Operating leverage as a tool for planning sales profits. Financial leverage and operating leverage

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

The most common types of leverage are:

• Production (operational) leverage.
• Financial leverage.

All companies use financial leverage to one degree or another. The whole question is what is the reasonable ratio between equity and debt capital.

Financial leverage ratio(leverage) is defined as the ratio of debt to equity capital. It is most correct to calculate it based on the market valuation of assets.

The effect of financial leverage is also calculated:

EGF = (1 - Kn)*(ROA - Tsk) * ZK/SK.

• where ROA is the return on total capital before taxes (the ratio of gross profit to the average value of assets), %;
• SK - average annual amount of equity capital;
• Кн - taxation coefficient, in the form of a decimal fraction;
• Tsk - weighted average price of borrowed capital, %;
• ZK - 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 - Tsk) - the difference between return on assets and the interest rate for the loan. It is called differential (D).

(ZK/SC) - financial leverage (LF).

You can write the formula for the effect of financial leverage in short:

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

The effect of financial leverage shows by what percentage the return on equity increases due to the attraction of borrowed funds. The effect of financial leverage occurs due to the difference between 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 debt, ceteris paribus, 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 effects of inflation (debts and interest on them are not indexed). As the inflation rate increases, the fee for using 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 enterprises whose activities are cyclical in nature. As a result, several consecutive years of low sales can push highly leveraged businesses into bankruptcy.

For a more detailed analysis of changes in the value of the financial leverage ratio and the factors that influenced it, use the 5-factor financial leverage ratio methodology.

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

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

It is the ratio of a company's fixed to variable expenses and the effect that ratio has on earnings before interest and taxes (operating profit). Operating leverage shows by what percentage profit will change if revenue changes by 1%.

Price operating leverage is calculated using the formula:

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

where: B - sales revenue.

P - profit from sales.

Zper - variable costs.

Postage - fixed costs.

Рс - price operating leverage.

pH is a natural operating lever.

Natural operating leverage is calculated using the formula:

Rn = (V-Zper)/P

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

Рн = (P + Zpost)/P = 1 + Zpost/P

Operating leverage is used by managers to balance various types of costs and increase revenue accordingly. Operating leverage makes it possible to increase profits when the ratio of variable and fixed costs changes.

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

With an increase in production volume, variable costs per unit of production can either decrease (the use of advanced technological processes, improve the organization of production and labor) or increase (increased losses due to defects, a decrease in labor productivity, etc.). Revenue growth rates are slowing down due to lower product prices as the market becomes saturated.

Financial leverage and operating leverage are similar methods. As with operating leverage, financial leverage increases fixed costs in the form of high interest payments on loans, but because lenders do not share in the company's income distribution, variable costs are reduced. Accordingly, increased financial leverage also has a two-fold effect: more operating income is required to cover fixed financial costs, but once cost recovery is achieved, profits begin to grow faster with each additional unit of operating income.

The combined influence of operating and financial leverage is known as the common lever and is their product:

Total leverage = OL x FL

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

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

Thus, both financial and operating leverage, both potentially effective, can be very dangerous due to the risks they contain. The trick, or rather good financial management, is to balance these two elements.

Sincerely, Young Analyst

In foreign practice, one of the most effective methods for solving problems of financial analysis is operational analysis, which is studied in the management accounting system. This analysis is also called “cost - volume - profit (profit)” or CVP.

In operational analysis, the main elements are:

Operating leverage (operating leverage);

Profitability threshold (break-even point);

Margin of financial strength.

The essence, significance and effect of operating leverage (leverage) is determined by the following conditions:

1. a high share of semi-fixed costs in total costs characterizes a high level of operational leverage and, as a consequence, a high level of operational (production) risk or business risk;

2. an increase in the level of technical equipment is accompanied by an increase in operating leverage and, accordingly, operational risk;

3. the essence of operational risk is that semi-fixed costs must be covered by corresponding income. Otherwise, income may not be enough to cover expenses;

4. With a high level of operating leverage, even a small change in production volume can lead to a significant change in operating profit (earnings before interest and taxes). In domestic practice, an analogue of operating profit is “profit (loss) from sales” (Form No. 2, p. 050).

Consequently, a financial manager must correctly assess operating leverage and be able to manage it in specific economic conditions.

To assess operating leverage or operating leverage, the following ratios can be used:

Conditionally fixed (material) costs and total costs;

Change in earnings before interest and taxes and change in output

Net profit and semi-fixed (material) costs.

Each of these indicators has its own advantages and disadvantages from the standpoint of comparability and analyticality. The most important thing is not the value of operating leverage, but the dependence of tempo indicators, which allows us to evaluate the company's strategy.

Let's analyze the value of operating leverage for two enterprises A and B, which have equal sales volumes but different cost structures (Table 2.5)

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№	Indicators	Basic option		Reduced production by 20%		Increased production by 20%
		A	IN	A	IN	A	IN
1.	Sales proceeds	10000	10000	8000	8000	12000	12000
2.	Variable costs	6700	4000	5360	3200	8040	4800
3.	Gross profit (item 1-item 2)	3300	6000	2640	4800	3960	7200
4.	Fixed costs (material)	1000	4000	1000	4000	1000	4000
5.	Total costs (item 2 + item 4)	7700	8000	6360	7200	9040	8800
6.		2300	1640	800	2960	3200
7.	Operating profitability, % (item 6/item 1 x100%)	23	20	20,5	10,0	24,7	26,7
8.	Operating leverage, coefficient (item 4 / item 5)	0,13	0,5	0,16	0,56	0,11	0,45
9.	Deviation of operating profitability from the base case (+, -)			- 2,5	-10,0	+1,7	+6,7

In table 2.5. The comparative analysis was carried out taking into account the following conditions in relation to the basic option:

1. reduction in production volume by 20%;

2. increase in production volume by 20%.

The calculations made in the table show that the level of operating leverage in company B is several times higher than in company A:

Under basic conditions, 3.8 times;

With a decrease in production volume by 20%, 3.5 times;

With an increase in production volume by 20% 4.1 times.

This indicates that company B has a higher technical equipment of production and, accordingly, a lower level of manual labor costs. Variable costs of company A are 1.6 times higher than those of company B. However, this is justified by the fact that the operating profitability of company A in the first two options (basic and production reduction) is higher than in company B, respectively, by 3% (23 - 20) and 10.5% (20.5 - 10) .

However, with an increase in production volume by 20%, the financial performance of company B becomes significantly better: operating profitability increased compared to the base case by 6.7%, and compared to company A by 2%. At the same time, the profitability indicator of company B varies greatly from - 10 to + 6.7.

Thus, company B takes a more risky position, i.e. may gain significantly in financial performance during periods of increased production, but may also lose significantly during periods of economic downturn and decreased production or sales.

The effect of operating leverage is manifested in the fact that any change in production (sales) volume always generates a stronger change in the financial result.

For practical calculations, the force of influence of the operating leverage (operating leverage effect) is determined by the formula:

SVOR = VP / P, (2.9)

SVOR - the force of influence of the operating lever (leverage);

VP - gross profit (gross margin);

P - operating profit (profit from sales)

Let us determine the SVOR coefficient for the basic version of the data in table. 2.5.:

1. SVOR (A) = 3300 / 2300 = 1.43

2. SVOR (B) = 6000 / 2000 = 3

If production volume decreases by 20%, operating profit will decrease for company A by 28.6% (1.43 * 20), and for company B by 60% (3 * 20).

Let's check with the data in the table. 2.5.:

1. Operating profit of company A will decrease by 28.6%

AP = (1640 / 2300 x 100%) - 100% = - 28.6%

2. Company B's operating profit will decrease by 60%

AP = (800 / 2000 x 100%) - 100% = - 60%

Accordingly, operating profit will increase by the same amounts if production volume increases by 20%:

AP (A) = (2960 / 2300 x100) - 100% = + 28.6%

AP (V) = (3200 / 2000 x100) - 100% = + 60.0%

The main thing to remember when using operating leverage formulas is that the strength of its impact is always calculated for a certain volume of production (sales revenue). SVOR largely depends on the average level of capital intensity for a given type of activity: the higher the cost of fixed assets, the higher the depreciation costs, which are considered fixed expenses.

To solve the problem of maximizing the rate of profit growth, you can change not only the value of variable costs depending on changes in sales volume, but also fixed costs. In this case, the behavior of profit will differ from the above calculations. An increase in fixed costs of at least 1% will significantly affect the decrease in the rate of profit growth. Let's look at this relationship in Table 2.6.

Table 2.6. Analysis of operating profit dynamics No. Indicators I quarter (basic case for company A) Predicted option II quarter (increase in production by 20%) II quarter (increase in production by 20% and fixed costs by 1%) 1. Sales proceeds 10000 12000 12000 2. Variable costs 8700 10440 10440 3. Gross profit 1300 1560 1560 4. Fixed costs 1000 1000 1010 5. Operating profit (item 3 - item 4) 300 560 540 6. Increase in profit (+, -), - +86,7 +80,0

According to Table 2.6. with an increase in sales revenue by 20%, the rate of profit growth in the second quarter will be 86.7%, but if fixed costs are increased by 1%, then the rate of profit growth will already be 80%, i.e. there is a decrease in the rate of profit growth by 6.7%.

Therefore, the policy of reasonable savings on fixed costs should be the focus of the financial manager and included in the cost management program.

The division of costs into variable and semi-fixed ones is of exceptional importance for determining the level of production and financial risks. In the practice of analytical work, this definition is used to calculate the critical sales volume. In the specialized literature there are several synonyms for critical sales volume: break-even point, threshold

profitability, equilibrium point, “dead” point. The critical sales volume is the cost breakeven point or the sales volume from which the revenues exactly cover the total costs. At the break-even point there is no profit, but there are no losses either, i.e. gross profit (margin) is only enough to cover semi-fixed costs.

Let's look at three main methods for calculating the break-even point:

1. analytical;

2. calculation of specific marginal profit;

3. graphic.

The analytical method is based on a direct relationship, which can be expressed:

V = VC + FC + P, (2.10)

V - (Value) proceeds from sale;

VC - (Variable Cost) variable costs;

FC - (Fixed Cost) semi-fixed costs;

P - (Profit) profit

Let's transform formula 2.10 and express the indicators in terms of natural units. At the point

breakeven, as already noted, profit is zero, therefore, the formula will take the form:

p x Q = v x Q + FC, (2.11)

p - unit price of the product;

Q - volume in physical terms;

v - variable costs per unit of product

Hence, the critical sales volume (in natural units) is defined as the ratio of fixed costs to the difference between the price of the product and variable costs per unit of product.

Qc = FC / p - v, (2.12)

Qc - critical sales volume

The calculation of specific marginal profit is derived from the analytical method. In this case, we determine the critical sales volume in the valuation using the formula:

Qc = FC / Nc, (2.13)

Nc is the share of marginal profit in the unit price of the product.

The formulas below use earnings before interest and taxes.

Using the formulas discussed, you can determine the sales volume required to achieve the planned amount of profit. In this case, formula 2.13 will take the form:

Q i = FC + P / p - v, (2.14)

Q i - sales volume providing the planned profit value

For example:

Determine the break-even point, having the following initial data. During the reporting period, variable costs per unit of product amounted to 12 rubles, the price of the product - 15 rubles, semi-fixed costs - 30 thousand rubles. Calculate the sales volume that ensures a profit of 20 thousand rubles.

1. break-even point in natural units:

Qc = 30,000 / (15 -12) = 10,000 (units)

2. break-even point in valuation:

Qc = 30,000 / 1 - (12 / 15) = 150,000 (rubles)

3. sales volume to achieve the planned profit: Qi = (30,000 + 20,000) / (15-12) « 16,667 (units)

The graphical method is useful for illustrating the relationship between costs, volume and profit.

Based on the break-even point, it is possible to determine the margin of financial strength (FSA), which characterizes the limit to which the volume of production (sales) can be reduced without a significant threat to the financial condition of the organization.

The margin of financial strength is determined as the difference between sales volume and the profitability threshold or by the formula:

ZFP = V - Qc,

(2.15)

The margin of financial strength is determined in value terms and as a percentage of production (sales) volume.

However, in practice there is often a need to determine the contribution of each type of product (goods, services) in achieving a financial result (profit). Therefore, it is necessary to consider the methodology for determining the profitability threshold and financial safety margin for several types of product.

Having the initial data for two types of product, we will determine the break-even threshold and the margin of financial strength for the enterprise as a whole, as well as separately for each type of product (Table 2.7). N

Table 2.7. Determination of the break-even point and margin of financial strength for 2

types of product

No.	Indicators	Product A	Product B	Total
	I. Initial data
1.	Sales proceeds, thousand rubles.	4000	5000	9000
2.	Variable costs, thousand rubles.	2800	3400	6200
3.	Gross profit, thousand rubles. (item 1 - item 2)	1200	1600	2800
4.	Gross profit level (item 3 / item 1)	0,3	0,32	0,3111
5.	Fixed costs, thousand rubles.	For both products		2500
6.	Profit, thousand rubles	For both products		300
7.	Break-even point, thousand rubles. (clause 5 / clause 4)	For both products		8036
8.	Margin of financial strength, thousand rubles. (item 1 - item 7)	For both products		964
	II. Calculation of Qc and FFP for products A and B
9.	Share of product in total revenue	0,4444	0,5556	1,0000
10.	Fixed costs for each type of product, thousand rubles. (item 5 * item 9)	1111	1389	2500
11.	Break-even point for each type of product (clause 10 / clause 4)	3703	4340	8043
12.	FFP for each type of product (clause 1 - clause 11)	297	660	957
13.	Profit (loss) for each type of product, thousand rubles. (clause 3 - clause 10)	89	211	300

According to the table. 2.7. Qc and FP indicators were determined for the enterprise as a whole and for each type of product (A and B). The break-even point as a whole was 8036 thousand rubles, and the margin of financial strength was 964 thousand rubles, i.e. The company under study is able to withstand an 11% (964/9000 x 100%) decrease in sales without a significant threat to its financial condition during an economic downturn or for other reasons.

Next, we will analyze the contribution of each product in achieving a total profit of 300 thousand rubles. To do this, it is necessary to “scatter” fixed costs for each type of product in proportion to its share in the total sales revenue.

Product A has fixed costs of 1111 thousand rubles, and product B - 1389 thousand rubles. Thus, Qc (A) = 3703 thousand rubles, and Qc (B) = 4340 thousand rubles. Let's compare the obtained figures (Section II) with the initial data of the table. 2.7. (Section I). Product A received revenue of 4,000 thousand rubles, it crossed its profitability threshold and gave a profit in the amount of 89 thousand rubles, product B also crossed its profitability threshold and gave a profit of 211 thousand rubles, i.e. both products had a positive impact on achieving a total profit of 300 thousand rubles. Therefore, producing product A and product B is profitable for the firm. Product A has a profit two times less than the profit of product B, but nevertheless its impact on the overall financial result is positive.

For reference: the values ​​of the profitability threshold and financial safety margin for two products in sections I and II of table. 2.7. do not match by 7 thousand rubles. This happened due to rounding of the coefficients “level of gross profit” (item 4) and “share of the product in total revenue” (item 9).

Using this technique, you can determine the profitability (profitability) of certain products or goods for any type of activity. It is possible that one of the product types

is unprofitable, but together with a profitable product it provides revenue that covers the total cost and provides a certain margin of financial strength.

Thus, the value of the profitability threshold is influenced by three main factors: the selling price of the product; variable costs per unit of product and the total amount of semi-fixed costs. The level of fixed costs indicates the degree of business and financial risks. Total costs consist of direct fixed costs and indirect fixed costs. Indirect costs are salaries of administrative and management personnel, rent and maintenance of an office, expenses for research and development, etc.

To conduct an in-depth operational analysis, it is necessary to combine direct variable costs with direct fixed costs. This allows you to determine the intermediate margin, i.e. the result of sales after reimbursement of direct variable and direct fixed costs. Intermediate margin allows you to solve the main issues of pricing and assortment policy:

1. What products are beneficial to include in the assortment;

2. What should be the price of the product.

Basic rules: When abandoning unprofitable types of products, the financial manager must always remember that covering fixed costs with profitable goods, as a rule, delays the achievement of the break-even point of production (sales). Products that absorb the majority of fixed costs are more efficient and preferable for a given type of activity. A product is unprofitable if the interim margin becomes negative.

However, when using these rules you need to remember:

1. break-even threshold is such sales revenue that covers variable and direct fixed costs;

2. The profitability threshold is such sales revenue that covers not only variable and direct fixed costs, but also the amount of indirect fixed costs attributed to the product.

Calculation of the break-even threshold and profitability threshold is a necessary tool in assessing the life cycle of a product.

When assessing the break-even of production, the financial manager must always remember the positive and negative effects of economies of scale.

Positive economies of scale are reductions in average costs resulting from increased scale of production.

The main reason for the manifestation of the law in reducing average production costs per unit of output is the increase in productivity and labor efficiency, due to high specialization and division of labor. Increasing productivity and labor efficiency helps reduce the cost of fixed capital per unit of output. This rule can be formulated in other words: an increase in the amount of resources involved in mass production, for example by 15%, leads to an increase in production volume by more than 15%, as well as to a reduction in costs per unit of manufactured products.

The increase in production volume and expansion of the company's activities has its limits in terms of the positive effect of its functioning. At a certain stage, an increase in production volume can lead to an increase in production costs per unit of product and, as a result, to negative results. This is the diseconomy of scale.

Diseconomies of scale are an increase in average costs due to an increase in the scale of production.

The main reason for the emergence of negative economies of scale is associated with the increase in management costs. The increase in costs is associated with the formation of new structures for control, production management, product sales, etc. In a small enterprise, one senior administrator can personally make all the most important decisions. At a large enterprise, there is an expansion of the hierarchical management apparatus, which creates difficulties in the exchange of information, coordination of decisions and bureaucratic red tape. As a result, decisions are made late, work efficiency decreases, and average production costs increase.

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Operating leverage, while helping to increase profits, simultaneously increases risks - instability of profits and higher critical profitability.

Operating leverage is used by managers to balance various types of costs and increase revenue accordingly.

Operating leverage makes it possible to increase profits when the ratio of variable and fixed costs changes. Increase in operating leverage, i.e. An increase in the share of fixed costs leads to an increase in profits.

Operating leverage makes it possible to increase profits when the ratio of variable and fixed costs changes.

Operating leverage can increase profits. However, to obtain benefits, the company must accept certain risks, namely, instability of profits and higher critical profitability.

Operating leverage is characterized by the ratio between fixed and variable expenses in their total amount. If the proportion of fixed expenses is high, the company is said to have a high level of operating leverage. So, the variability of sales profit due to changes in operating leverage quantifies production risk.

The effect of operating leverage is stable only in the short term. This is determined by the fact that operating costs, classified as fixed costs, remain unchanged only for a short period of time. As soon as, in the process of increasing the volume of product sales, another jump in the amount of fixed operating costs occurs, the enterprise needs to overcome the new break-even point or adapt its operating activities to it. In other words, after such a jump, which causes a change in the operating leverage ratio, its effect no - new manifests itself in new business conditions.

The mechanism of operating leverage also has the opposite direction - with any decrease in the volume of product sales, the amount of gross operating profit will decrease to an even greater extent. Moreover, the proportions of such a decrease depend on the value of the operating leverage ratio: the higher this value, the faster the amount of gross operating profit will decrease. operating profit in relation to the rate of decline in product sales. Likewise, as you approach the break-even point in the opposite direction, the negative effect of the rate of decline in profits relative to the rate of decline in product sales will increase. The proportionality of the decrease or increase in the effect of operating leverage with a constant value of its coefficient allows us to conclude that the operational leverage ratio is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out operating activities.

The effect of operating leverage is stable only in the short term. This is determined by the fact that operating costs, classified as fixed costs, remain unchanged only for a short period of time. As soon as, in the process of increasing the volume of product sales, another jump in the amount of fixed operating costs occurs, the enterprise needs to overcome the new break-even point or adapt its operating activities to it. In other words, after such a jump, which causes a change in the operating leverage ratio, its effect manifests itself in a new way in new business conditions.

The level of operating leverage, calculated as the ratio of semi-fixed costs to total costs, is twice as high in company B compared to company A.

The mechanism of operating leverage also has the opposite direction - with any decrease in the volume of product sales, the size of the gross operating profit will decrease to an even greater extent.

Operating leverage can be managed by influencing both fixed and variable operating costs.

Production or operating leverage is characterized by the relationship between sales revenue and sales profit. There is a multifaceted relationship between these indicators. An increase in revenue can be accompanied by both an increase and a decrease in profits. The study of factors influencing the increase in profit from the conditions for generating revenue relates to the field of application of industrial leverage.

What is operating leverage and what does it characterize?

The positive impact of operating leverage begins to appear only after the company has passed the break-even point of its operating activities. This is due to the fact that the enterprise is obliged to reimburse its fixed operating costs regardless of the specific volume of product sales, therefore, the higher the amount of fixed costs and the operating leverage ratio, the later, other things being equal, it will reach the break-even point of its activities.

In the economic literature, the concept of “leverage” (operational and financial) is often encountered.

Definition

Thus, production leverage is represented by the ratio of variable and fixed costs of the enterprise, which influences is determined without taking into account taxes and interest.

With a significant amount of fixed costs, a business entity is characterized by high-level operating leverage, which leads to small changes in production volumes to significant changes in operating profit.

In other words, the effect of such production leverage also manifests itself in generating strong changes in profits with any changes in sales revenue.

It is not without reason that along with the term “leverage”, this article uses its synonym – “leverage”. Indeed, translated from English, leverage means “lever.”

Thus, production leverage (operational leverage is another name) is a mechanism for effectively managing the profits of any business entity, which is based on improving the ratio of variable and fixed costs. Using this indicator, it becomes possible to plan any changes in profit at the enterprise depending on changes in sales volumes. In this case, the break-even point can be calculated.

Cost classification

A necessary condition under which operating leverage (leverage) can be used is the use of the marginal method, based on dividing all expenses into variable and constant.

Thus, the higher the share of fixed costs in the total costs of a business entity, the less the profit margin will change in relation to the rate of change in the enterprise’s revenue.

Returning to the classification of expenses, it should be noted that their level (for example, in a company’s revenue has a significant impact on the trend of changes in costs or profits. This is due to the fact that additional profitability, which goes to cover fixed costs, is generated from an additional unit of production. When In this case, the increase in total income from such an additional unit of finished products (or goods) is expressed in a change in the amount of profit. When the break-even level is reached, profit is formed, which is characterized by faster growth than

Operating leverage effect

This serves as a fairly effective tool in determining and analyzing the above dependence. In other words, its main purpose is to establish the impact of profit on any changes in sales volumes.

The essence of its action is that an increase in revenue contributes to a greater increase in the amount of profit. However, this may be limited in terms of variable and fixed costs. Economists have proven that the higher the share of fixed costs, the higher its limitation.

Industrial leverage (operating) in quantitative terms is characterized by a comparison of fixed and variable costs in their total amount with the value of such an economic indicator as earnings before interest and taxes. The following price and natural are known.

By calculating production operating leverage, it is possible to predict with sufficient accuracy any change in profit with various changes in the amount of revenue.

To better understand this economic indicator, it is necessary to consider the procedure for its calculation.

Operating leverage

The formula for calculating production leverage is quite simple: the ratio of revenue and profit from sales.

Considering revenue as the sum of both constants and profits, you can understand that the formula for calculating operating leverage will take the following form:

Ol = (Pr + Rper + Rpost)/Pr = 1 + Rper/Pr + Rpost/Pr.

Operating leverage is not assessed as a percentage, since this indicator is represented by the ratio of marginal income to profit. Due to the fact that in addition to profit, there is also the amount of fixed costs, the value of the production lever is always above one.

Operating leverage as an indicator of enterprise performance

The value of this indicator is considered to reflect the riskiness of not only the business entity itself, but also the type of business in which it is engaged. This is due to the fact that the ratio of expenses in the structure of all costs is a reflection not only of the characteristics of the enterprise with its accounting policies, but also of individual industry characteristics of its economic activities.

Economists have proven that a high level of fixed costs in the overall cost structure of a business entity is not always a negative phenomenon. This is due to the fact that it is impossible to simply absolute the amount of marginal income. An increasing level of operating leverage shows an increase in the company's overall production capacity, technical re-equipment, and increased labor productivity. The profit of a business entity with a high level of production leverage is too sensitive to any changes in the value of revenue. With a sharp drop in sales, this enterprise quickly “falls” below the break-even limit. In other words, an enterprise with a very high leverage value is quite risky.

Characteristics of other types of economic levers

In the economic literature one can find the simultaneous use of such indicators as operating and financial leverage. Moreover, if operating leverage characterizes the dynamics of profit depending on changes in the amount of revenue of the enterprise, then financial leverage already characterizes changes in the value of profit minus interest payments on loans and credits in response to changes in operating profit.

There is another economic indicator - total leverage, which combines operating and financial leverage and shows how (by how many percentage points) changes in earnings after interest payments will occur for a one percent change in revenue.

Credit (financial) leverage

This economic indicator represents the ratio of the enterprise's own and borrowed capital, as well as its impact on profit.

With an increase in the share of borrowed capital, the value of net profit decreases. This is due to rising interest costs on loans.

The debt-to-equity ratio shows the level of risk (financial stability). A highly leveraged enterprise is a financially dependent company. If an enterprise finances its own economic activities only from its own capital, then it can be classified as a financially independent company.

Payment for the use of borrowed capital is often lower than the profit that it additionally provides. The specified additional profit can be summed up with the profit obtained using equity capital, which helps to increase the profitability ratio.

Problems to be solved

To fully analyze this economic indicator, it is necessary to list the tasks solved with the help of this operating leverage:

• both for the enterprise as a whole and for individual types of products using the “expenses - volumes - profit” scheme;
• calculation of the critical production point using it when making certain management decisions, as well as establishing the cost of work;
• making decisions on the execution of additional orders and considering them for possible increases in costs in terms of fixed costs;
• consideration of the issue of discontinuing the production of certain types of goods when prices fall below the level of variable costs;
• maximizing profits due to a relative reduction in fixed costs;
• using the level of profitability with the development of production programs, setting prices for goods.

Conclusion

To summarize, it should be noted that operating leverage can be increased by raising borrowed funds. And very high production leverage can be leveled using financial leverage. Such effective economic instruments discussed in this article help the enterprise achieve the required return on investment while controlling the level of risk.

AND . The influence of this ratio on the amount of profit from product sales can be traced from the figure.

Graph of the amount of profit depending on the ratio of fixed and variable costs

The figure shows two enterprises that, with the same volume of achieved sales of products ( R f) have the same amount of costs (current costs) and the same amount of net income. However, enterprise A has a ratio of fixed and variable costs of 2:1, and enterprise B has a ratio of 1:2, respectively. Due to the existing operating leverage (a high share of fixed costs in their total amount), enterprise A reaches the break-even point when selling products much later ( R TB), i.e. To reach this point, he needs to sell a much larger volume of products than enterprise B.

At the same time, with a further increase in the volume of product sales (after overcoming ), enterprise A will receive a larger amount of profit per unit of increase in production than enterprise B. This is due to the fact that due to fixed costs, their overall level in relation to the volume of product sales and net income at enterprise A will decrease to a greater extent (thereby increasing, ceteris paribus, the amount ).

Operating leverage (operating leverage, production leverage) is the ratio of a company's fixed and variable expenses and the impact of this ratio on operating profit, that is, earnings before interest and taxes. If the share of fixed costs is large, then the company has a high level of production leverage, while a small change in production volumes can lead to a significant change in operating profit.

The use of operating leverage allows you to manage future sales profits of an enterprise by planning future revenue. The main factors that influence revenue volume are:

• product price;
• variable costs;
• fixed costs.

Therefore, the goal of management is to optimize variable and fixed costs, regulate pricing policies to increase sales profits.

Price operating leverage is calculated using the formula:

R c = V/P R c = (P + Z lane + Z post)/P = 1+ Z lane / P + Z post / P

Where
IN- sales revenue;
P- revenue from sales;
Z lane- variable costs;
3 post- fixed costs;
R c- price operating leverage;
R n- natural operating leverage.

Natural operating leverage is calculated using the formula:

R n = (V - W lane)/P

Considering that B = P + Z lane + Z post, we can write:

R n = (P + G post)/P = 1 + G post /P

Operating leverage is used by managers to balance various types of costs and, accordingly, increase income.

Operating leverage makes it possible to increase profits when the ratio of variable and fixed costs changes.

Problems that are solved using operational leverage:

1. calculation of the financial result for the organization as a whole, as well as for types of products, works or services based on the “costs – volume – profit” scheme;
2. determining the critical point of production and using it in making management decisions and setting prices for work;
3. making decisions on additional orders (answering the question: will an additional order lead to an increase in fixed costs?);
4. making a decision to stop producing goods or providing services (if the price falls below the level of variable costs);
5. solving the problem of maximizing profits through a relative reduction in fixed costs;
6. using a threshold when developing production programs, setting prices for goods, work or services.