Operating and financial leverage. Level, effect, score, coefficient, operational leverage formula
In the economic literature quite often there is such a thing as "leverage" (operational and financial).
Thus, the production leverage is represented by the ratio of the variable and fixed costs of the enterprise, which affects the operating profit, which is determined without taking into account taxes and interest.
In other words, the effect of such a production lever also manifests itself in generating strong profit changes with any changes in sales revenue.
Not for nothing, along with the term "leverage" in this article is used its synonym - "lever". Indeed, in English, leverage means "lever".
Thus, production leverage(operational - its other name) is a mechanism for effective management of the profit of any business entity, which is based on improving the ratio of variables and fixed costs. With the help of this indicator it becomes possible to plan any changes in profit at the enterprise, depending on changes in sales volumes. In this case, a break-even point can be calculated.
Classification of costs
A necessary condition under which the operating leverage (leverage) can be used is the use of a marginal method based on the separation of all expenditures into variables and constants.
So, the higher the share of fixed costs in the general expenses of the business entity, the less the profit will change in relation to the rate of changes in the company's revenue.
Returning to the classification of costs, it is necessarynote that their level (for example, fixed costs) in the company's revenue has a significant impact on the trend of changes in the value of costs or profits. This is due to the fact that the additional yield, going to cover fixed costs, is formed from an additional unit of output. At the same time, the increase in total revenues from such an additional unit of finished goods (or goods) is expressed in a change in the amount of profit. When the breakeven level is reached, the profit is formed, which is characterized by a faster growth than the sales volume.
Effect of operating leverage
This operating lever is sufficientAn effective tool in determining and analyzing the above dependence. In other words, its main purpose is to determine the effect of profit on any changes in sales volumes.
The essence of its action is the increase in revenuecontributes to a greater increase in the amount of profit. At the same time, this growth rate can be limited by variable and constant costs. Economists have proved that the higher the share of fixed costs, the higher its limitation.
Production leverage (operating) inquantitative expression is characterized by a comparison of fixed and variable costs in their total amount with the value of such an economic indicator as profit before interest and taxes. The following types of leverage are known: price and natural.
Having calculated the operational operating leverage, it is possible to predict with sufficient accuracy any change in profit under various changes in the amount of revenue.
For a better understanding of this economic indicator, it is necessary to consider the procedure for calculating it.
The formula for calculating the production lever is quite simple: the ratio of revenue and sales profit.
Considering revenue as the sum of costs (variables and constants) and profit, you can understand that the formula for calculating the operational leverage will take the following form:
Ол = (Пр + Рпер + Рпост) / Пр = 1 + Рпер / Пр + Рпост / Пр.
The assessment of operating leverage is not made inpercent, since this indicator is represented by the ratio of marginal revenue to profit. In connection with the fact that, in addition to profits, marginal revenue also includes the sum of fixed costs, the value of the production lever is always above unity.
Operational leveridzh as an indicator of the activities of the enterprise
The value of this indicator is considereda reflection of the riskiness of not only the business entity itself, but also the type of business that it is engaged in. This is due to the fact that the ratio of costs in the structure of all costs is a reflection not only of the characteristics of the enterprise with its accounting policies, but also of specific industry features of its economic activities.
Characteristics of other types of economic instruments
In economic literature one can meetsimultaneous use of such indicators as operational and financial leverage. At the same time, if the operating lever characterizes the dynamics of profit depending on changes in the amount of the company's revenue, the financial leverage already characterizes the changes in the value of the profit minus interest payments on loans and credits in response to changes in operating profit.
There is one more economic indicator -aggregate leverage that combines operational and financial leverage and shows how (by how many percentage points) there will be changes in profits after paying interest with a change in revenue by one percent.
Credit (financial) leverage
This economic indicator is the ratio of the company's own and borrowed capital, as well as its impact on profit.
The ratio of the loan to ownCapital shows the level of risk (financial stability). An enterprise with a high level of borrowed funds is a financially dependent company. If an enterprise finances its own economic activity only at the expense of its own capital, then it can be classified as a financially independent company.
Payment for the use of borrowed capital is oftenLower than the profit, the receipt of which is provided to them additionally. The specified additional profit can be summed up with the profit received with use of own capital that promotes increase of factor of profitability.
For a complete analysis of this economic indicator, it is necessary to list the tasks solved with the help of this operating leverage:
- determination of the financial result both for the enterprise as a whole and for certain types of products using the "expenditure - volume - profit" scheme;
- calculation of a critical production point using it in making certain managerial decisions, as well as setting the cost of work;
- making decisions on the implementation of additional orders and considering them for possible appreciation in terms of fixed costs;
- consideration of the issue of stopping the release of certain types of goods when the price falls below the level of variable costs;
- maximization of profit due to a relative reduction in fixed costs;
- use of the level of profitability with the development of production programs, the establishment of prices for goods.
Summarizing the above, it should be noted thatThe operating leverage can be increased by borrowing. A very high production leverage can be leveled using a financial lever. Considered in this article such effective economic instruments contribute to the achievement by the enterprise of the necessary return on the invested funds with the control of the level of risk.