The mechanism of influence of the operating lever. Operating Leverage Effect (Operating Leverage)

Operating leverage is closely related to a company's cost structure. Operating lever or production leverage(leverage - leverage) is a mechanism for managing the company's profit, based on improving the ratio of fixed and variable costs.

With its help, you can plan the change in the profit of the organization depending on the change in the volume of sales, as well as determine the break-even point. A prerequisite for the use of the operating leverage mechanism is the use of a marginal method based on the division of costs into fixed and variable costs. The lower specific gravity fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

As already mentioned, there are two types of costs in the enterprise: variables and constants... Their structure as a whole, and in particular the level of fixed costs, in the total revenue of an enterprise or in revenue from a unit of production can significantly affect the trend of changes in profits or costs. This is due to the fact that each additional unit of production brings some additional profit, which goes to cover fixed costs, and depending on the ratio of fixed and variable costs in the company's cost structure, the total increase in income from an additional unit of goods can be expressed in a significant sharp changes in profits. Once the break-even level is reached, profits appear that start growing faster than sales.

The operating lever is a tool for identifying and analyzing this relationship. In other words, it is designed to establish the effect of profit on the change in the volume of sales. The essence of its action lies in the fact that with an increase in the volume of proceeds, a higher rate of growth in the volume of profit is observed, but this higher rate of growth is limited by the ratio of fixed and variable costs. The lower the proportion of fixed costs, the less this limitation will be.

Production (operating) leverage is quantitatively characterized by the ratio between fixed and variable costs in their total amount and the value of the “Profit before interest and taxes” indicator. Knowing the production leverage, it is possible to predict the change in profit when the revenue changes. Distinguish between price and natural price leverage.

Price operating lever(Rts) is calculated by the formula:

Rts = V / P

where, B - sales proceeds; P - profit from sales.

Considering that B = P + Zper + Zpost, the formula for calculating the price operating leverage can be written as:

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

where, Zper - variable costs; Zpost - fixed costs.

Natural operating lever(Рн) is calculated by the formula:

Rn = (V-Zper) / P = (P + Zpost) / P = 1 + Zpost / P

where, B - sales proceeds; P - profit from sales; Zper - variable costs; Zpost - fixed costs.

Operating leverage is not measured as a percentage, as it is the ratio of profit margin to profit from sales. And since the marginal income, in addition to the profit from sales, also contains the amount of fixed costs, the operating leverage is always greater than one.

The value operating leverage can be considered an indicator of the riskiness of not only the enterprise itself, but also the type of business in which this enterprise is engaged, since the ratio of fixed and variable costs in general structure costs is a reflection of not only the characteristics of the enterprise and its accounting policies, but also the industry-specific features of the activity.

However, it is impossible to assume that a high share of fixed costs in the structure of an enterprise's costs is a negative factor, just as it is impossible to make the value of marginal income absolute. An increase in production leverage may indicate an increase in the production capacity of an enterprise, technical re-equipment, and an increase in labor productivity. The profit of an enterprise with a higher level of production leverage is more sensitive to changes in revenue. With a sharp drop in sales, such an enterprise can very quickly "fall" below the break-even level. In other words, an enterprise with a higher level of production leverage is more risky.

Since operating leverage shows the dynamics of operating profit in response to a change in the company's revenue, and financial leverage characterizes the change in profit before tax after interest on loans and borrowings in response to a change in operating profit, the cumulative leverage gives an idea of how much of the change in profit before taxes. after interest payment when revenue changes by 1%.

Thus, a small operating lever can be strengthened by attracting debt capital. High operating leverage, on the other hand, can be offset by low leverage. With the help of these powerful tools - operational and financial leverage - an enterprise can achieve the desired return on invested capital with a controlled level of risk.

32 Operating Leverage Analysis.

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

The operating leverage is manifested in that any change in sales volumes generates a larger change in profit. At the same time, the strength of the operating leverage (COP) reflects the degree of entrepreneurial risk: the greater the value of the strength of the operating leverage, the higher the entrepreneurial risk.

Since the growth in sales proceeds causes a corresponding increase in variable costs with the consumption of a larger volume of raw materials, materials, labor production costs, etc., then a part of the additional proceeds received will become a source of their coverage. Another part of the operating costs, the so-called fixed costs (not related to the functional dependence on the volume of production), in the context of expanding the scale of the business can also increase. This growth will be recognized as justified only with the outstripping growth in sales revenue. Restraining the growth of fixed costs while increasing sales of products will help generate additional profit, since the effect of the operating lever will manifest itself.

The following formulas are used to calculate the indicator of the strength of the operating leverage:

SOS = Margin profit / profit from sales = (revenue from sales - variable flow) / profit = (profit + post flow) / profit = psot. expense / profit +1

Degree operating leverage (DOL) expresses the ratio of the rate of growth or decline in profit to growth or decline in revenue... Often, even a small change in revenue affects the amount of profit. By calculating the operating leverage, it is possible to predict the growth / decline in profits when the volume of sales changes.

Calculation of the action of the operating lever

DOL = MT / EBIT = ((C-PZed) * K) / ((C-PZed) * Q-OL)

where,
MP- profit (margin);
EBIT- Operating profit;
ETC- fixed costs;
TO- production volume in physical terms;
C- unit price;
PZed- variable costs per unit of output.
Given that a company often produces a whole range of products, it is advisable to use the following lever formula:

DOL = (VIR-PZ) / (VIR-PZ-PR) = (EBIT + PR) / EBIT

where, Vyr- revenues from sales; PZ- variable costs, EBIT- gross profit of the enterprise (read about).

Operating lever mechanism

The mechanism of the operating leverage effect implies that with an increase in production volume:

Revenue is growing.
Gross fixed costs are unchanged (fixed costs per unit of output are reduced).
Gross variable costs are rising (variable costs per unit of output remain unchanged)

Operating Leverage Principles

Thus, the highest level of operating leverage is achieved by companies with a large amount of fixed costs. And, accordingly, the lowest level of operating leverage is in companies whose business involves high variable costs.
Also, when calculating the operating leverage, it is important to take into account that the force of the operating leverage strongly depends on the initial (current, taken for calculation) volume of output, thus:

When production levels are close to breakeven, we see the greatest operating leverage.
With a significant excess of the break-even volume, there is a decrease in operating leverage and an increase in the financial strength of the organization

Features of the operating lever mechanism

It is customary to refer to such features:

Operating Leverage Effect manifests itself after production passes the break-even point. Only after reaching the critical volume of production and sales, we can come to grips with the analysis of fixed and variable costs, the percentage of which affects the strength of the manifestation of the effect of operating leverage.
Moving upward from the value of the break-even point, we can observe a decrease in the effect of operational leverage. The growth in the rate of sales revenue and profit will be the closest to each other.
With a decrease in production volumes and revenue, we will observe a decline in profits.
The higher the profit value, the less the operating leverage is manifested. We can observe the greatest manifestation of the operating leverage immediately when the break-even point is exceeded.
The higher the risk of the enterprise (and the closer it is, the closer the level of production is to the break-even point), the more pronounced the effect of operating leverage.

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 the change in profit as a function of sales volume based on an operating leverage mechanism. The operation of this mechanism is based on the fact that profits always change 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, using the example of an industrial enterprise, the value of the operating leverage and the strength of its impact are calculated and analyzed.

Characteristics of approaches to the definition of the concept of "financial support of the organization"
The financial and economic state of Kabarda and Balkaria in the post-war period
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The impact of the sustainability of agricultural formations on the development of rural areas

One of the most effective methods financial analysis for the purpose of operational and strategic planning is an operational analysis, 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 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;
stock financial strength enterprises.

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 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 upward: 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 operational 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, a 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 a change 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 evaluated 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 has steadily increased. 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 in comparison with 2012. from 48.3% to 56%, and in 2014. - by 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 point of view financial management activities of the organization, net profit is a value depending on the level of rational use financial resources enterprises, 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 cost, 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; P- 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 (since the share of variable costs increased) by 7.7%. Operating leverage decreased from 17.09 to 7.23. In 2014. - the share of fixed costs decreased (with an increase in the share of variable costs) by another 11%. Operating leverage also decreased from 7.23 to 6.21.

With a decrease in sales proceeds, an increase in SVOR occurs. Each percentage decrease in revenue causes more and more decrease in profits. This reflects the strength of the operating lever.

If the revenue from sales increases, but the break-even point has already been passed, then the force of the influence of the operating leverage decreases, and with each percentage of the 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 it is impossible to increase fixed costs, since the decrease in profit from each percentage reduction in sales revenue can become many times larger as a result of the cumulative effect caused by the influence of the large strength of the operating leverage. However, if an organization expects 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 share of fixed costs in their total amount indicates that the company 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 receiving 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 situation, 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 force 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 allows for targeted control of the ratio of fixed and variable costs and, as a result, contribute to increased efficiency. current activities enterprise, which actually involves the use of changes in the value of the strength of the operating lever 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 enterprise is in the early stages life cycle, in its policy it is necessary to determine possible measures that will help reduce the strength of the 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.

Implementation automated systems relatively heavier fixed costs in the unit cost. Indicators react differently to this circumstance: the gross margin ratio, the threshold of profitability and other elements of the 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, 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 offers great opportunities for effective management cost structure than using predominantly manual labor 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

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

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

The strength of the operating leverage shows the percentage of change in profit with an increase (decrease) in revenue by 1%. The higher the proportion of costs (fixed) used in production and sale, the more powerful the lever is. The formula for its definition: the difference between revenue and costs / profit.

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

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

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

In the case when there is an increase in fixed costs, it is necessary to choose a strategy aimed at increasing sales volumes. It does not even matter if the level falls. The effect of operating leverage is influenced only by fixed costs. Analyzing it is important for financial managers. Examining operating leverage helps you choose the right strategy for managing profit, cost, and business risk.

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

The price at which the products are sold;

Volume of sales;

Costs are mostly fixed.

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

The industry affiliation of the enterprise dictates certain requirements for the amount of capital investment, labor automation, for the qualifications of specialists, etc. If the organization works in the field of mechanical engineering, heavy industry, then managing the operating lever is difficult. This is associated with high fixed costs. But if the firm is in the business of providing services, the leverage is fairly straightforward.

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

Operating leverage (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, it is possible to predict the change in profit when the revenue changes.

The minimum amount of revenue required to cover all expenses is called the break-even point, in turn, how much revenue can decrease so that the company would work without losses shows the margin of financial strength.

A change in revenue can be caused by a change in price, a change in the volume of sales and a change in both of these factors.

The change in the effect of production leverage is based on the change in the proportion of fixed costs in the total cost of the enterprise. It should be borne in mind that the sensitivity of profit to changes in sales volume can be ambiguous in organizations with a different ratio of fixed and variable costs. The lower the proportion of fixed costs in the total costs of the enterprise, the more the amount of profit changes in relation to the rate of change in sales proceeds.

The amount of operational (production) leverage may change under the influence of: price and sales volume; variable and fixed costs; a combination of any of the factors listed.

It should be noted that in specific situations, the manifestation of the operating lever mechanism has a number of features that must be taken into account in the process of its use.

These features are as follows:

1. The positive impact of the production lever begins to manifest itself only after the enterprise has overcome the break-even point of its activities, i.e. the enterprise must first receive a sufficient amount of marginal income to cover its fixed costs. This is due to the fact that the company is obliged to reimburse its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities.

In this regard, while the company has not ensured a break-even point of its activities, a high level of fixed costs will be an additional negative factor on the way to reaching the break-even point.

2. As sales continue to increase and move away from the breakeven point, the effect of production leverage begins to decline. Each subsequent percentage increase in sales will lead to an ever greater rate of increase in the amount of profit.

3. The mechanism of production leverage also has the opposite direction - with any decrease in the volume of sales, the size of the company's profit will decrease to an even greater extent.

4. There is an inverse relationship between the production leverage and the profit of the enterprise. The higher the profit of the enterprise, the lower the effect of production leverage and vice versa. This allows us to conclude that production leverage is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out production activities.

5. The effect of production leverage appears only in the short run. This is determined by the fact that the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as in the process of increasing the volume of sales there is another jump in the amount of fixed costs, the company needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a leap, the effect of production leverage manifests itself in a new way in the new economic conditions.

Understanding the mechanism of manifestation of production leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of production and economic activity with various trends in the product market and the stage of the enterprise's life cycle.

With an unfavorable market structure, which determines a possible decrease in sales, as well as in the early stages of a company's life cycle, when it has not yet crossed the break-even point, it is necessary to take measures to reduce fixed costs. Conversely, with a favorable conjuncture of the commodity market and the presence of a certain margin of safety, the requirements for the implementation of the regime of saving fixed costs can be significantly weakened. During such periods, the enterprise can significantly expand the volume of real investments, carrying out the reconstruction and modernization of fixed assets.

When managing fixed costs, it should be borne in mind that their high level is largely determined by the sectoral characteristics of the activity, which determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less susceptible to rapid change, therefore, enterprises with a high value of production leverage lose flexibility in managing their costs.

Despite these objective constraints, each enterprise has enough opportunities to reduce, if necessary, the amount and share of fixed costs.

These reserves include:

Significant reduction of overhead costs (management costs) in case of unfavorable conditions on the commodity market;
- sale of a part of unused equipment and intangible assets in order to reduce the flow of depreciation charges;
- widespread use of short-term forms of machinery and equipment instead of acquiring them as property;
- reduction in the volume of a number of consumed utilities and others.

When managing variable costs, the main guideline should be to ensure their constant savings, since there is a direct relationship between the amount of these costs and the volume of production and sales. Providing these savings before the enterprise crosses the break-even point leads to an increase in marginal income, which allows you to quickly overcome the threshold of profitability. After breaking even the break-even point, the amount of savings in variable costs will provide a direct increase in the company's profits.

The main reserves for saving variable costs include:

Reducing the number of workers in the main and auxiliary industries by ensuring the growth of their labor productivity;
- reduction of the size of stocks of raw materials, materials and during periods of unfavorable conjuncture of the commodity market;
- providing favorable conditions for the enterprise for the supply of raw materials and materials, and others.

The use of the operating lever mechanism, the purposeful management of fixed and variable costs, the prompt change in their ratio under changing economic conditions will increase the potential for the formation of an enterprise's profit.

An analysis of the properties of the operating lever arising from its definition leads to the following conclusions:

1. With the same total costs, the operating leverage is the greater, the lower the share of variable costs or the greater the share of fixed costs in the total cost.
2. The operating leverage is the higher, the closer to the break-even point the volume of actual sales is "located", which is associated with a high risk.
3. A situation with low production leverage is associated with less risk, but also with less reward in the profit formula.

Based on the results of the operational analysis, it can be concluded that the company is attractive to investors because it has:

Sufficient (more than 10%) margin of financial strength;
favorable value of the force of influence of the operating leverage with a reasonable proportion of fixed costs in the total amount of costs.

It can be noted that the weaker the influence of the operating leverage, the greater the margin of financial strength.

The strength of the influence of the operating leverage, as already noted, depends on the relative value of fixed costs, which are difficult to reduce with a decrease in the company's income. The high impact of operating leverage in conditions of economic instability, falling consumer demand means that every percentage of revenue decline leads to a significant drop in profits and the possibility of the enterprise entering the zone of losses.

If we define the risk of a particular enterprise as an entrepreneurial risk, then we can trace the following relationship between the strength of the operating leverage and the degree of entrepreneurial risk: with a high level of fixed costs of the enterprise and no decrease in them during a period of falling demand for products, entrepreneurial risk increases.

Small firms specializing in the production of one type of product are characterized by high degree entrepreneurial risk. The instability of demand and prices for finished products, prices for raw materials and energy resources.

In this way, modern management costs involves a fairly diverse approaches to accounting and analysis of costs, profits, business risk. You have to master these interesting tools in order to ensure the survival and development of your business.

Understanding the essence of the operating leverage and the ability to manage it represent additional opportunities for the use of this instrument in the investment policy of the company. Thus, production risk in all industries can be regulated to a certain extent by managers, for example, when choosing projects with higher or lower fixed costs. When releasing products with a high market capacity, with the confidence of managers in sales volumes significantly exceeding the break-even point, it is possible to use technologies that require high fixed costs, implementation investment projects for the installation of highly automated lines and other capital-intensive technologies. In spheres of activity, when the company is confident in the possibility of conquering a stable market segment, as a rule, it is advisable to implement projects with a smaller share of variable costs.

Summing up, we can say:

An enterprise with a greater amount of operational risk is more at risk in the event of deteriorating market conditions, and at the same time, it has advantages in the event of an improvement in market conditions;
the company must navigate the market situation and adjust the cost structure accordingly.

Cost management due to the use of the effect of operating leverage allows you to quickly and comprehensively approach 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 half, then it is more profitable for the supplied types of products to work on reducing costs. If the share of variable costs is less than 50%, then the company is better off increasing sales - this will give more gross margin.

Operating Leverage Effect

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 financial results 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:

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

Where
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 manifestation of business (production) risk.

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

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

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

Where S - sales proceeds;
VC - variable costs.

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 structure of the balance sheet and large administrative expenses have great 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 the profitability of the company's operating activities.

Operating Lever Strength

The strength of the impact of production leverage depends on the proportion of fixed costs in the total costs of the enterprise.

The effect of production leverage is one of the most important indicators, since it shows how many percent the balance sheet profit will change, as well as the economic profitability of assets when the volume of sales or proceeds from the sale of products (works, services) changes by one percent.

In practical calculations, to determine the strength of the influence of operating leverage on a particular enterprise, the result from the sale of products after reimbursement of variable costs (VC), which is often called marginal income, is used.

The operating leverage is always calculated for a specific sales volume. With a change in sales revenue, so does its impact. Operating leverage allows you to assess the impact of changes in sales volumes on the size of the future profits of the organization. Operating leverage calculations show how much the profit will change if the sales volume changes by 1%.

The effect of operating leverage is that any change in sales revenue (due to a change in volume) leads to an even stronger change in profit. The effect of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activity of the enterprise when the volume of production changes.

The strength of the influence of the operating leverage shows the degree of entrepreneurial risk, that is, the risk of losing profits associated with fluctuations in the volume of sales. The greater the effect of operating leverage (the greater the proportion of fixed costs), the greater the entrepreneurial risk.

Thus, modern cost management presupposes quite diverse approaches to accounting and analysis of costs, profits, and entrepreneurial risk. You have to master these interesting tools in order to ensure the survival and development of your business. Production risk is associated with the concept of operational, or production, leverage, and financial - with the concept of financial leverage.

There are three main measures of operational leverage:

A) the share of fixed production costs in the total cost, or, equivalently, the ratio of fixed and variable costs;
b) the ratio of the rate of change in profit before interest and taxes to the rate of change in the volume of sales in physical units;
regarding net profit to fixed production costs Any serious improvement in the material and technical base towards an increase in the share of non-current assets is accompanied by an increase in the level of operating leverage and production risk.

The method of controlling the level of fixed costs is a method of calculating the critical volume of sales. Its meaning is to calculate at what volumes of production in natural units the marginal profit (i.e. the difference between sales proceeds and variable costs of a non-financial nature or direct variable costs) will be equal to the sum of conditionally fixed costs. This method allows you to find the minimum production volume that is necessary to cover the conditionally fixed costs, i.e. expenses that do not depend on the volume of production.

Among the indicators for assessing the level of financial leverage, two are best known: the ratio of debt and equity capital and the ratio of the rate of change in net profit to the rate of change in profit before interest and taxes.

As part of the general financial strategy of an economic entity, the management of borrowed funds involves a preliminary analysis of their attraction and use, adjustment of the attraction policy or the development of new policies... The analysis involves the study of volumes, dynamics, forms of attraction, types of loans, terms of attraction, credit conditions, composition of creditors, efficiency of use and the course of repayment of borrowed funds.

The borrowing policy includes the definition of:

A) the reasons and prerequisites for such attraction;
b) the targeted nature of the use of borrowed funds;
c) limits (maximum volumes) of attraction;
d) conditions (including terms and prices of attraction);
e) general composition, structure;
f) forms of attraction;
g) creditors, etc.

Operating Lever Impact

The strength of the influence of the operating leverage indicates the level of entrepreneurial risk of the enterprise: with a high value of the strength of the operating leverage, each percentage reduction in revenue results in a significant decrease in profit.

The strength of the operating leverage, as noted, depends on the relative magnitude of fixed costs. For enterprises weighed down with bulky production assets, the high strength of the operating leverage poses a significant danger: in conditions of economic instability, a fall in effective customer demand and severe inflation, every percentage of the decline in revenue turns into a catastrophic drop in profits and the enterprise entering a loss zone. The management is blocked, i.e. deprived of most of the options for choosing productive solutions.

The strength of the influence of the operating leverage, which depends largely on the amount of fixed costs and the mass of profit, and hence the demand and prices for products, prices for material resources and energy, characterizes the magnitude of the entrepreneurial risk.

The strength of operating leverage is highly dependent on the relative magnitude of fixed costs. The income of the enterprise weighed down by a bulky OPF ( oil industry), the high strength of the operating lever suggests a significant hazard, because in conditions of economic instability and a fall in the solvency of the firm's clients due to the high level of inflationary expectations, any percentage decrease in revenue can result in a catastrophic drop in profits and. Therefore, operational analysis is called break-even analysis. it allows you to calculate the amount (number) of sales at which the income is equal to the expense, i.e. the business does not incur losses, but it also does not generate income. Selling below the break-even point results in a loss, and selling above the break-even point makes a profit.

The strength of the operating leverage indicates the degree of entrepreneurial risk, i.e. the risk of loss of profit associated with fluctuations in the volume of sales.

The strength of the operating leverage, calculated, as a rule, for a certain volume of sales, for a given sales proceeds, largely depends on the average industry level of capital intensity: the higher the cost of fixed assets, the higher the fixed costs, and the higher the fixed costs and the higher less profit, the stronger the operating lever is.

The strength of the operating leverage indicates the degree of entrepreneurial risk associated with a given company: the greater the strength of the operating leverage, the greater the entrepreneurial risk.

Whether the strength of the operating leverage, as noted, depends on the relative magnitude of fixed costs. For enterprises weighed down with bulky production assets, the high strength of the operating leverage poses a significant danger: in conditions of economic instability, a fall in effective customer demand and severe inflation, every percentage of the decline in revenue turns into a catastrophic drop in profits and the enterprise entering a loss zone. The management is blocked, i.e. deprived of most of the options for choosing productive solutions.

If the force of influence of the operating leverage is equal to three, then with a decrease in revenue by (100%: 3) 33%, the company has zero profit.

The formula for the force of the operating leverage will now help us answer the question of how sensitive the gross margin, or the net result of the exploitation of investments, to changes in the physical volume of sales of products.

The higher the force of influence of the operating leverage, the lower the level of elasticity of demand, which is necessary to maintain and increase profits when prices fall.

So, the greater the force of influence of the operating leverage (or the greater the fixed costs), the more sensitive the net result of the exploitation of investments to changes in the volume of sales and proceeds from sales; the higher the level of leverage, the more sensitive the net earnings per share to changes in the net result of the exploitation of investments.

What factors determine the strength of the operating leverage and how it is determined.

So, the greater the influence of the operating leverage (or the greater the fixed costs), the more sensitive the net result of the exploitation of investments to changes in the volume of sales and proceeds from sales; the higher the level of leverage, the more sensitive the net earnings per share to changes in the net result of the exploitation of investments.

In practical calculations, the ratio of the so-called gross margin (the result from sales after reimbursement of variable costs) to profit is used to determine the strength of the influence of the operating leverage. Gross margin is the difference between sales revenue and variable costs. This indicator in the economic literature is also designated as the amount of coverage. It is desirable that the gross margin be sufficient not only to cover fixed costs, but also to generate profits.

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

In practical calculations, to determine the strength of the impact of operating leverage, the indicator gross margin (BM) is used - the results from sales after reimbursement of variable costs.

In practical calculations, the so-called gross margin to profit ratio is used to determine the strength of the operating leverage. Gross margin is understood as the difference between sales revenue and variable costs, in other words, it is the result from sales after variable costs are recovered. Since the gross margin is the sum of the coverage, it is desirable that the gross margin be sufficient not only to cover fixed costs, but also to generate profits.

This is easily shown by transforming the formula for the force of the operating leverage: GROSS MARGIN / PROFIT (CONSTANT COSTS PROFIT) / PROFIT.

When the revenues decrease, the operating leverage increases. Each percentage reduction in revenue then gives a larger and larger percentage decline in profits. This is how the formidable power of the operating lever manifests itself.

As revenue moves away from its threshold value, the force of the operating leverage weakens, and the margin of financial strength increases. This is due to the relative decrease in fixed costs in the relevant range.

We remind those in doubt that (1 - CONSTANT COSTS / GROSS MARGIN) is the reciprocal of the force of the operating leverage.

By how many percent is it necessary to reduce fixed costs so that with a decrease in revenue by 25% and with the same value of the force of the operating leverage, the company retains 75% of the expected profit.

At the stage of product maturity, the company maintains a sufficient mass of profits by reducing costs, and, moreover, mostly constant; the force of influence of the operating lever, as a rule, decreases.

Each next dose of investment or, what is the same, each investment-related jump in fixed costs leads to an increase in the share of fixed costs in their total amount and to an increase in the force of the operating leverage with all the ensuing consequences that we described in detail earlier.

At the stages of introducing goods to the market and increasing sales, the main financial goal of the enterprise becomes a steady increase in profits; it should be borne in mind that at these stages, especially at the stage of growth, profit maximization turns into a maximization of the amount (after crossing the threshold of profitability with a rapid rate of increase in profit, the force of the operating lever is dangerously high); swelling of accounts receivable can cause a lot of trouble.

Consequently, further declines are impractical as production approaches the threshold. The strength of the influence of the operating leverage, equal to four, indicates a high operational dependence of enterprises on changes in production volumes.

The results of calculations using this formula indicate the level of total risk associated with this enterprise and answering the question: how much percentage changes in net earnings per share when the volume of sales changes by 1 percent. The strength of the operating leverage is calculated as the ratio of gross margin to profit and shows how much of a change in profit is given by any percentage change in revenue.

The greater the operating leverage, the smaller the revenue decline is considered unacceptable. So, with the force of the operating leverage equal to 20, even a 5% decrease in revenue is unacceptable.

DD The greater the operating leverage, the smaller the revenue decline is considered unacceptable. So, with the force of the operating leverage equal to 20, even a 5% decrease in revenue is unacceptable.

How and why the operating leverage and financial strength change as revenues move away from the profitability threshold.

Everything converges, and now we have not one, but several methods of calculating the strength of the operating lever - according to any of the intermediate links in the chain of our formulas. Note also that the strength of the operating leverage is always calculated for a certain volume of sales, for a given sales proceeds. Sales proceeds change - so does the operating leverage. The strength of the influence of the operating leverage largely depends on the average industry level of capital intensity: the higher the cost of fixed assets, the higher the fixed costs - this is, as they say, an objective factor.

Operating lever formula

The effect of operating leverage is based on the mechanism of influence of the ratio of variable and fixed costs on the financial results of the enterprise. The presence of fixed costs leads to the fact that the change in profit occurs at a faster pace than revenue. At the same time, the dependence of the change in profit on the change in the volume of sales will be the higher, the higher the share of fixed costs in the total costs of the organization.

The operating leverage effect is characterized by a ratio that is calculated using the formula:

Growth rate of profit from sales (operating),% divided by Growth rate of revenue,%

This formula allows you to answer the question of what the increase in profit will be, depending on the specific increase in sales with the existing structure of expenses.

Enterprise operating lever

The most effective method solving interrelated problems, and more broadly - financial analysis for the purpose of operational and strategic planning is operational analysis, also called Cost-Volume-Profit (CVP) analysis, which monitors the dependence of business financial results on costs and production (sales) volumes.

The key elements of operational analysis are: operating leverage, the threshold of profitability, and the margin of market safety of the enterprise.

Operating leverage or production leverage is a mechanism for managing a company's profit, based on improving the ratio of fixed and variable costs. With its help, you can plan the change in the profit of the organization depending on the change in the volume of sales, as well as determine the break-even point. A prerequisite for the use of the operating leverage mechanism is the use of a marginal method based on the division of costs into fixed and variable costs. The lower the proportion of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

As already mentioned, there are two types of costs in the enterprise: variable and fixed. Their structure as a whole, and in particular the level of fixed costs, in the total revenue of an enterprise or in revenue from a unit of production can significantly affect the trend of changes in profits or costs. This is due to the fact that each additional unit of production brings some additional profit, which goes to cover fixed costs, and depending on the ratio of fixed and variable costs in the company's cost structure, the total increase in income from an additional unit of goods can be expressed in a significant sharp changes in profits. Once the break-even level is reached, profits appear that start growing faster than sales. The operating lever is a tool for identifying and analyzing this relationship. In other words, it is designed to establish the effect of profit on the change in the volume of sales.

The operating price leverage (Pc) is calculated using the formula:

Rts = V / P
where, B - sales proceeds; P - profit from sales.

Considering that B = P + Zper + Zpost, the formula for calculating the price operating leverage can be written as:

Rts = (P + Zper + Zpost) / P = 1 + Zper / P + Zpost / P
where, Zper - variable costs; Zpost - fixed costs.

Natural operating leverage (Pn) is calculated using the formula:

Rn = (V-Zper) / P = (P + Zpost) / P = 1 + Zpost / P
where, B - sales proceeds; P - profit from sales; Zper - variable costs; Zpost - fixed costs.

The amount of operating leverage can be considered an indicator of the riskiness of not only the enterprise itself, but also the type of business in which this enterprise is engaged, since the ratio of fixed and variable costs in the overall cost structure is a reflection of not only the characteristics of this enterprise and its accounting policy, but also the industry-specific features of its activities.

Operating Leverage Calculation

The action of the operational (production) leverage is manifested in the fact that any change in sales proceeds generates a strong change in profit. In practical calculations, the ratio of gross margin (the result of a sale after reimbursing variable costs) to profit is used to determine the strength of the effect of operating leverage.

It is desirable that the margin is sufficient to cover fixed costs and generate profits. Operating leverage is close to the threshold of profitability and declines as sales revenue rises. The relationship between the effects of financial and operating leverage is as follows: the company, using loans, increases the volume of production, which has a positive effect on its profitability.

This influence of operating leverage occurs up to a certain limit: a gradual increase in production volume increases overhead and fixed costs, which leads to a decrease in profits. The action of the operating lever is associated with production risks... The values of the operating leverage for enterprises of different industries differ and cannot be determined unambiguously, therefore, we should talk about some framework. On the one hand, this will be the volume of production corresponding to the profitability threshold, on the other, the volume of production of these goods, which will require a one-time increase in fixed costs.

Let's consider an example of calculating operating leverage using the formula and procedure for calculating the effect of operating leverage.

Alpha V LLC revenue reporting period amounted to 650 million rubles, the total costs (cost) amounted to 340 million rubles, including fixed costs amounted to 35 million rubles, variable 305 million rubles.

To determine the effect of operating leverage, the amount of marginal income (revenue minus variable costs) is determined.

In our example, the gross margin is RUB 345 million. (650-305 = 345), operating profit (gross profit), the difference between revenue and cost, is 310 million rubles.

Then the strength of the operating leverage (the ratio of marginal profit to gross profit) is 1.11 (345/310).

So, an increase in revenue by 10% should give an 11.1% increase in gross profit (10% * 1.11), and a 3% decrease in sales will reduce operating profit by 3.34% (3% * 1.11 ).

Let's look at another small example:

Alpha LLC provides cleaning services. The number of service consumers is 150 people / month. The price of the service for one consumer per month is 20 thousand rubles. Fixed costs are equal to 400 thousand rubles, variable costs per consumer per month - 14 thousand rubles. Determine if such an activity is profitable?

Profit = (p - v) Q - FC = (20 - 14) * 150 - 400 = 500 thousand rubles

The demand for services is growing and the organization is increasing customer base for 20 clients per month. At the same time, there is no need to purchase additional equipment and staff expansion. How will the profit of the organization change in this case?

Profit = (20 - 14) * 170 - 400 = 620 thousand rubles.

At the same time, the volume of services increased by 13.3% ((170-150) / 150 * 100% = 13.3%), and the profit increased by 24% ((620-500) / 500 = 24%). This is the operating lever in action. If the revenue increases by 13.3%, then the profit increases by 24%. Reducing the data, we get the effect of operating leverage: with a 1% increase in revenue, profit increases by 1.8%.

Production leverage shows how much the rate of change in profit exceeds the rate of change in revenue. The effect is manifested due to the presence of fixed costs in the cost structure.

The effect of operating leverage is that any change in proceeds from the sale of goods and the provision of services leads to an even stronger change in profit. The effect of the effect is associated with the disproportionate impact of conditionally constant and conditionally variable costs on the financial result when the volume of production and sales changes.

The higher the share of nominally fixed costs and production costs, the stronger the effect of operating leverage. Conversely, with an increase in the volume of sales, the share of conditionally fixed costs decreases, and the impact of operating leverage decreases.

The effect of production leverage appears only in the short run. This is determined by the fact that the fixed costs of the organization remain unchanged only for a short period of time. As soon as in the process of increasing the volume of sales there is another jump in the amount of fixed costs, the company needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a leap, the effect of production leverage manifests itself in a new way in the new economic conditions.

Operating leverage financial safety margin

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

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

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

When using the analysis, you need to be clear about the following:

First, a change in fixed costs changes the position of the break-even point, but does not change the amount of marginal income.
- secondly, a change in variable costs per unit of production changes the value of the indicator of marginal income and the location of the break-even point.
- thirdly, the simultaneous change in fixed and variable costs in the same direction causes a strong shift in the break-even point.
- fourth, a change in the selling price changes the profit margin and the location of the break-even point.

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

Operating Leverage = (Revenue - Variable Cost) / (Revenue - Variable Cost - Fixed Cost)

The strength of the operating leverage shows how much the profit will change if there is a one percent change in revenue. Thus, by setting one or another rate of increase in the volume of sales (revenue), 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 different enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of action of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to improve the efficiency of the current activities of the enterprise. This management is reduced to a change in the value of the strength of the operating leverage at various trends in the conjuncture of the product market and stages of the life cycle of the enterprise.

With 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 on fixed costs. With favorable market conditions and with a certain margin of safety, the requirement for the implementation of the regime of saving fixed costs can be significantly weakened. During such periods, the enterprise can expand the volume of real investments by modernizing fixed assets. It should be noted that fixed costs are less susceptible to rapid change, so enterprises with more operating leverage lose flexibility in managing their costs. As for variable costs, the basic principle of variable cost management is to ensure their constant savings.

Financial strength margins = (sales revenue - profitability threshold) / sales revenue

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

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

One of the factors that "weighs down" fixed costs is the increase in the effect of "financial leverage" with an increase in interest on loans in the capital structure. In turn, operating leverage generates stronger profit growth than the growth in sales (revenues), increasing earnings per share, thereby increasing leverage. Thus, financial and operational leverage are closely linked, mutually reinforcing each other.

The combined effect of operating and financial leverage is measured by the level of the associated effect of both levers, which is calculated using the following formula:

Level of conjugate effect of operating and financial leverage = force of influence of operating leverage X force of influence of financial leverage

The level of the conjugate effect of the action of both levers indicates the level of the total risk of the enterprise and shows how many percent changes in earnings per share when the volume of sales (sales proceeds) changes by 1%.

The combination of strong operating leverage with strong financial leverage can be detrimental to the enterprise, as business and financial risks mutually multiply, multiplying the adverse effects. The interaction of operating and financial leverage exacerbates negative impact diminishing revenue by the amount of net profit.

The task of reducing the total risk of an enterprise is reduced to choosing one of three options:

1. High level of leverage combined with weak leverage.
2. Low leverage combined with strong operating leverage.
3. Moderate levels of financial and operating leverage effects, which are most difficult to achieve.

In the very general view the criterion for choosing one or another option is the maximum possible market value of an enterprise share with minimal risk. As you know, this is achieved through a compromise between risk and return.

The level of the associated effect of the operating and financial leverage allows making planned calculations of the future value of earnings per share depending on the planned volume of sales (revenue), which means the possibility of direct access to the company's dividend policy.