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Operating leverage is present when a firm has fixed operating costs—regardless of production volumes.
The presence in the composition of the costs of any amount of their constant types leads to the fact that when the volume of sales changes, the amount of profit always changes at an even faster pace.
In other words, fixed operating costs, by the very fact of their existence, cause a disproportionately higher change in the amount of profit of the enterprise with any change in the volume of sales of products, regardless of the size of the enterprise, industry characteristics and other factors.
The lever works in the opposite direction - it increases not only the profits of the company, but also its losses. In the latter case, losses may arise as a result of an unexpected drop in sales due to the refusal of consumers to buy products of this enterprise (manufacturer).
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.
However, the degree of sensitivity of profit to changes in sales proceeds varies greatly in enterprises with different ratios of constants and variable costs. The ratio of fixed and variable costs of the enterprise, allowing the use of the mechanism of the operating lever is characterized by the force of the impact of the operating lever (CWOR).
In practical calculations, to determine the strength of the impact of the operating lever, the ratio of the so-called marginal income (MA) to profit (P) is used.
(7.6)
Marginal income (MD) is the difference between sales proceeds and variable costs, this indicator in the economic literature is also referred to as the amount of coverage. It is desirable that marginal income is enough not only to cover fixed costs, but also to generate profits.
SVOR shows how much the profit will change with a change in revenue by 1 percent.
The force of operating leverage is always calculated for a certain volume of sales, for a given sales proceeds. When the proceeds from sales change, the strength of the operating leverage also changes. The strength of the impact of operating leverage largely depends on the industry average level of capital intensity: the greater the cost of fixed assets, the greater the fixed costs.
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 force of the lever on the value of fixed costs: the larger the fixed costs (Fix) and the lower the profit, the stronger the operating lever.
When the income of the enterprise decreases, fixed costs are difficult to reduce. This means that high specific gravity fixed costs in their total amount indicates a weakening of the flexibility of the enterprise. If it is necessary to leave your business and move to another area of activity, it will be very difficult for an enterprise to diversify abruptly, both organizationally and especially financially.
The increased share of fixed costs increases the effect of operating leverage, and the decrease in the business activity of the enterprise results in multiplied losses in profits. It remains to be consoled by the fact that if the revenue is still growing at a sufficient pace, then with a strong operating leverage, the enterprise, although it pays the maximum amount of income tax, is able to pay solid dividends and provide financing for development.
Therefore, we can say that the strength of the impact of the operating lever indicates the degree of entrepreneurial risk associated with this firm: the higher the value of the impact of the production lever, the greater the entrepreneurial risk associated with the activities of this enterprise.
The action of the effect is associated with the unequal influence of fixed and variable costs on financial results when changing the volume of production (sales).
The ratio between fixed and variable costs for an enterprise that uses the mechanism of production leverage with different intensity of impact on profits is expressed by the coefficient of this leverage. It is determined by the formula:
, (7.7)
where is the coefficient of production (operational) leverage;
Z - total costs
The higher the value of this coefficient, the more the enterprise is able to accelerate the rate of profit growth in relation to the rate of increase in production (sales). In other words, at identical rates of growth in output, an enterprise that has a higher coefficient of production leverage (ceteris paribus) will always increase the amount of profit to a greater extent compared to enterprises with a lower value of this coefficient.
The specific ratio of the increase in the amount of profit and the value of the volume of production (sales), achieved at a set value of the coefficient of production leverage, is characterized by the parameter "effect of production leverage".
The standard formula for calculating this indicator is:
, (7.8)
where EPR is the effect of the production lever;
?П - profit growth rate;
?OP - the rate of increase in production (sales).
By setting one or another rate of increase in the volume of production, it is always possible to calculate the extent to which the mass of profit increases with the value of the coefficient of production leverage prevailing at the enterprise.
The positive impact of the operating lever begins to manifest itself only after the company has overcome the break-even point of its activities.
The threshold of profitability is such a proceeds from the sale at which the company no longer has losses, but still does not have profits. Marginal income is enough to cover fixed costs, and the profit is zero.
Profitability Threshold (PR) can be calculated as follows:
, (7.9) where KMD is the coefficient of marginal income, the share of marginal income in sales proceeds;
B is sales revenue.
Having determined what quantity of manufactured goods corresponds, at given selling prices, to the profitability threshold, it is possible to calculate the threshold (critical) value of the volume of production (in pieces, etc.) (PKT). Below this quantity, it is unprofitable for the enterprise to produce. The threshold value is found by the formula:
(7.10) After breaking the break-even point, the higher the impact of the OP, the greater strength the impact on profit growth will have the company, increasing the volume of sales.
The greatest positive impact of OP is achieved in a field as close as possible to the breakeven point.
Using operating leverage, you can choose the most effective financial policy of the enterprise.
The key elements of operational analysis are: operating leverage, margin of profitability and financial strength of the enterprise.
The margin of financial strength of an enterprise (FFR) is the difference between the actual sales proceeds achieved and the profitability threshold. If the sales proceeds fall below the profitability threshold, then financial condition enterprises are deteriorating, there is a shortage of liquid funds:
(7.11)
The relative size of the financial safety margin as a percentage is determined by the formula:
. (7.12) The margin of financial strength is the higher, the lower the force of the impact of the operating leverage.
. (7.13)
Topic 18. Financial and operational leverage and their joint actions
§one. The concept and essence of leverage or leverage
The creation and operation of an enterprise is a process of investing financial results in order to make a profit. The asset management process aimed at increasing profits is characterized by the indicator leverage or lever. In the financial aspect, this is a certain factor, a slight change in which will lead to significant changes in performance indicators.
The concept of leverage is ambiguously interpreted in the literature. However, despite the multivariance, it allows you to determine the optimal volume of production, the structure of liabilities, calculate the effectiveness of investments and financial risks.
Exists two types of lever, which are determined by rearranging the itemization of the income statement items. Net income is the difference between revenue and costs of two types - operating and financial. They are not interchangeable, but their values can be controlled. This division of costs is very important in a market economy. The amount of net profit depends on how efficiently the resources provided to the company are used, as well as on the structure of sources. The first point is reflected in the ratio between fixed and working capital. An increase in the share of fixed assets is associated with an increase in fixed costs and, at least in theory, with a decrease in variable costs. The ratio of fixed and variable costs in the cost associated with the strategy of the enterprise and its technological policy.
The relationship between variable and fixed costs is non-linear and is estimated operational(production) lever.
Operating lever– potential opportunity to influence gross profit by changing the cost structure.
The level of operating leverage is usually measured by the ratio of the growth rate of profit before taxes and interest to the growth rate of revenue or physical volume:
Y op \u003d DOL \u003d T p EBIT / T p BP,
Uop - level of operating leverage;
EBIT - earnings before taxes and interest;
VR - sales proceeds;
T r EBIT - the growth rate of profit before taxes and interest;
T r BP - the growth rate of sales proceeds.
The level of operating leverage shows the degree of sensitivity of gross profit to changes in production volumes. At its high values, even small changes in production volumes will lead to a significant change in gross profit. Enterprises with high proportion technological component, have enough high level operating lever.
Sales revenue is calculated by the formula:
Q is the physical volume of production;
P is the unit price of the product.
Profit before taxes and interest is calculated by the formula:
EBIT = Q * P - (Q * V + F) = Q * (P - V) - F,
V - variable costs per unit of production;
F - fixed costs.
Assume that the volume of production increased by 1%. Then:
EBIT = 1.01 * Q * (P - V) - F,
The absolute change in profit is:
ΔEBIT = 1.01 * Q * (P - V) - F - Q * (P - V) + F = 0.01 * Q * (P - V)
Let's find the growth rate:
T pr EBIT \u003d 0.01 * Q * (P - V) / * 100% \u003d Q * (P - V) / \u003d (EBIT + F) / EBIT \u003d MD / P r,
MD - marginal income;
P r - profit.
It can be seen from the formula that if the company's fixed costs are zero, then the operating leverage force is 1.
Example. The company's management intends to increase sales revenue by 10% from 40 to 44 thousand rubles. Total variable costs amounted to 31 thousand rubles, fixed costs - 3 thousand rubles. Calculate the amount of profit corresponding to the new level of revenue in the traditional way and using operating leverage.
V 1 \u003d 31 + 31 * 0.1 \u003d 34.1 thousand rubles.
P p 1 \u003d 44 - 34.1 - 3 \u003d 6.9 thousand rubles.
Profit calculation with operating leverage:
P p 0 \u003d 40 - 31 - 3 \u003d 6 thousand rubles.
MD 0 \u003d 40 - 31 \u003d 9 thousand rubles.
SVPR \u003d MD / P p \u003d 9 / 6 \u003d 1.5,
where SVPR is the force of the production leverage.
If revenue increases by 10% with an operating leverage of 1.5, then profit growth will be 15%:
T pr Pr \u003d 10% * 1.5 \u003d 15%
P p 1 \u003d 6 + 6 * 0.15 \u003d 6.9 thousand rubles.
With an increase in sales revenue. It occurs under the influence of fixed costs for the production process and sales. At the same time, these costs remain unchanged, while revenues grow.
The strength of the operating leverage shows how many percent there will be a change in profit with an increase (decrease) in revenue by 1%. The higher the share of costs (fixed) used in production and sales, the more powerful the leverage. The formula for determining it is the difference between revenue and cost/profit.
The definition of "lever" is used in various sciences. it special device, which allows you to increase the impact on a particular object. In economics, fixed costs act as such a mechanism. The operating lever reveals how much the company depends on the costs included in this indicator. This indicator characterizes business risk.
The effect of operating leverage is observed in the fact that even a small change in revenue leads to a stronger increase 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. Therefore, the business risk is significant. If such an enterprise changes even slightly the volume of sales, it will receive a significant fluctuation in profits.
Every organization has a break-even point. In it, the level of operating leverage tends to infinity. But with a slight deviation from this point, a quite significant change in profitability occurs. And the greater the deviation from the breakeven point, the less revenue 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 in terms of total sales proceeds 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. In this case, even a decrease in the level does not matter. Only fixed costs affect the effect of operating leverage. Its analysis is important for financial managers. The study of operating leverage helps to choose the right strategy in managing profits, costs and business risk.
There are several factors that affect the level of production leverage:
The price at which the product is sold;
Volume of sales;
Costs are mostly fixed.
If the market has developed an unfavorable conjuncture, then this leads to a decrease in sales. This usually happens in the first stage. life cycle product. Then the break-even point has not yet been overcome. And this requires a significant reduction in fixed costs, the calculation financial leverage. Conversely, when market conditions are favorable, cost control can be relaxed a little. A similar period can be used to modernize fixed assets, invest in new projects, purchase assets, etc.
The sectoral affiliation of the enterprise dictates certain requirements for the amount of capital investments, labor automation, for the qualifications of specialists, etc. If the organization works in the field of mechanical engineering, heavy industry, then the management of the operating lever is difficult. This comes with high fixed costs. But if the firm is engaged in the provision of services, then the regulation of operating leverage is quite simple.
Purposeful management of variable and fixed costs, changing them depending on the current market situation will reduce business risk and increase
Plan
Introduction
1 Essence, concept and methods of calculation operating leverage in financial management
1.1 The concept of operating leverage
1.2 The effect of operating leverage. Essence and methods for calculating the impact force of operational analysis
1.3 Three components of operating leverage
2 Using the operating lever
Conclusion
Bibliography
Introduction
One of the most important tasks of an enterprise is to assess its financial position, which is possible with a combination of methods that allow determining the state of affairs of an enterprise as a result of analyzing its activities over a finite time interval. The purpose of this analysis is to obtain information about its financial position, solvency and profitability.
Operational analysis, which tracks the dependence of the financial results of the company on the volume of production (sales), is effective method for operational and strategic planning. The task of operational analysis is to find the most profitable combination of variable and fixed costs, price and sales volume. The key elements of operational analysis are the gross margin, operating and financial leverage, profit margin, and the firm's margin of safety.
In conditions market economy the well-being of any enterprise depends on the amount of profit received. One of the tools for managing and influencing the balance sheet profit of an enterprise is operating leverage (lever). It allows you to evaluate the economic benefits as a result of changes in the cost structure and output volume. Analysts use operating leverage to determine how sensitive a company's operating profit is to changes in sales volume. This indicator is closely related to the calculation of the break-even area, i.e. points with zero operating profit (total revenues equal to total costs).
In general, the operating production leverage (leverage) is a process of managing the assets and liabilities of an enterprise, aimed at increasing profits, i.e. this is a certain factor, a small change of which can lead to a significant change in performance indicators, give the so-called leverage effect or leverage effect.
Target this study- to study the methods of calculation and analysis of the operating leverage in the management of the financial mechanism of the enterprise. To achieve this goal, the following tasks were presented:
1) consider the concept and use of operating leverage;
2) study the effect of operating leverage;
3) consider the relationship between the effect of operating leverage and the entrepreneurial risk of the enterprise.
The relevance of this work is due to the fact that every enterprise today seeks to maximize its profits, and the operating or production leverage is the potential opportunity to influence the balance sheet profit by changing the cost structure and output volume.
1 The essence, concept and methods of calculating the operating leverage in
financial management
1.1 The concept of operating leverage
AT 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 operational (production) financial management. 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.
Operating leverage is closely related to the cost structure. Operating leverage or production leverage (leverage in literal translation - leverage) is a mechanism for managing the profit of an enterprise based on optimizing the ratio of fixed and variable costs. With its help, you can predict the change in the profit of the enterprise depending on the change in sales volume, as well as determine the break-even point.
A necessary condition for the application of the mechanism of operating leverage is the use of the marginal method based on the division of the company's costs into fixed and variable. The lower the share of fixed costs in total amount costs 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 per unit of production can significantly affect the trend in profits or costs. This is due to the fact that each additional unit of production brings some additional contribution, 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 contribution from an additional unit of goods can be expressed in a significant jump. change in profit. As soon as the break-even point is reached, there is profit, which begins to grow faster than sales. The operating lever is a tool for defining and analyzing this dependence. In other words, it is designed to establish the impact of profit on the change in sales.
The level of operating leverage is calculated as:
Where OR is the level of operating leverage.
1.2 The effect of operating leverage. Essence and calculation methods
the impact forces of operational analysis
Operational analysis works with such parameters of the company's activities as costs, sales volume and profit. Great importance for operational analysis has a division of costs into fixed and variable. The main values used in operational analysis are: gross margin (coverage amount), operating leverage strength, profitability threshold (break-even point), financial safety margin.
Gross margin (coverage amount). This value is calculated as the difference between sales revenue and variable costs. It shows whether the company has enough funds to cover fixed costs and make a profit.
The force of the operating lever. It is calculated as the ratio of gross margin to profit after interest, but before income tax.
The dependence of the financial results of the enterprise's operating activities, ceteris paribus, on assumptions related to changes in the volume of production and sales of marketable products, fixed costs and variable costs of production, is the content of the analysis of operating leverage.
The impact of an increase in the volume of production and sales of marketable products on the profit of an enterprise is determined by the concept of operating leverage, the impact of which is manifested in the fact that a change in revenue is accompanied by a stronger dynamics of change in profit.
Together with this indicator, when analyzing the financial and economic activities of an enterprise, the magnitude of the effect of the operating leverage (leverage) is used, which is the reciprocal of the security threshold:
or 
,
where ESM is the effect of operating leverage.
Operating leverage shows how much profit will change if revenue changes by 1%. The effect of operating leverage is that a change in sales revenue (expressed as a percentage) always results in a larger change in profit (expressed as a percentage). The strength of operating leverage is a measure of the entrepreneurial risk associated with an enterprise. The higher it is, the greater the risk to shareholders.
The value of the operating leverage effect found using the formula is further used to predict the change in profit depending on the change in the company's revenue. To do this, use the following formula:
,
where D BP - change in revenue in%; D P - change in profit in%.
Example 1 .
The management of the Technologiya enterprise intends to increase sales revenue by 10% (from UAH 50,000 to UAH 55,000) due to the growth in sales of electrical goods, while not going beyond the relevant period. The total variable costs for the initial version are UAH 36,000. Fixed costs are equal to 4,000 UAH. You can calculate the amount of profit in accordance with the new sales revenue traditional method or using the operating lever.
Traditional method:
1. The initial profit is 10,000 UAH. (50,000 - 36,000 - 4,000).
2. Variable costs for the planned volume of production will increase by 10%, that is, they will be equal to UAH 39,600. (36,000 x 1.1).
3. New profit: 55,000 - 39,600 - 4,000 = 11,400 UAH.
Operating lever method :
1. The strength of the influence of the operating lever: (50,000 - 36,000 / / 10,000) = 1.4. This means that a 10% increase in revenue should bring a profit increase of 14% (10 x 1.4), that is, 10,000 x 0.14 = 1,400 UAH.
The effect of operating leverage is that any change in sales revenue results in an even larger change in profits. 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 and production costs, the stronger the impact of operating leverage. Conversely, with an increase in sales, the share of semi-fixed costs falls and the impact of operating leverage falls.
Profitability threshold (break-even point) is an indicator that characterizes the volume of product sales, at which the company's revenue from the sale of products (works, services) is equal to all its total costs. That is, this is the volume of sales at which the business entity has neither profit nor loss.
In practice, three methods are used to calculate the break-even point: graphical, equations, and marginal income.
With the graphical method, finding the break-even point is reduced to building a comprehensive schedule of "costs - production volume - profit". The sequence of constructing the graph is as follows: a line of fixed costs is drawn on the graph, for which a straight line is drawn parallel to the x-axis; on the x-axis, a point is selected, that is, a volume value. To find the break-even point, the value of total costs (fixed and variable) is calculated. A straight line is drawn on the graph corresponding to this value; again, any point on the abscissa axis is selected and for it the amount of proceeds from the sale is found. A straight line is constructed corresponding to the given value.
Direct lines show the dependence of variable and fixed costs, as well as revenue on the volume of production. The point of the critical volume of production shows the volume of production at which the proceeds from the sale is equal to its full cost. After determining the break-even point, profit planning is based on the effect of the operating (production) leverage, that is, the margin of financial strength at which the company can afford to reduce the volume of sales without leading to a loss. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The revenue corresponding to the break-even point is called the threshold revenue. The volume of production (sales) at the break-even point is called the threshold volume of production (sales). If the company sells products less than the threshold sales volume, then it suffers losses; if more, it makes a profit. Knowing the threshold of profitability, you can calculate the critical volume of production:
Margin of financial strength. This is the difference between the company's revenue and the threshold of profitability. The margin of financial safety shows how much revenue can decrease so that the company still does not incur losses. The margin of financial strength is calculated by the formula:
FFP = VP - RTHRESHOLD
The higher the power of influence of the operating lever, the lower the margin of financial strength.
Example 2 . Calculation of the impact force of the operating lever
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
2. Let's assume that next year sales growth is predicted 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 = 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".
The calculation of the above values makes it possible to assess the sustainability of the company's entrepreneurial activity and the entrepreneurial risk associated with it.
And if in the first case the chain is considered:
Cost (Cost) - Volume (Sales proceeds) - Profit (Gross profit), which makes it possible to calculate the profitability indicator of turnover, the self-sufficiency ratio and the indicator of profitability of production by costs, then when calculating cash flows, we have an almost similar scheme:
outflow Money- Cash inflow - Net cash flow, (Payments) (Receipts) (Difference) which makes it possible to calculate various indicators of liquidity and solvency.
However, in practice, a situation arises when an enterprise has no money, but there is a profit, or there are funds, but there is no profit. The problem lies in the mismatch in time of the movement of material and cash flows. In most sources of modern financial and economic literature, the problem of liquidity - profitability is considered within the framework of management working capital and is missed when analyzing enterprise cost management processes.
Although in this perspective, the most significant bottlenecks in the functioning of domestic industrial enterprises: payment, or rather "non-payment" discipline, problems of dividing costs into fixed and variable, access to the problem of intra-company pricing, the problem of assessing cash receipts and payments over time.
Theoretically interesting is the fact that when considering the CVP model in the context of cash flows, the behavior of the so-called fixed and variable costs changes completely. It becomes possible to plan the level of "real" rather than prospective profitability within shorter periods, based on agreements for the repayment of accounts payable and receivable.
The use of operational analysis of the standard model is complicated not only by the above limitations, but also by the specifics of compiling financial statements(once a quarter, every six months, a year). For the purposes of operational management of costs and results, this frequency is clearly not enough.
Differences in the structure of the assortment of the enterprise are also the "bottleneck" of this type of cost analysis. Given the difficulty of dividing mixed costs into fixed and variable parts, the problems with the further distribution of allocated and "pure" fixed costs for a specific type of product, the break-even point for a specific type of enterprise product will be calculated with significant assumptions.
In order to obtain more timely information and limit assortment assumptions, it is proposed to use a methodology that directly takes into account the movement of financial flows (payments for cost items and receipts for specific products sold, which ultimately form the cost of production and sales revenue).
The production activity of the majority of industrial enterprises is regulated by certain technologies, state standards and established terms of settlements with creditors and debtors. For this reason, it is necessary to consider the methodology in the context of cash flow cycles, production cycles.
There is a direct relationship between operating leverage and entrepreneurial risk. That is, the greater the operating leverage (the angle between revenue and total costs), the greater the entrepreneurial risk. But at the same time, the higher the risk, the greater the reward.
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1 - sales proceeds; 2 - operating profit; 3 - operating losses; 4 - total costs; 5 - breakeven point; 6 - fixed costs.
Rice. 1.1 Low and high operating leverage
The effect of operating leverage is that any change in sales revenue (due to a change in volume) leads to an even greater 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.
The strength of the impact of the operating lever 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.
As a rule, the higher the fixed costs of the enterprise, the higher the entrepreneurial risk associated with it. In turn, high fixed costs are usually the result of a company having expensive fixed assets that need maintenance and periodic repairs.
1.3 Three components of operating leverage
The main three components of operating leverage are fixed costs, variable costs and price. All of them, to one degree or another, are related to the volume of sales. By changing them, managers can influence sales. Change in fixed costs If managers can significantly cut fixed cost items, for example by cutting overheads, the minimum breakeven volume can be significantly reduced. As a result, the effect of the accelerated change in profits will start to work at a lower level. 
1 - new minimum break-even volume 2 - old minimum break-even volume Reduced fixed costs by 25% from 200 tr. up to 150 tr. led to a shift in the break-even point to the left by 100 pcs. or 25% from 400 pcs. up to 300 pcs. As can be seen from the figure, reducing fixed costs is a direct and effective method reduce the minimum breakeven volume to increase the profitability of the firm. Changing variable costs A decrease in direct variable costs of production leads to an increase in the indemnity that each additional unit brings, which in turn affects the increase in profits, as well as a shift in the break-even point. A decrease in direct variable costs can be achieved by switching to new more modern materials production or by reorienting to a supplier that offers less expensive components. 
1 - new minimum break-even volume 2 - old minimum break-even volume up to 356 pcs. As we can see, this shift is less significant than with the same share of reduction in fixed costs. The reason for this lies in the fact that the reduction applies only to a small fraction of the total cost of production, since in this example the variable costs are relatively small. Price change If the change in fixed and variable costs in most cases is controlled by management, then the price change in most cases is dictated by the market demand. A change in the price of a product usually affects the market equilibrium and directly affects the volume of production in physical terms. As a result, the analysis of price changes will not be enough to determine its impact on break-even, since as a result of price changes, the volume of products sold will also change. In other words, a change in price may have a disproportionate effect on the volume of products sold. An increase in price can shift the break-even point to the left, but at the same time significantly reduce the volume of products sold, which will lead to a loss of profit. Also, an increase in price can shift the break-even point to the right, but at the same time increase the volume of sales so much that profits increase very significantly. 
As we can see, as a result of reducing the price of products by 100r. The break-even point has shifted 100 pcs. to the right. That is, now, in order to achieve the same level of profit as before, the company must sell 100 units. additionally. As we can see, the change in price affects internal results, but often it has an even greater effect on the market. Therefore, if immediately after the price reduction, competitors in the market also reduced their prices, then this decision was erroneous, since everyone had a decrease in profit. If the advantage in increased sales volume can be obtained over a long period of time, then the decision to reduce the price was correct. Therefore, when changing prices, it is necessary to take into account the requirements of the market more than the internal needs of the enterprise.
2 Using the operating lever
Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits. The value of the production lever can change under the influence of:
Prices and sales volume;
Variable and fixed costs;
Combinations of any of the above factors.
The change in the effect of the production lever is based on the change in the share of fixed costs in the total cost of the enterprise. At the same time, it must be borne in mind that the sensitivity of profit to changes in sales volume can be ambiguous in enterprises with a different ratio of fixed and variable costs. The lower the share 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.
It should be noted that in specific situations, the manifestation of the mechanism of production leverage 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.
In order for the positive effect of the production lever to begin to manifest itself, 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 sales volume, therefore, the higher the amount of fixed costs, the later, all other things being equal, it will reach the break-even point of its activities. In this regard, until the enterprise has ensured the break-even of its activities, a high level of fixed costs will be an additional “burden” on the way to reaching the break-even point.
2. As sales increase further 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 increasing rate of increase in the amount of profit.
3. The mechanism of industrial leverage also has the opposite direction - with any decrease in sales, the size of the enterprise's profit will decrease even more.
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 a short period. 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 the next jump in the amount of fixed costs occurs in the process of increasing sales, the enterprise needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.
With unfavorable commodity market conditions that determine a possible decrease in sales, as well as in the early stages of the life cycle of an enterprise, when it has not yet overcome the break-even point, it is necessary to take measures to reduce the fixed costs of the enterprise. And vice versa, with a favorable commodity market situation and the presence of a certain margin of safety, the requirements for the implementation of a regime of saving fixed costs can be significantly weakened. During such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing fixed production assets.
When managing fixed costs, it should be borne in mind that their high level is largely determined by industry specifics activities that determine a different level of capital intensity of manufactured products, differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with high value production leverage, lose flexibility in managing their costs.
However, despite these objective constraints, each enterprise has enough opportunities to reduce, if necessary, the amount and proportion of fixed costs. Such reserves include: a significant reduction in overhead costs (management costs) in case of unfavorable commodity market conditions; sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation charges; widespread use of short-term forms of leasing 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 company overcomes the break-even point leads to an increase in marginal income, which allows you to quickly overcome this point. After breaking the break-even point, the amount of savings in variable costs will provide a direct increase in the profit of the enterprise. The main reserves for saving variable costs include: reducing the number of employees of the main and auxiliary industries by ensuring the growth of their labor productivity; reduction in the size of stocks of raw materials, materials and finished products during periods of unfavorable commodity market conditions; provision of favorable conditions for the supply of raw materials and materials for the enterprise, and others.
An analysis of the properties of the operating leverage arising from its definition allows us to draw the following conclusions: 1. With the same total costs, the operating leverage is greater, the smaller the share of variable costs or the greater the share of fixed costs in the total cost. 2. The operating leverage is higher, the closer to the break-even point the volume of actual sales is “located”, which is the reason for the high risk. 3. A low leverage situation comes with less risk but also less reward in the profit formula. Based on the results of the operational analysis, we can conclude that the company is attractive to investors because it has: a) sufficient (more than 10%) margin of financial strength; b) favorable meaning the force of operating leverage with a reasonable proportion of fixed costs in the total cost.
Understanding the essence of the operating lever and the ability to manage it provide additional opportunities for using this tool in the company's investment policy. 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. With the release of products with a high market capacity, with the confidence of managers in sales volumes that significantly exceed the break-even point, it is possible to use technologies that require high fixed costs, the implementation investment projects for the installation of highly automated lines, other capital-intensive technologies. In the areas 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 that have a lower proportion of variable costs.
The general conclusion is:
An enterprise with a higher operational risk takes more risks in the event of a deterioration in market conditions, and at the same time it has advantages in the event of an improvement in the market situation;
The enterprise must navigate the market situation and adjust the cost structure accordingly.
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;
Develop a flexible pricing policy, based on it, increase turnover and drive out competitors;
Save material and financial resources of the enterprise, get additional working capital;
Evaluate the effectiveness of the activities of the company's divisions, staff motivation.
Conclusion
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 activities under various trends in the commodity market and the stage of the life cycle of an enterprise.
The use of the mechanism of production leverage, targeted management of fixed and variable costs, the rapid change in their ratio under changing business conditions will increase the potential for generating profits for the enterprise.
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.
Understanding the essence of the operating lever and the ability to manage it is additional features to use this tool 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. With the release of products with a high market capacity, with the confidence of managers in sales volumes that significantly exceed the break-even point, it is possible to use technologies that require high fixed costs, implement investment projects for the installation of highly automated lines, and other capital-intensive technologies. In the areas 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 that have a lower proportion of variable costs.
The different degree of influence of variable and fixed costs on the amount of profit when changing production volumes causes the effect of operating leverage (production leverage). It consists in the fact that any change in sales volumes causes a stronger change in profits. In addition, the strength of operating leverage increases with an increase in the proportion of fixed costs.
An analysis of the properties of the operating lever, arising from its definition, allows us to draw the following conclusions:
1. With the same total costs, the greater the operating leverage, the smaller the share of variable costs or the greater the share of fixed costs in the total cost.
2. The operating leverage is higher, the closer to the break-even point the volume of actual sales is “located”, which is the reason for the high risk.
3. A low leverage situation comes with less risk but also less reward in the profit formula. According to the results of the operational analysis, it can be concluded that the company is attractive to investors because it has:
a) sufficient (more than 10%) margin of financial strength;
b) a favorable value of the impact force of the operating lever with a reasonable proportion of fixed costs in the total cost.
It can be noted that the weaker the impact of the operating leverage, the greater the margin of financial strength. The strength of the impact of the operating lever, as already noted, depends on the relative magnitude of fixed costs, which, with a decrease in the income of the enterprise, are difficult to reduce. high strength the impact of the operating leverage in conditions of economic instability, the fall in the effective demand of consumers means that each percentage of the decline in revenue leads to a significant drop in profits and the possibility of the company entering the zone of losses. If we define the risk of a particular enterprise as an entrepreneurial risk, then we can trace the following relationships between the strength of the operating leverage and the degree of entrepreneurial risk: with a high level of fixed costs of the enterprise and the absence of their reduction during the period of falling demand for products, entrepreneurial risk increases. Small enterprises specializing in the production of one type of product are characterized by a high degree of entrepreneurial risk. In the same direction, the instability of demand and prices for finished products, prices for raw materials and energy resources.
Bibliography:
1. Analysis and diagnostics of the financial and economic activities of the enterprise. P.P., Vikulenko A.E., Ovchinnikova L.A. and etc.: Tutorial for universities / Edited by P.P. Taburchak, V.M. Tumin and M.S. Saprykin. - Rostov n. / D: Phoenix, 2002. - 352C.
2. Ansoff I. Strategic management. - M.: Economics, 2003
3. Balabanov I.T. Fundamentals of financial management. How to manage capital? - M. "Finance and statistics", 2003.
4. Balabanov I.T. Financial analysis and planning of an economic entity. - 2nd ed., add. - M.: Finance and statistics, 2001. - 208C.
5. Blank I.A. Capital Management. - Kyiv.: Elga, Nika-Center, 2004. - 574С.
6. Guskova E.A., Orlova A.I. Operational leverage as a tool for profit management and forecasting.// Economist's Handbook. - 2004. - No. 2. -19 - 27C.
7. Efimova O.V. How to analyze the financial position of the company. - M.: Intel-Sintez, 2002.
8. Pavlova L.N. Financial management. Cash flow management of the enterprise: Textbook. - M.: "Banks and exchanges", "UNITI", 2001.
9. Ruzhanskaya N.V. Features of the calculation of financial leverage in the Russian practice of financial management // Financial management No. 6, 2005.
10. Ryndin A.G., Shamaev G.A. Organization of financial management at the enterprise. - M.: Publishing house "RDD", 1999.
11. Selezneva N.N. Ionova A.F. The financial analysis. Financial management: Proc. Allowance for universities. - 2nd ed., revised. and additional - M.: UNITI-DANA, 2003. - 639C.
12. Financial management: theory and practice: Textbook. / Ed. E.S. Stoyanova. – 5th ed., revised. and additional - M .: Perspective, 2000. - 656C.
13. Finance. Proc. allowance / Ed. prof. A.M. Kovaleva. - M.: Finance and statistics, 1996.
14. Sheremet A.D., Saifulin R.S. Enterprise finance. - M.: "INFRA-M", 1997.
15. Sheremet A.D., Saifullin R.S. Methodology financial analysis. - M.: INFRA-M, 1995. - 176C.
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 within a constant amount of total costs will affect financial indicators in order to assess risks.
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 / Appr. + 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 profits is measured gradually becomes larger. Operating leverage works in both directions, both on increases and decreases in sales. Therefore, a business 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 strength of the impact of the operating leverage is stronger, the lower the profit and the greater 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- amount; 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 of operating 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 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.
Kinds dividend policy in 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 is usually used at the stage of formation of the company and is associated with a high level of 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 payments in relation to profit (or a norm for the distribution of profit into consumed and capitalized parts). 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.
In 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 is associated with many factors that affect its result. 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.
Analysis 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 impact 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 when choosing profitable assortment policy options - the 50:50 rule.
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 the material and financial resources of the enterprise, obtain additional working capital;
- to evaluate the efficiency of the company's divisions, staff motivation.
Operating leverage (production leverage) is a potential opportunity to influence 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. Operating lever level has highest value 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.
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The process of financial management, as you know, is associated with the concept of leverage. Leverage 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 operating leverage effect 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 profits.
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 obtained 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 improve 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 reduced. During such periods, the enterprise can expand the volume of real investments by modernizing the basic production assets.
