Proverbs and sayings about May HORIZONTALLY: 2. May will deceive - in ... will leave.4 ....
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, it is possible to predict the change in profit with a change in revenue.
The minimum amount of revenue required to cover all expenses is called breakeven point, in turn, how much revenue can decrease so that the enterprise works without losses shows margin of financial strength.
A change in revenue can be caused by a change in price, a change in physical volume of sales, and a change in both of these factors.
Let us introduce the notation:
Price operating leverage calculated by the formula:
Rts \u003d (P + Zper + Zpost) / P \u003d 1 + Zper / P + Zpost / P
Natural operating lever calculated by the formula:
Rn \u003d (V-Zper) / P
Considering that B \u003d P + Zper + Zpost, we can write:
Rn \u003d (P + Zpost) / P \u003d 1 + Zpost / P
Comparing formulas for operating leverage in price and in kind it can be noticed that pH has less impact. This is explained by the fact that with an increase in natural volumes, variable costs simultaneously grow, and with a decrease, they decrease, which leads to a slower increase / decrease in profit.
The effect of operating (production) leverage is that any change in sales revenue always generates a stronger change in profit. A number of indicators are used to calculate the effect or strength of a lever. This requires the separation of costs into variables and constants with the help of an intermediate result. This effect is caused by varying degrees of influence of the dynamics variable costs and fixed costs for the financial result when the volume of output changes. By influencing the value of not only variable, but also fixed costs, you can determine by how many percentage points the profit will increase. In other words, the effect of the production lever shows the degree of sensitivity of the profit from the sale to the change in the proceeds from the sale.
The level or strength of the impact of the operating leverage (Degree operating leverage, DOL) is calculated by the formula:
DOL = MP/EBIT = ((p-v)*Q)/((p-v)*Q-FC),
where MP - marginal profit; EBIT - earnings before interest; FC - conditional fixed costs industrial nature; Q is the volume of production in natural terms; p - price per unit of production; v - variable costs per unit of output.
The level of operating leverage allows you to calculate the percentage change in profit depending on the dynamics of sales by one percentage point. In this case, the change in EBIT will be DOL%.
The greater the share of the company's fixed costs in the cost structure, the higher the level of operating leverage, and hence the greater the business (production) risk.
As revenue moves away from the break-even point, the impact of operating leverage decreases, and the organization's financial strength, on the contrary, grows. This feedback is associated with a relative decrease fixed costs enterprises.
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 EBIT+FC =MP, S - sales proceeds; VC - variable costs.
The calculation of the effect of production calculation allows answering the question of how sensitive the marginal income is to changes in the volume of production and sales, and how much it would be enough not only to cover fixed costs, but also to generate profit. It should also be noted that, the impact force of the operating lever:
Depends on relative magnitude fixed costs, from the structure of the assets of the enterprise, shares outside current assets. The greater the value of fixed assets, the greater the share of fixed costs;
Directly related to the growth in sales volume;
The higher, the closer the enterprise is to the threshold of profitability;
Depends on the level of capital intensity;
The stronger, the lower the profit and the higher the fixed costs.
The level of operating leverage is not a constant value and depends on a certain, basic implementation value. For example, with a breakeven volume of sales, the level of operating leverage will tend to infinity. The level of operating leverage is greatest at a point just above the breakeven point. In this case, even a slight change in sales leads to a significant relative change in EBIT. The change from zero profit to any profit represents an infinite percentage increase.
In practice, those companies that have a large share of fixed assets and intangible assets (intangible assets) in the balance sheet structure and large management expenses have a large operating leverage. Conversely, the minimum level of operating leverage is inherent in companies that have a large share of variable costs.
Thus, understanding the mechanism of operation of production leverage allows you to effectively manage the ratio of fixed and variable costs in order to increase profitability. operational activities companies.
The following conclusions can be drawn:
The high proportion of fixed costs narrows the boundaries of mobile management of current costs;
The greater the force of operating leverage, the higher the entrepreneurial risk.
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The ratio of costs for a given volume of sales, one of the options for measuring which is the ratio of marginal income to profit, is called operating leverage. This indicator"It 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 variables is higher, and accordingly lower in the opposite case.
The operating leverage indicator allows you to quickly (without preparing a full income statement) to determine how changes in sales volume will affect the company's profit. Multiply the percentage change in sales by the level of operating leverage to determine the percentage change in profit.
One of the main tasks of the analysis of the ratio "costs - volume - profit" is the selection of the most profitable combinations of variable and fixed costs, sales prices and sales volumes. The value of marginal income (both gross and specific) and the value of the marginal income ratio are key in making decisions related to the costs and income of companies. Moreover, the adoption of these decisions does not require the preparation of a new income statement, since only an analysis of the growth of those items that are supposed to be changed can be used.
When using the analysis, you should be clear about the following:
First, a change in fixed costs changes the position of the break-even point, but does not change the size of marginal income.
Secondly, a change in variable costs per unit of output changes the value of the marginal income indicator and the location of the break-even point.
Thirdly, the simultaneous change in fixed and variable costs in the same direction causes a strong shift in the break-even point.
Fourth, a change in the selling price changes the margin and the location of the break-even point.
In practical calculations, to determine the strength of the impact of operating leverage, the ratio of gross margin to profit is used:
Operating leverage measures the percentage change in earnings for a one percent change in revenue. Thus, by setting a certain rate of growth in the volume of sales (revenue), it is possible to determine the extent to which the amount of profit will increase with the strength of the operating leverage prevailing at the enterprise. Differences in the effect achieved at different enterprises will be determined by differences in the ratio of fixed and variable costs.
Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to improve the efficiency of the current activities of the enterprise. This control is reduced to changing the value of the strength of the operating lever under various conjuncture trends commodity market and stages of the life cycle of an enterprise.
With unfavorable commodity market conditions, as well as in the early stages of the life cycle of an enterprise, its policy should be aimed at reducing the strength of the operating lever by saving on fixed costs. With favorable market conditions and with a certain margin of safety, the requirement for the implementation of a fixed cost savings regime can be significantly weakened. During such periods, an enterprise can expand the volume of real investments by modernizing fixed production assets. It should be noted that fixed costs are less amenable to rapid change, so enterprises with great power operating leverage, lose flexibility in managing their costs. As for variable costs, the basic principle of managing variable costs is to ensure their constant savings.
The margin of financial strength is the edge of the enterprise's safety. The calculation of this indicator allows us to assess the possibility of an additional reduction in revenue from sales of products within the break-even point. Therefore, the financial safety margin is nothing more than the difference between the sales proceeds and the profitability threshold. The margin of financial strength is measured either in monetary terms or as a percentage of the proceeds from product sales:
So, the strength of the operating lever depends on the share of fixed costs in their total amount and determines the degree of flexibility of the enterprise. All this taken together generates entrepreneurial risk.
One of the factors that “weight” fixed costs is the increase in the effect of “ financial leverage» with an increase in interest on a loan in the capital structure. In turn, operating leverage generates stronger earnings growth than sales growth (revenues), increasing earnings per share, and thereby enhancing financial leverage. Thus, financial and operational levers are closely linked, mutually reinforcing each other.
The combined effect of operational and financial leverage is measured by the level of the conjugate effect of the action of both levers, which is calculated using the following formula:
The level of the conjugate effect of the action of both levers indicates the level of the total risk of the enterprise and shows the percentage change 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 an enterprise, as entrepreneurial and financial risks multiply, multiplying adverse effects. The interaction of operational and financial leverage exacerbates negative impact declining revenue by the amount of net profit.
The task of reducing the overall risk of the enterprise is reduced to choosing one of three options:
1. High level of financial leverage combined with low operating leverage.
2. Low level of financial leverage combined with strong operating leverage.
3. Moderate levels of financial and operational leverage effects, which is the most difficult to achieve.
In the very general view The criterion for choosing one or another option is the maximum possible market value of the company's shares with minimal risk. As you know, this is achieved through a compromise between risk and return.
The level of the conjugate effect of the operating and financial leverage allows you to make 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.
Control questions
2. The mechanism of enterprise cost management.
3. Analysis of the influence of factors on the total cost.
4. The essence of the concept of "margin income"
5. The concept of "breakeven point", "margin of safety", "operating leverage", "financial leverage".
In Russian accounting practice, the terms "operating leverage" and "production leverage (lever)" are also used.
The action of the operational (production, economic) lever is manifested in the fact that any change in sales proceeds always generates a stronger change in profit.
Figure 5 - circuit diagram organization's cash flow
Solving the problem of maximizing the rate of profit growth, it is possible to manipulate the increase or decrease of not only variable, but also fixed costs, and depending on this, calculate by what percentage the profit will increase.
In practical calculations, to determine the strength of the impact of operating leverage, the ratio of gross margin (the result of sales after recovering variable costs) to profit is used. Gross margin (coverage amount) is the difference between sales revenue and variable costs.
It is desirable that the gross margin is enough not only to cover fixed costs, but also to generate profits.
If we interpret the force of the impact of the operating lever as a percentage change in the gross margin (or, depending on the goals of the analysis, the net result of the operation of investments) for a given percentage change in the physical volume of sales, then formula (1) can be represented as follows:
(2)
where: K - the physical volume of sales.
ΔK - change in the physical volume of sales.
In this form, the formula for the strength of the impact of the operating lever can answer the question of how sensitive the gross margin, or the net result of the operation of investments, is to changes in the physical volume of product sales. Further sequential transformations of formula (2) will give a way to calculate the strength of the impact of the operating lever using the unit price, variable costs per unit of goods and the total amount of fixed costs:
operating lever force =
(3)
(4)
These are several ways to calculate the strength of the operating lever - according to any of the intermediate links of formulas (1) - (4). The force of operating leverage is always calculated for a certain volume of sales, for a given sales proceeds. The proceeds from the sale change - the strength of the impact of the operating lever also changes. The strength of the impact of the operating lever largely depends on the industry average level of capital intensity: the greater the cost of fixed assets, the greater the fixed costs - this is an objective factor.
At the same time, the effect of the operating lever can be controlled precisely on the basis of taking into account the dependence of the leverage force on the value of fixed costs: the greater the fixed costs (with constant sales revenue), the stronger the operating leverage, and vice versa (Transformation of the operating leverage force formula) - gross margin/profit = (fixed costs + profit)/profit.
If sales revenue decreases, the impact of operating leverage increases both with an increase and a decrease in the share of fixed costs in their total amount.
With an increase in sales revenue, if the profitability threshold (the cost recovery point) has already been passed, the impact of the operating leverage decreases: each percentage of revenue growth gives a smaller and smaller percentage of profit growth (while the share of fixed costs in their total amount decreases). But with a jump in fixed costs, dictated by the interests of further increasing revenue or other circumstances, the company has to pass a new threshold of profitability. At a small distance from the threshold of profitability, the force of the impact of the operating leverage will be maximum, and then it will begin to decrease again ... and so on until a new jump in fixed costs with overcoming the new threshold of profitability.
All this is extremely useful for:
Planning payments for income tax, in particular, advance payments;
Development of details of the commercial policy of the enterprise.
With pessimistic forecasts of the dynamics of revenue from sales, fixed costs cannot be increased, since the loss of profit from each percentage of revenue loss can be many times greater due to the too strong effect of operating leverage. At the same time, if there is confidence in the long-term increase in demand for goods (services), then it is possible to abandon the austerity regime on fixed costs, because an organization with a larger share of them will receive a greater increase in profits.
With a decrease in the income of the organization, fixed costs are very difficult to reduce. In essence, this means that a high proportion of fixed costs in their total amount indicates a weakening of the flexibility of activities. The greater the cost of tangible fixed assets, the more the organization "bogs" in its market niche. An increased share of fixed costs increases the effect of operating leverage, and a decrease in the organization's business activity leads to a loss of profit.
Thus, the strength of the operating leverage indicates the degree of entrepreneurial risk associated with a given firm: the greater the strength of the operating leverage, the greater the entrepreneurial risk.
The effect of operating leverage (or production leverage)called a phenomenon that is expressed in the fact that a change in sales volume (sales proceeds) causes a more intensive change in profit in one direction or another. As you know, all costs of the enterprise are divided into fixed and variable. In the short run, unlike fixed costs, variable costs can change under the influence of adjustments in the volume of production (sales). In the long run, all costs are variable. When sales volume changes, variable costs change proportionally, while fixed costs remain the same, thus, a huge positive potential for the company's activities lies in saving on fixed costs, including the costs associated with enterprise management.
A sharp change in the amount of fixed costs occurs due to a radical restructuring organizational structure enterprises during periods of mass replacement of fixed assets and qualitative “technological leaps”. Thus, any change in sales revenue generates an even stronger change in carrying profit.
The strength of the impact of the production lever depends on the proportion of fixed costs in total amount enterprise costs.
The effect of production leverage is one of the most important indicators of financial risk, because it shows how much the balance sheet profit will change, as well as the economic profitability of assets with a change in sales volume or proceeds from sales of products by 1%.
In practical calculations, to determine the strength of the impact of the operating lever on a particular enterprise, the result from the sale of products after reimbursement will be used. variable costs, which is often called marginal income:
Marginal income = Sales volume - Variable costs
Contribution margin = Fixed costs + EBIT
EBIT– operating income (from sales before deducting interest on loans and income taxes).
Marginal Income Ratio = Marginal Income / Sales Volume
It is desirable that marginal income not only covers fixed costs, but also serves as a source of operating profit (EBIT) /
After calculating the marginal income, you can determine the force of the impact of the production lever (SLR):
ROI = Marginal Income / EBIT
The ratio expresses how many times marginal income exceeds operating profit.
Operating leverage effectboils down to the fact that any change in sales revenue (due to a change in volume) leads to an even stronger change in profit. Action this effect due to the disproportionate impact of fixed and variable costs on the result of the financial and economic activity of the enterprise when the volume of production changes.
Operating lever forceshows the degree of entrepreneurial risk, i.e. the risk of loss of profit 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.
The strength of the operating leverage is always calculated for a certain volume of sales. As sales revenue changes, so does its impact. The operating lever allows you to assess the degree of influence of changes in sales volumes on the size of the organization's future profits. Operating leverage calculations show how much profit will change if sales volume changes by 1%.
Thus, modern cost management involves quite diverse approaches to accounting and analysis of costs, profits, business risk. You have to master these interesting tools to ensure the survival and development of your business.
44. Calculation of the break-even point. Profitability threshold
and financial strength
Break even corresponds to the volume of sales at which the firm covers all fixed and variable costs without making a profit. Any change in revenue at this point results in a profit or loss. In practice, 2 methods are used to calculate this point: the graphical method and the method of equations.
With the graphic method finding the break-even point comes down to building a comprehensive schedule of "costs - output - profit".
The break-even point on the chart is the point of intersection of the straight lines built by the value of total costs and gross revenue. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The amount of profit or loss is shaded. If the company sells products less than the threshold sales volume, then it suffers losses; if more, it makes a profit.
The revenue corresponding to the break-even point is called threshold revenue . The volume of production (sales) at the break-even point is called production threshold (sales), if the company sells products less than the threshold sales volume, then it suffers losses, if more, it makes a profit.
Equation method based on the use of the formula for calculating the break-even point
Qpcs \u003d Fixed costs / (Price per unit of production - Variable costs per unit of production)
y=a+bx
a- fixed costs b- variable costs per unit of output, x- the volume of production or sales at a critical point.
Profitability threshold- this is such sales revenue at which the company has no losses, but has not yet made a profit. In such a situation, sales revenue after recovering variable costs is sufficient to recover fixed costs.
Profitability Threshold = Fixed Costs / Marginal Income Ratio
Coeff. contribution margin = (sales volume - variable costs) / sales volume
It is desirable that marginal income not only covers fixed costs, but also serves as a source of operating profit.
The company begins to make a profit when the actual revenue exceeds the threshold. The greater this excess, the greater the margin of financial strength of the enterprise and the greater the amount of profit. Margin of financial strength – excess of actual sales proceeds over the profitability threshold:
Financial safety margin = ((Planned sales revenue - Threshold sales revenue) / Planned sales revenue) ´ 100%
The strength of the impact of operating leverage shows how many times the profit will change if the sales proceeds change by one percent.
45. Financial risks: essence, methods of determination and
management
In the most general form, risks are understood as the probability of losses or shortfalls in income compared to the predicted option.
Types of financial risks:
· Financial stability risk(risk of imbalance in financial development) of the enterprise. It is characterized by an excessive share of borrowed funds and an imbalance of positive and negative cash flows by v.
· Insolvency risk(or the risk of unbalanced liquidity) of the enterprise. It is characterized by a decrease in the level of liquidity of current assets, generating an imbalance in the positive and negative cash flows of the enterprise over time.
· Investment risk- the possibility of financial losses in the implementation of the investment activities of the enterprise.
· inflation risk– the possibility of depreciation of the real cost of capital of the expected income from financial transactions in the context of inflation.
· Interest risk- an unexpected change in the interest rate in the financial market.
· Currency risk consists in the shortfall in the provided income as a result of a change in the exchange rate of the foreign currency used in the foreign economic operations of the enterprise.
· Deposit risk reflects the possibility of non-return of deposits.
· Credit risk- the risk of non-payment or late payment for finished products released by the enterprise on credit.
· tax risk the likelihood of introducing new taxes changing the terms and conditions for making certain tax payments, canceling existing tax incentives, the possibility of increasing the level of rates
· Structural risk characterized by inefficient financing of the current costs of the enterprise, causing a high proportion of fixed costs in their total amount.
· Criminogenic risk manifests itself in the form of declaring fictitious bankruptcy by its partners (forgery of documents that ensure the misappropriation of monetary and other assets by third parties).
· Other types of risks– risks natural Disasters, the risk of untimely implementation of settlement and cash transactions.
The main characteristics of the risk category:
1) Economic nature- financial risk is manifested in the sphere of economic activity of the enterprise, directly related to the formation of income and possible losses in the implementation of financial activities.
2) Objectivity of manifestation - financial risk accompanies all types of financial transactions and all areas of its financial activity.
3) Probability of implementation - the degree of probability of occurrence of a risk event is determined by the action of objective and subjective factors.
4) Uncertainty of consequences - financial risk may be accompanied by financial losses or the formation of additional income.
5) Expected unfavorable consequences - a number of extremely negative consequences financial risks determine the loss of not only income, but also the capital of the enterprise, which leads it to bankruptcy.
6) Level variability. The level of financial risk varies significantly over time, i.e. depends on the duration of the financial transaction.
7) The subjectivity of the assessment is determined by the different levels of completeness and reliability of information, qualifications financial managers, their experience in the field of risk management.
Management of risks is a special field of activity (risk management), which is associated with the identification of forecasting analysis, measurement and prevention of risks, with their minimization, retention within certain limits and compensation.
Risk management methods:
1) risk avoidance or avoidance;
2) risk transfer;
3) risk localization (limitation);
4) risk distribution;
5) risk compensation.
1. Evasion or avoidance of risk. Development of strategic and tactical decisions that exclude the occurrence of risky situations.
The decision to avoid risk is usually taken at a preliminary stage, because refusal to continue the operation often entails not only financial, but also other losses, and sometimes it is difficult due to contractual obligations. Risk Avoidance Measures:
Refusal to carry out financial transactions, the level of risk for which is high. Its use is limited, because. most financial transactions are related to the main production and commercial activities;
· Refusal to use large amounts of borrowed capital, which avoids one of the significant risks - the loss of financial stability, but at the same time it reduces the effect of financial leverage;
· rejection of excessive use of current assets in a low-liquid form;
· Refusal to use temporarily free cash assets as short-term financial investments, which avoids deposit and interest risks, but gives rise to inflationary risk and the risk of lost profits;
Rejection of the services of unreliable partners;
· rejection of innovative and other projects where there is no confidence in their feasibility and effectiveness.
The implementation of these measures should be carried out under the following conditions:
if the rejection of one type of risk does not entail the emergence of a higher one;
if the degree of risk is incomparable with the level of profitability of the proposed financial transaction;
if financial losses exceed the possibilities of their compensation at the expense of own funds
if the income from the risky operation is insignificant;
if risky operations are not typical for the company.
2. Transfer of risk- the transfer of risk to other persons through insurance or transfer to partners in financial operations through the conclusion of contracts. The most dangerous financial risks are subject to insurance. However, insurance is not applicable:
when establishing new types of products or technologies;
· when insurance companies do not have statistical data for making calculations.
Financial risk insurance- insurance that provides for the obligations of the insurer for insurance payments in the amount of full or partial compensation for losses as a result of: stoppage of production, bankruptcy, unforeseen expenses, failure to fulfill contractual obligations, etc.
Transfer of risk through conclusion of a surety agreement or providing a guarantee, i.e. The guarantor undertakes to be responsible to the creditor for the performance of the obligation in whole or in part. Bank as guarantor.
Risk transfer suppliers of raw materials and supplies(subject of transfer - risks associated with damage or loss of property).
Risk transfer participants investment project . It is important to make a clear delineation of the areas of action and responsibilities of the participants.
Transfer of risk through factoring conclusions. The subject of the transfer is the company's credit risk (same as receivables insurance).
Transfer of risk through exchange transactions(For example, hedging).
3. Risk localization. Assumes the delimitation of the system of rights, powers and responsibilities so that the consequences of risky situations do not affect the implementation management decisions. Limiting is implemented by establishing internal financial standards at the enterprise. Localization of risks includes measures to create venture (risky) enterprises, the allocation of specialized units and the use of standards.
The system of financial standards:
· the maximum amount of borrowed funds by type of activity;
the minimum amount of assets in a highly liquid form;
· maximum size commodity or consumer credit to one buyer;
· the maximum size of the deposit in one bank;
maximum investment size Money in securities of one issuer;
The maximum period for diverting funds into receivables.
4. Risk distribution between market entities. Main methods of risk distribution:
diversification of activities (in the manufacturing sector: increasing the number of technologies, expanding the range, focusing on various groups of consumers and suppliers, regions; in the financial sector: income from various financial transactions, the formation of a loan portfolio, long-term financial investments, work in several segments of the financial market) ;
diversification of investments - preference for several projects of small capital intensity
· diversification of the portfolio of securities;
· diversification of the deposit portfolio;
· Diversification of credit and foreign exchange portfolio.
5. Risk compensation. Main methods:
forecasting the economic situation, developing development scenarios and assessing the future state of the business environment (behavior of partners, competitors, changes in the market);
Active targeted marketing - the formation of demand for products;
· monitoring the socio-economic and regulatory environment - tracking current information and socio-economic processes;
Creation of a system of reserves within the enterprise.
Operating leverage is a mechanism for managing the profit of an organization based on optimizing the ratio of fixed and variable costs.
With it, you can predict the change in profit depending on the change in sales volume.
The operation of operating leverage is manifested in the fact that any change in revenue from the sale of products always generates a stronger change in profit.
Example:
Profit always grows faster if the same proportions between constants and variables are maintained.
If fixed costs increase by only 5%, then the profit growth rate will be 34%.
Solving the problem of maximizing the rate of profit growth, you can control the increase or decrease of not only variable but also fixed costs and, depending on this, calculate how much% the profit will increase.
In practical calculations, the indicator of the effect of the operating leverage (the force of the operating leverage) is used. ESM is a quantitative assessment of the change in profit depending on the change in the volume of sales. It shows by how much% profit will change with a change in revenue by 1%. Or it shows how many times the profit growth rate is higher than the revenue growth rate.
The effect of operating leverage is related to the level of entrepreneurial risk. The higher it is, the higher the risk. Since with its increase, the critical volume of sales increases and the margin of financial strength decreases.
EOR = = = = 8.5 (times)
ESM = = = 8.5 (%/%)
Using the concept of operating leverage to compare cost allocation options.
Sometimes it is possible to transfer part of the variable costs to the category of fixed ones (ie, change the structure) and vice versa. In this case, it is necessary to determine how the redistribution of costs will be reflected within the unchanged amount of total costs on financial indicators for the purpose of risk assessment.
ZFP \u003d (Vf - Vkr) / Vf
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Operating leverage is the relationship between a company's total revenue, operating expenses, and earnings before interest and taxes. The action of the operational (production, economic) lever is manifested in the fact that any change in sales proceeds always generates a stronger change in profit.
Price operating leverage(Pc) is calculated by the formula:
Рц = Revenue / Profit from sales
Given that Revenue = Approx. + Zper + Zpost, the formula for calculating the price operating leverage can be written as:
Rts \u003d (Inc. + Zper + Zpost) / Appr. = 1 + Sper/Ad. + Zpost/Appr.
Natural operating lever(Рн) is calculated by the formula:
Рн = (Vyr.-Zper) / Approx. = (Ac + Zpost)/Ac. = 1 + Zpost/Inc.
The strength (level) of the impact of the operating leverage (the effect of the operating leverage, the level of production leverage) is determined by the ratio of marginal income to profit:
EPR = Marginal income / Profit from sales
That. operating leverage shows how much the company's balance sheet profit changes when revenue changes by 1 percent.
The operating lever indicates the level of entrepreneurial risk of a given enterprise: the greater the impact of the production lever, the higher the degree of entrepreneurial risk.
The effect of operating leverage indicates the possibility of reducing costs due to fixed costs, and hence the increase in profits with an increase in sales. Thus, the growth of sales is an important factor in reducing costs and increasing profits.
Starting from the break-even point, an increase in sales leads to a significant increase in profits, since it starts from zero.
The subsequent increase in sales increases profits to a lesser extent compared to the previous level. The effect of operating leverage decreases as sales increase beyond the breakpoint level, as the base against which the increase in earnings is measured gradually becomes larger. Operating leverage works in both directions, both on increases and decreases in sales. Therefore, an enterprise operating in the immediate vicinity of the critical point will have a relatively large share of the change in profit or loss for a given change in sales.
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Operating leverage effect is that any change in sales revenue leads to an even stronger change in profit. The action of this effect is associated with the disproportionate impact of conditionally fixed and conditionally variable costs on the financial result when the volume of production and sales changes.
The higher the share of semi-fixed costs in the cost of production, the stronger the impact of operating leverage.
The strength of the operating leverage is calculated as the ratio of marginal profit to profit from sales.
Marginal profit is calculated as the difference between the proceeds from the sale of products and the total amount of variable costs for the entire volume of production.
Profit from sales is calculated as the difference between the proceeds from the sale of products and the total amount of fixed and variable costs for the entire volume of production.
Thus, the size of financial strength shows that the company has a margin of financial stability, and hence profit. But the lower the difference between revenue and profitability threshold, the greater the risk of losses. So:
· force of influence of the operational lever depends on the relative size of fixed expenses;
The strength of the impact of the operating lever is directly related to the growth in the volume of sales;
The force of the impact of the operating lever is the higher, the closer the enterprise is to the threshold of profitability;
The strength of the impact of the operating lever depends on the level of capital intensity;
· the force of the impact of the operating leverage is stronger, the lower the profit and the higher the fixed costs.
Entrepreneurial risk is associated with a possible loss of profit and an increase in losses from operating (current) activities.
The effect of production leverage is one of the most important indicators of financial risk, as it shows how much 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.
Shows the degree of entrepreneurial risk, that is, the risk of loss of profit 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.
The strength of the operating leverage is always calculated for a certain volume of sales. As sales revenue changes, so does its impact. The operating lever allows you to assess the degree of influence of changes in sales volumes on the size of the organization's future profits. Operating leverage calculations show how much profit will change if sales volume changes by 1%.
Where DOL (DegreeOperatingLeverage)- the strength of the operating (production) leverage; Q- number; R- unit selling price (without VAT and other external taxes); V- variable costs per unit; F- total fixed costs for the period.
Entrepreneurial risk is a function of two factors:
1) volatility of quantity output;
2) the strength of the operating leverage (changing the structure of costs in terms of variables and constants, the break-even point).
To make decisions on overcoming the crisis, it is necessary to analyze both factors, reducing the operating leverage in the loss zone, increasing the share of variable costs in the total cost structure, and then increasing the leverage when moving into the profit zone.
There are three main measures operating leverage:
a) the proportion of permanent 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 natural units;
c) the ratio of net profit to fixed production costs
Any significant 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.
Types of dividend policy in the company.
Dividend Policy of the company is to choose the proportion between the consumed by shareholders and the capitalized parts of the profit to achieve the goals of the company. Under company's dividend policy is understood as the mechanism of formation of the share of profit paid to the owner, in accordance with the share of his contribution to the total equity companies.
There are three main approaches to the formation of a company's dividend policy, each of which corresponds to a specific methodology for dividend payments.
1. Conservative dividend policy - its priority goal: the use of profits for the development of the company (growth of net assets, increase in the market capitalization of the company), and not for current consumption in the form of dividend payments.
The following dividend payment methods correspond to this type:
a) Residual Dividend Methodology commonly used in the early stages of a company and associated with high level its investment activity. The dividend payment fund is formed from the profit remaining after the formation of its own financial resources necessary for the development of the company. The advantages of this technique: strengthening investment opportunities, ensuring high rates of development of the company. Disadvantages: instability of dividend payments, the uncertainty of their formation in the future, which negatively affects the company's market positions.
b) Methodology of fixed dividend payments- regular payment of dividends in a constant amount for a long time without taking into account changes in the market value of shares. At high inflation rates, the amount of dividend payments is adjusted for the inflation index. Advantages of the method: its reliability, it creates a sense of confidence among shareholders in the invariability of the size of current income, stabilizes stock quotes on the stock market. Minus: weak connection with the fin. company results. During periods of unfavorable market conditions and low profits, investment activity can be reduced to zero.
2. Moderate (compromise) dividend policy – in the process of profit distribution, dividend payments to shareholders are balanced with the growth of own financial resources for the development of the company. This type corresponds to:
a) methodology for paying the guaranteed minimum and extra dividends- payment of regular fixed dividends, and in the case of successful company activity, also a periodic, one-time payment of additional. premium dividends. The advantage of the technique: stimulating the investment activity of the company with a high connection with the financial. results of her activities. The method of guaranteed minimum dividends with premiums (premium dividends) is most effective for companies with unstable profit dynamics. The main disadvantage of this technique: with a long payment of min. the size of dividends and the deterioration of financial.
state of investment opportunities are declining, the market value of shares is falling.
3. Aggressive dividend policy provides for a constant increase in dividend payments, regardless of financial results. This type corresponds to:
a) Method of constant percentage distribution of profits (or method of a stable level of dividends)— establishment of a long-term normative ratio of dividend payouts in relation to profit (or a norm for the distribution of profits into consumed and capitalized parts of it). The advantage of the technique: the simplicity of its formation and a close connection with the size of the profit. The main drawback of this technique is the instability of the size of dividend payments per share, depending on the amount of generated profit. Such instability can cause sharp fluctuations in the market value of shares for certain periods. Only large companies with stable profits can afford to pursue such a dividend policy. it is associated with a high level of economic risk.
b) The method of constant increase in the amount of dividends, the level of dividend payments per share is to establish a fixed percentage of the increase in dividends to their size in the previous period. Advantage: the possibility of increasing the market value of the company's shares by creating a positive image among potential investors. Disadvantage: excessive rigidity. If the growth rate of dividend payments increases and the dividend payout fund grows faster than the amount of profit, then the investment activity of the company decreases. Other things being equal, its stability also decreases. The implementation of such a dividend policy can afford only promising, dynamically developing joint-stock companies.
Operating leverage effect
Entrepreneurial activity is associated with many factors. All of them can be divided into two groups. The first group of factors is related to profit maximization. Another group of factors is associated with the identification of critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, with the division of costs into variable and fixed. The effect of operating leverage is that any change in sales revenue always generates a larger change in earnings.
V modern conditions at Russian enterprises, the issues of mass regulation and profit dynamics come to one of the first places in the management of financial resources. The solution of these issues is included in the scope of operational (production) financial management.
The basis of financial management is financial economic analysis, within which the analysis of the cost structure comes to the fore.
It is known that entrepreneurial activity associated with many factors influencing its outcome. All of them can be divided into two groups. The first group of factors is associated with profit maximization through supply and demand, pricing policy, product profitability, and its competitiveness. Another group of factors is associated with the identification of critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, with the division of costs into variable and fixed.
Variable costs that change with changes in the volume of output include raw materials and materials, fuel and energy for technological purposes, purchased products and semi-finished products, the main wage the main production workers, the development of new types of products, etc. Fixed (company-wide) costs - depreciation, rent, salaries of the administrative and managerial apparatus, interest on loans, travel expenses, advertising costs, etc.
The analysis of production costs allows you to determine their impact on the amount of profit from sales, but if you go deeper into these problems, it turns out the following:
- such a division helps to solve the problem of increasing the mass of profit due to the relative reduction of certain costs;
- allows you to search for the most optimal combination of variable and fixed costs, providing an increase in profit;
- allows you to judge the cost recovery and financial stability in the event of a deterioration in the economic situation.
The following indicators can serve as a criterion for choosing the most profitable products:
- gross margin per unit of production;
- the share of gross margin in the price of a unit of production;
– gross margin per unit of limited factor.
Considering the behavior of variable and fixed costs, one should analyze the composition and structure of costs per unit of output in a certain period of time and with a certain number of sales. This is how the behavior of variable and fixed costs is characterized when the volume of production (sales) changes.
Table 16 - Behavior of variable and fixed costs when changing the volume of production (sales)
The cost structure is not so much a quantitative relationship as a qualitative one. Nevertheless, the influence of the dynamics of variable and fixed costs on the formation of financial results with a change in production volume is very significant. Operating leverage is closely related to the cost structure.
The effect of operating leverage is that any change in sales revenue always generates a larger change in earnings.
A number of indicators are used to calculate the effect or strength of a lever. This requires the separation of costs into variables and constants with the help of an intermediate result. This value is usually called the gross margin, the amount of coverage, the contribution.
These metrics include:
gross margin = profit from sales + fixed costs;
contribution (coverage amount) = sales proceeds - variable costs;
leverage effect = (sales revenue - variable costs) / sales profit.
If we interpret the effect of the operating leverage as a change in the gross margin, then its calculation will allow us to answer the question of how much the profit changes from an increase in the volume (production, sales) of products.
Revenue changes, leverage changes. For example, if the leverage is 8.5, and revenue growth is planned at 3%, then profit will increase by: 8.5 x 3% = 25.5%. If revenue falls by 10%, then profit decreases by: 8.5 x 10% = 85%.
However, with each increase in sales revenue, the leverage changes and profits increase.
Let's move on to the next indicator, which follows from the operational analysis - the threshold of profitability (or break-even point).
The threshold of profitability is calculated as the ratio of fixed costs to the gross margin ratio:
Gross Margin = Gross Margin / Sales Revenue
profitability threshold = fixed costs / gross margin
The next indicator is the margin of financial strength:
Margin of financial strength \u003d sales proceeds - profitability threshold.
The size of financial strength shows that the company has a margin of financial stability, and hence profit. But the lower the difference between revenue and profitability threshold, the greater the risk of losses. So:
the strength of the impact of the operating lever depends on the relative magnitude of fixed costs;
the strength of the operating leverage is directly related to the growth in sales volume;
the force of the impact of the operating leverage is the higher, the closer the enterprise is to the threshold of profitability;
the strength of the impact of the operating lever depends on the level of capital intensity;
the strength of the impact of operating leverage is stronger, the lower the profit and the higher the fixed costs.
Calculation example
Initial data:
Proceeds from the sale of products - 10,000 thousand rubles.
Variable costs - 8300 thousand rubles,
Fixed costs - 1500 thousand rubles.
Profit - 200 thousand rubles.
1. Calculate the force of the operating leverage.
Coverage amount = 1500 thousand rubles. + 200 thousand rubles. = 1700 thousand rubles.
Operating lever force = 1700 / 200 = 8.5 times,
Assume that next year sales are projected to grow by 12%. We can calculate by what percentage the profit will increase:
12% * 8,5 =102%.
10000 * 112% / 100= 11200 thousand rubles
8300 * 112% / 100 = 9296 thousand rubles.
11200 - 9296 \u003d 1904 thousand rubles.
1904 - 1500 = 404 thousand rubles
Lever force = (1500 + 404) / 404 = 4.7 times.
From here, profit increases by 102%:
404 — 200 = 204; 204 * 100 / 200 = 102%.
Let's define the profitability threshold for this example. For these purposes, the gross margin ratio should be calculated. It is calculated as the ratio of gross margin to sales revenue:
1904 / 11200 = 0,17.
Knowing the gross margin ratio - 0.17, we consider the profitability threshold.
Profitability threshold \u003d 1500 / 0.17 \u003d 8823.5 rubles.
Analysis of the cost structure allows you to choose a strategy of behavior in the market. There is a rule for choosing profitable options assortment policy - the rule "50: 50".
Cost management in connection with the use of the effect of operating leverage allows you to quickly and comprehensively approach the use of enterprise finances. You can use the 50/50 rule for this.
All types of products are divided into two groups depending on the share of variable costs. If it is more than 50%, then it is more profitable for the given types of products to work on reducing costs. If the share of variable costs is less than 50%, then it is better for the company to increase sales volumes - this will give more gross margin.
Having mastered the cost management system, the company receives the following benefits:
- the ability to increase the competitiveness of manufactured products (services) by reducing costs and increasing profitability;
– to develop a flexible pricing policy, on its basis to increase turnover and oust competitors;
- save money and financial resources enterprises, get additional working capital;
- to evaluate the efficiency of the company's divisions, staff motivation.
Operating leverage (production leverage) is a potential opportunity to influence the company's profit by changing the cost structure and production volume.
The effect of operating leverage is that any change in sales revenue always leads to a larger change in profit. This effect is caused by varying degrees of influence of the dynamics of variable costs and fixed costs on the financial result when the volume of output changes. By influencing the value of not only variable, but also fixed costs, you can determine by how many percentage points the profit will increase.
The level or strength of the impact of the operating leverage (Degree operating leverage, DOL) is calculated by the formula:
DOL = MP/EBIT = ((p-v)*Q)/((p-v)*Q-FC)
MP - marginal profit;
EBIT - earnings before interest;
FC - semi-fixed production costs;
Q is the volume of production in natural terms;
p is the price per unit of production;
v - variable costs per unit of production.
The level of operating leverage allows you to calculate the percentage change in profit depending on the dynamics of sales by one percentage point. In this case, the change in EBIT will be DOL%.
The greater the share of the company's fixed costs in the cost structure, the higher the level of operating leverage, and hence the greater the business (production) risk.
As revenue moves away from the break-even point, the impact of operating leverage decreases, and the organization's financial strength, on the contrary, grows. This feedback is associated with a relative decrease in the fixed costs of the enterprise.
Since many enterprises produce a wide range of products, it is more convenient to calculate the level of operating leverage using the formula:
DOL = (S-VC)/(S-VC-FC) = (EBIT+FC)/EBIT
where S is sales proceeds; VC - variable costs.
The level of operating leverage is not a constant value and depends on a certain, basic implementation value. For example, with a breakeven volume of sales, the level of operating leverage will tend to infinity. The level of operating leverage is greatest at a point just above the breakeven point. In this case, even a slight change in sales leads to a significant relative change in EBIT. The change from zero profit to any profit represents an infinite percentage increase.
In practice, those companies that have a large share of fixed assets and intangible assets (intangible assets) in the balance sheet structure and large management expenses have a large operating leverage. Conversely, the minimum level of operating leverage is inherent in companies that have a large share of variable costs.
Thus, understanding the mechanism of operation of production leverage allows you to effectively manage the ratio of fixed and variable costs in order to increase the profitability of the company's operations.
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The process of financial management, as you know, is associated with the concept of leverage. Lever is a factor, a small change in which can lead to a significant change in performance. The operating lever uses the relationship ʼʼcosts - production volume - profitʼʼ, ᴛ.ᴇ. it implements in practice the possibility of optimizing profits by managing costs, the ratio of their constant and variable components.
The effect of operating leverage is manifested in the fact that any change in the costs of the enterprise always generates a change in revenue and an even stronger change in profit.
1. Revenue from product sales in the current period is
2. The actual costs that led to the receipt of this revenue,
formed in the following volumes:
- variables - 7,500 rubles;
- permanent - 1500 rubles;
- total - 9,000 rubles.
3. Profit in the current period - 1000 rubles. (10,000 - 7500-1500).
4. Suppose that the proceeds from the sale of products in the next period will increase to 110,000 (+10%).
Then the variable costs, according to the rules of their movement, will also increase by 10% and amount to 8,250 rubles. (7500 + 750).
6. Fixed costs according to the rules of their movement remain the same -1500 rubles.
7. The total costs will be equal to 9,750 rubles. (8 250 + 1500).
8. Profit in this new period will be 1,250 rubles. (11 LLC - 8,250 - 500), which is 250 rubles. and 25% more profit of the previous period.
The example shows that a 10% increase in revenue led to a 25% increase in profits. This increase in profits is the result of the effect of operating (production) leverage.
Operating lever force- This is an indicator used in practice when calculating the rate of profit growth. The following algorithms are used to calculate it:
Operating Leverage = Gross Margin / Profit;
Gross Margin = Sales Revenue - Variable Costs.
Example. We use the digital information of our example and calculate the value of the indicator of the force of the impact of the operating lever:
(10 000 — 7500): 1000 = 2,5.
The resulting value of the impact force of the operating lever (2.5) shows how many times the profit of the enterprise will increase (decrease) with a certain increase (decrease) in revenue.
With a possible decrease in revenue by 5%, profit will decrease by 12.5% (5 × 2.5). And with an increase in revenue by 10% (as in our example), profit will increase by 25% (10 × 2.5), or by 250 rubles.
The impact of operating leverage is greater, the higher the proportion of fixed costs in the total cost.
The practical significance of the effect of operating leverage essentially consists in the fact that, by setting one or another rate of growth in the volume of sales, it is possible to determine in what sizes the amount of profit will increase with the strength of the operating lever that has developed at the enterprise. Differences in the effect achieved at enterprises will be determined by differences in the ratio of fixed and variable costs.
Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of the current activities of the enterprise. This management is reduced to changing the value of the strength of the operating lever under various trends in the commodity market and stages of the life cycle of the enterprise:
In case of unfavorable commodity market conditions, as well as in the early stages of the life cycle of an enterprise, its policy should be aimed at reducing the strength of the operating lever by saving fixed costs;
With favorable market conditions and with a certain margin of safety, savings in fixed costs should be significantly weakened. During such periods, the enterprise can expand the volume of real investments by modernizing the basic production assets.
