, understanding the mechanism of action of production leverage allows you to effectively manage the ratio of fixed and variable costs in order to increase profitability. operational activities companies.

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The process of financial management is known to be associated with the concept of leverage. Leverage is a factor in which a small change can lead to a significant change in performance. The operating lever uses the relationship “costs - volume of production - profit”, ᴛ.ᴇ. it implements in practice the possibility of optimizing profits by managing costs, the ratio of their constant and variable components.

The effect of operating leverage is manifested in the fact that any change in the costs of the enterprise always gives rise to a change in revenue and an even stronger change in profit.

1. Revenue from the sale of products in the current period is

2. The actual costs that caused the receipt of this revenue,

developed in the following volumes:

- Variables - RUB 7,500;

- permanent - 1500 rubles;

- total - 9,000 rubles.

3. Profit in the current period - 1000 rubles. (10,000 - 7500-1500).

4. Suppose that the proceeds from the sale of products in the next period will increase to 110 LLC (+ 10%).

Then the variable costs according to the rules of their movement will also increase by 10% and amount to 8,250 rubles. (7500 + 750).

6. Fixed costs according to the rules of their movement remain the same -1500 rubles.

7. The total costs will be equal to 9,750 rubles. (8 250 + 1500).

8. Profit in this new period will be 1,250 rubles. (11 LLC - 8 250 - 500), which is 250 rubles. and 25% more than the profit of the previous period.

The example shows that a 10% increase in revenue resulted in a 25% increase in profit. This increase in profit is the result of the effect of operating (production) leverage.

Operating Lever Force- This is an indicator used in practice when calculating the rate of profit growth. The following algorithms are used to calculate it:

Operating Leverage Strength = Gross Margin / Profit;

Gross Margin = Sales Revenue - Variable Cost.

Example. We use the digital information of our example and calculate the value of the force indicator of the operating lever:

(10 000 — 7500): 1000 = 2,5.

The obtained value of the force of influence of the operating lever (2.5) shows how many times the profit of the enterprise will increase (decrease) more strongly with a certain increase (decrease) in revenue.

With a possible decrease in revenue by 5%, profit will decrease by 12.5% (5 × 2.5). And with an increase in revenue by 10% (as in our example), the profit will increase by 25% (10 × 2.5), or 250 rubles.

The strength of the influence of the operating leverage is the greater, the higher the proportion of fixed costs in the total amount of costs.

The Practical Significance of the Leverage Effect is essentially that, by setting one or another rate of increase in the volume of sales, it is possible to determine the extent to which the amount of profit will increase with the existing force of the operating leverage at the enterprise. Differences in the achieved effect at enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of action of the operating leverage 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 a change in the value of the strength of the operating leverage at various trends in the commodity market and stages life cycle enterprises:

In an unfavorable conjuncture of the commodity market, 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 leverage by saving fixed costs;

With favorable market conditions and with a certain margin of safety, the savings in fixed costs should be significantly weakened. During such periods, an enterprise can expand the volume of real investments by modernizing its basic production assets.

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

OPERATING LEVER IMPACT FORCE
OPERATING LEVER
VARIABLE COSTS
OPERATIONAL ANALYSIS
CONSTANT COSTS

The Volume - Cost - Profit ratio quantifies changes in profit versus sales volume based on an operating leverage mechanism. The operation of this mechanism is based on the fact that profit always changes at a faster rate than any change in the volume of production, due to the presence of fixed costs in the composition of operating costs. In the article by example industrial enterprise the size of the operating leverage and the strength of its impact are calculated and analyzed.

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One of the most effective methods financial analysis for the purpose of operational and strategic planning, operational analysis is used, which characterizes the relationship of financial performance with costs, production volumes and prices. It helps to identify the optimal proportions between variable and fixed costs, price and volume of sales, and minimization of entrepreneurial risk. Operational analysis, being an integral part of 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 monetary circulation. Its results may constitute a trade secret of the enterprise.

The main elements of operational analysis are:

operating leverage (leverage);
profitability threshold;
the 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 value of the operating leverage based on the data of the analyzed enterprise - OJSC 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 2012 level. Moreover, 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 a level of operating leverage.

When a financial manager pursues the goal of maximizing the rate of growth of profits, he can influence not only variables, but also fixed costs, applying procedures of increasing or decreasing. Depending on this, he calculates how the profit has changed - whether it has increased or decreased - and the magnitude of this change in percentage. In practice, to determine with what force the operating leverage is used, the ratio is used, in the numerator of which they take sales revenue minus variable costs (gross margin), and in the denominator - profit. This metric is often referred to as the coverage amount. We must strive to ensure that the gross margin covers not only fixed costs, but also forms the profit from sales.

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

Table 2. Calculation of the force of influence of the operating lever on OJSC "NZVA"

As the data in Table 2 show, the value of variable costs for the analyzed period increased steadily. So, in 2013. it amounted to 138.9 percent to the level of 2012, and in 2014. - 124.2% 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 over the previous year. The force with which the operating lever acts decreases steadily. In 2014. it decreased by more than 2 times in comparison with the beginning of the analyzed period.

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

Obviously, the greater the share of fixed costs in the total volume of costs, the more forcefully the production lever acts and vice versa. This is true when the sales revenue increases. And if the revenue from sales decreases, then the power of the influence of production leverage, regardless of the share of fixed costs, increases even faster.

Thus, we can conclude that:

the SVOR is significantly influenced by the structure of the organization's assets, the share of non-current assets. With the growth of the cost of fixed assets, the proportion of fixed costs grows;
a high proportion of fixed costs limits the possibilities of increasing the flexibility of operating costs management;
with an increase in the force of influence of the production lever, the entrepreneurial risk increases.

The formula for calculating SWOR helps answer the question of how sensitive the gross margin is. In the future, by successively transforming this formula, we will be able to determine the force with which the operating leverage operates, based on the price and value of variable costs per unit of goods, and the total amount of fixed costs.

Operating leverage is typically calculated for a known volume of sales, for a given specific sales revenue. As the sales revenue changes, so does the operating leverage. SWOR is largely determined by the influence of the average industry level of capital intensity as an objective factor: with an increase in the cost of fixed assets, fixed costs increase.

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

VM / P = (Z post + P) / P, (1)

where VM- gross margin; NS- profit; 3 post- fixed costs.

Operating leverage grows as the share of fixed costs in gross margin increases. At the analyzed enterprise in 2013. the share of fixed costs decreased (as the share of variable costs increased) by 7.7%. Operating leverage declined 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 proceeds, an increase in SVOR occurs. Every percentage of the decline in revenue causes an ever greater decline in profits. This reflects the strength of the operating lever.

If the sales revenue increases, but at the same time the break-even point has already been passed, then the force of the operating leverage decreases, and with each percentage increase in revenue, it becomes faster and larger. At a short distance from the profitability threshold, the CBOR will be maximum, then it starts to decrease again until the next jump in fixed costs with the passage of a new cost-recovery point.

All these points can be used in the process of forecasting payments for income tax in the implementation of optimization of tax planning, as well as in the development of detailed components of the commercial policy of the enterprise. If the expected dynamics of sales revenue is pessimistic enough, 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 the large force of operating leverage. However, if an organization assumes an increase in demand for its goods (work, services) in the long term, then it can afford not to strictly save on fixed costs, since a large share of them is quite capable of providing a higher increase in profits.

In circumstances that reduce the company's income, it is very difficult to reduce fixed costs. In other words, the 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 both 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 an increased share of fixed costs greatly enhances the operating leverage. In such conditions, a decrease in business activity means for the organization to receive multiplied profit losses. However, if revenue grows at a sufficiently high rate, and the company is characterized by strong operating leverage, then it will be able not only to pay the necessary amounts of income tax, but also provide good dividends and proper financing for its development.

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

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

Thus, by changing the rate of increase in the volume of sales, it is possible to determine how the amount of profit will change with the existing strength of the operating leverage at the enterprise. The achieved effects in enterprises will differ depending on the variations in the ratio of fixed and variable costs.

We have discussed the mechanism of action of the operating lever. Understanding it makes it possible to carry out 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 leverage at various trends in the conjuncture of the commodity market and at different stages of the cycle of functioning of an economic entity.

When the conjuncture of the commodity market is not favorable, and the company is in the early stages of its life cycle, its policy must define 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 a comprehensive modernization of fixed assets. Fixed costs are much more difficult to change, so enterprises with more operating leverage are no longer flexible enough, which negatively affects the effectiveness of the cost management process.

The SWOR, as already noted, is significantly influenced by the relative value of fixed costs. For enterprises with heavy fixed assets, high values of the indicator of the strength of the operating leverage are very dangerous. In the process of an unstable economy, when customers are characterized by low effective demand, when there is strong inflation, every percentage of the reduction in sales revenue entails a catastrophic large-scale drop in profits. The enterprise enters the zone of losses. Management seems to be blocked, that is, the financial manager cannot take advantage of most of the options for choosing the most effective and efficient management and financial decisions.

The introduction of automated systems makes the fixed costs relatively heavy in the unit cost. Indicators react differently to this circumstance: gross margin ratio, profitability threshold and other elements of operational analysis. Automation, with all its benefits, 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 is automating, it should be especially careful to weigh the investment decisions it makes. There must be a well thought out long-term strategy for the organization. Automated manufacturing, while generally having relatively low variable costs, increases operating leverage as a measure of using fixed costs. And because of the higher profitability threshold, the margin of financial strength is usually lower. Therefore, the overall level of risk associated with production and economic activities with the intensification of capital is higher than with the intensification of direct labor.

However, automated manufacturing implies more opportunities to effectively manage the cost structure than using predominantly manual workers. Given a wide choice, a 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 what is the initial position of the analyzed enterprise, what financial goals it intends to achieve, what are the circumstances and features of its functioning.

Bibliography

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The goal of any commercial enterprise is the maximum profit as a result economic activity... To assess the effectiveness of management, the rationality of activities requires comparison and, by calculating the operating leverage.

Operating lever

An indicator that reflects the degree of change in the rate of profit over the rate of change in revenue as a result of the sale of goods or services.

Features of the operating arm

A positive effect is observed only when the break-even point is overcome, when all costs are covered and the company increases profitability as a result of its activities.
As the volume of sales increases, the operating leverage decreases. with an increase in the number of goods sold, the amount of profit growth becomes larger, and vice versa, with a decrease in the volume of goods sold, the operating leverage is higher. Enterprise profit and operating leverage are inversely related.
The effect of operating leverage is reflected only in a short time frame. Since fixed costs are constant only for a short period.

Operating arm types

price- determines the price risk, i.e. its influence on the amount of profit from sales;
natural- allows you to assess the risk of production, how the volume of output affects the rate of profit.

Operating Leverage Measures

share of fixed costs;
the ratio of profit before taxes to the rate of output in physical terms;
the ratio of net income to fixed costs of the company.

Operating Leverage Formula

P = (B - Per) (B - Per - Post) = (B - Per) P P = (B- \ text (Per)) (B- \ text (Per) - \ text (Post)) = (B - \ text (Per)) \ text (P)P =(B -Per) (B -Per− Fast) = (B -Per) NS,

where B B B- the amount of proceeds from the sale of goods,

Per \ text (Per) Per- variable costs,

Post \ text (Post) Fast- fixed costs,

N \ text (n) NS- profit from activities.

Examples of problem solving

Example 1

Determine the amount of operating leverage if in the reporting period the company has revenues of 400 thousand rubles, variable costs 120 thousand rubles, fixed costs 150 thousand rubles.

Solution

Operating Leverage Formula
P = 400 - 120 400 - 120 - 150 = 2, 15 P = 400 - 120 400 - 120 - 150 = 2.15P =4 0 0 − 1 2 0 4 0 0 − 1 2 0 − 1 5 0 = 2 , 1 5

Answer: The operating lever is 2.15.

Output: For every ruble of profit, 2.15 rubles are accounted for. margin revenue.

Example 2

The company's variable costs last year were equal to 450 thousand rubles, in the current year 520 thousand rubles. How much has the revenue changed if the profit last year was 200 thousand rubles, this year was 250 thousand rubles, and the operating lever having a level of 1.85 decreased by 30% this year?

Solution

Let's compose the equations of the operating leverage for two periods:

P 1 = (B 1 - 450) 200 = 1.85 P1 = (B1-450) 200 = 1.85P 1 =(B 1 -4 5 0 ) 2 0 0 = 1 , 8 5

P 0 = (2 - 520) 250 = 1.85 ⋅ (1 - 0.30) P0 = (2-520) 250 = 1.85 \ cdot (1-0.30)P 0 =(2 − 5 2 0 ) 2 5 0 = 1 , 8 5 ⋅ (1 − 0 , 3 0 )

B 1 = 1.85 ⋅ 200 + 450 = 820 B1 = 1.85 \ cdot200 + 450 = 820B 1 =1 , 8 5 ⋅ 2 0 0 + 4 5 0 = 8 2 0 thousand roubles.

B2 = 1.85 ⋅ 0.70 ⋅ 250 + 520 = 843.75 B2 = 1.85 \ cdot0.70 \ cdot250 + 520 = 843.75B 2 =1 , 8 5 ⋅ 0 , 7 0 ⋅ 2 5 0 + 5 2 0 = 8 4 3 , 7 5 thousand roubles.

Change in revenue: 843750 − 820000 = 23750 843750-820000 = 23750 8 4 3 7 5 0 − 8 2 0 0 0 0 = 2 3 7 5 0 rub.

Answer: Revenue changed by 23,750 rubles.

Thus, the operating leverage is the greater, the lower the variable costs of the enterprise and the higher the proportion of fixed costs. To reduce the risk commercial activities it is necessary to strive for a lower value of the operating leverage.

Let us analyze the operating leverage of the enterprise and its impact on production and economic activity, consider the formulas for calculating the price and natural leverage and analyze its assessment using an example.

Operating lever. Definition

Operating lever (operating leverage, production leverage) - shows the excess of the growth rate of profit from sales over the growth rate of the company's revenue. The purpose of the functioning of any enterprise is to increase the profit from sales and, accordingly, net profit, which can be aimed at increasing the productivity of the enterprise and increasing its financial efficiency (value). The use of operating leverage allows you to manage the future profit from sales of an enterprise by planning future revenue. The main factors that affect the amount of revenue are: product price, variable, fixed costs. Therefore, the goal of management is to optimize variable and fixed costs, to regulate pricing to increase sales profits.

Formula for calculating price and natural operating leverage

Formula for calculating price operating leverage	Formula for calculating natural operating leverage
where: Op. leverage p - price operating leverage; Revenue - sales revenue; Net Sales - sales profit (operating profit); TVC (Total Variable Costs) - cumulative variable costs; TFC (Total Fixed Costs)	where: Op. leverage n - natural operating leverage; Revenue - sales revenue; Net Sales - sales profit (operating profit); TFC (Total Fixed Costs) - total fixed costs.

What does the operating lever show?

Price operating lever reflects price risk, that is, the effect of price changes on the amount of profit from sales. shows the production risk, that is, the variability of profit from sales depending on the volume of output.

High operating leverage reflects a significant excess of revenue over profit from sales and indicates an increase in fixed and variable costs. Cost increases may result from:

Modernization of existing facilities, expansion of production areas, increase in production personnel, introduction of innovations and new technologies.
Decrease in sales prices, ineffective growth of wages for low-skilled personnel, an increase in the number of rejects, a decrease in the efficiency of the production line, etc. This leads to the inability to provide the required sales volume and, as a result, reduces the margin of financial strength.

In other words, any costs at the enterprise can be both effective, increasing the production, scientific, technological potential of the enterprise, and vice versa, restraining development.

Operating leverage. How does performance affect profits?

Operating Leverage Effect

Operating (production) effect leverage is that the change in the company's revenue has a stronger effect on the profit from sales.

As we can see from the above table, the main factors affecting the size of the operating leverage are variable, fixed costs, and sales profit. Let's take a closer look at these leverage factors.

Fixed costs- these are costs that do not depend on the volume of production and sales of goods, to them, in practice, include: rent for production areas, salaries of management personnel, interest on a loan, deductions for the unified social tax, depreciation, property taxes, etc. etc.

Variable costs - these are costs that change depending on the volume of production and sale of goods, they include the costs of: materials, components, raw materials, fuel, etc.

Sales profit depends, first of all, on the volume of sales and the pricing policy of the enterprise.

Enterprise operating leverage and financial risks

The operating leverage is directly related to the financial strength of the enterprise through the ratio:

Op. Leverage - operational leverage;

ZPF is a margin of financial strength.

With the growth of operating leverage, the financial strength of the enterprise decreases, which brings it closer to the threshold of profitability and inability to ensure sustainable financial development. Therefore, an enterprise needs to constantly monitor its production risks and their impact on financial ones.

Let's look at an example of calculating operating leverage in Excel. To do this, you need to know the following parameters: revenue, sales profit, fixed and variable costs. As a result, the formula for calculating the price and natural operating leverage will be as follows:

Price operating lever= B4 / B5

Natural operating lever= (B6 + B5) / B5

Example of calculating operating leverage in Excel

On the basis of the price leverage, it is possible to assess the impact of the company's pricing policy on the amount of profit from sales, so with an increase in the price of products by 2%, the profit from sales will increase by 10%. And with an increase in production by 2%, profit from sales will increase by 3.5%. Likewise, conversely, as prices and volumes decrease, the resulting profit from sales will decrease in accordance with the leverage.

Summary

In this article, we examined the operational (production) leverage that allows you to estimate the profit from sales depending on the price and production policy of the enterprise. High values of the leverage increase the risk of a sharp reduction in the company's profits in an unfavorable economic situation, which, as a result, can bring the company closer to the break-even point, when profits are equal to losses.

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Operating Leverage Effect

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Bibliography

Examples of problem solving

Example 1

Example 2

Operating lever. Definition

Formula for calculating price and natural operating leverage

What does the operating lever show?

Operating Leverage Effect

Enterprise operating leverage and financial risks