Operating and financial leverage. Level, effect, score, coefficient, operational leverage formula

In the economic literature, such a notion as "leverage" (operational and financial) is quite common.

Definition

Thus, the production leverage is represented by the ratio of the variable and fixed costs of the enterprise, which affects the operating profit, which is determined without taking into account taxes and interest. With a significant amount of fixed costs, the business entity has a high level operating leverage, which, with small changes in production volumes, leads to significant changes in operating profit.

In other words, the operation of such a production lever also manifests itself in the generation of strong changes in profit with any changes in sales revenue.

Not for nothing, along with the term "leverage" in this article is used its synonym - "lever". Indeed, in English, leverage means "lever".

Thus, production leverage (operational - its other name) is a mechanism for effective profit management of any business entity, which is based on improving the ratio of variables and fixed costs. With the help of this indicator it becomes possible to plan any changes in profit at the enterprise, depending on changes in sales volumes. In this case, a break-even point can be calculated.

Classification of costs

A prerequisite for the use of an operating leverage (leverage) is the use of a marginal method based on the separation of all costs into variables and constants.

So, the higher the share of fixed costs in the general expenses of the business entity, the less the profit will change in relation to the rate of changes in the company's revenue.

Returning to the classification of costs, it should be noted that their level (for example, fixed costs) in the company's revenue has a significant impact on the trend of changes in the value of costs or profits. This is due to the fact that the additional yield, going to cover the fixed costs, is formed from an additional unit of output. At the same time, the increase in total revenues from such an additional unit of finished goods (or goods) is expressed in a change in the amount of profit. When the breakeven level is reached, the profit is formed, which is characterized by a faster growth than the volume of sales.

Effect of operating leverage

This operating lever is a fairly effective tool in determining and analyzing the above dependence. In other words, its main purpose is to determine the effect of profit on any changes in sales volumes.

The essence of its action is that the increase in revenue contributes to a greater increase in the amount of profit. At the same time, this growth rate can be limited by variable and constant costs. Economists have proved that the higher the share of fixed costs, the higher its limitation.

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

Having calculated the operational operating leverage, it is possible to predict with sufficient accuracy any change in profit under various changes in the amount of revenue.

For a better understanding of this economic indicator, it is necessary to consider the procedure for calculating it.

Operating leverage

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

Considering revenue as the sum of costs (variables and constants) and profits, you can understand that the formula for calculating the operational leverage will take the following form:

Ол = (Пр + Рпер + Рпост) / Пр = 1 + Рпер / Пр + Рпост / Пр.

Evaluation of operating leverage is not in percentage, since this indicator is represented by the ratio of marginal revenue to profit. In connection with the fact that in addition to profits, the margin income includes also the sum of fixed costs, the value of the production lever is always higher than one.

Operational leveridzh as an indicator of the enterprise

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

Economists have proved that a high level of fixed costs in the general structure of costs of a business entity is not always a negative phenomenon. This is due to the fact that it is impossible to simply absolutize the amount of marginal revenue. The increasing level of operational leverage shows an increase in the company's total production capacity, technical re-equipment, and increased labor productivity. The profit of a business entity with a high level of production leverage is too sensitive to any changes in the value of revenue. With a sharp drop in sales, this enterprise quickly "falls" below the breakeven point. In other words, an enterprise with a very high leverage is risky enough.

Characteristics of other types of economic instruments

In the economic literature, one can find simultaneous use of such indicators as operational and financial leverage. At the same time, if the operating leverage characterizes the dynamics of profit depending on changes in the amount of the company's revenue, financial leverage already characterizes the changes in the value of profit less the payments on interest on loans and credits in response to changes in operating profit.

There is also another economic indicator - the aggregate leverage that combines operational and financial leverage and shows how (by how many percentage points) there will be changes in profits after paying interest with a change in revenue by one percent.

Credit (financial) leverage

This economic indicator is the ratio of the company's own and borrowed capital, as well as its impact on profit. With increasing share of borrowed capital, the value of net profit decreases. This is due to an increase in the cost of paying interest on loans.

The ratio of debt to equity shows the level of risk (financial stability). An enterprise with a high level of borrowed funds is a financially dependent company. If an enterprise finances its own economic activity only at the expense of its own capital, then it can be classified as a financially independent company.

Payment for the use of borrowed capital is often lower than the profit, which is provided additionally. The specified additional profit can be summed up with the profit received with use of own capital that promotes increase of factor of profitability.

Solved problems

For a complete analysis of this economic indicator, it is necessary to list the tasks that are solved with the help of this operating leverage:

• Determination of the financial result both for the enterprise as a whole and for certain types of products using the "expenses - volumes - profit" scheme;
• Calculation of the critical production point using it in making certain managerial decisions, as well as setting the cost of work;
• Making decisions on the implementation of additional orders and considering them for possible appreciation in terms of fixed costs;
• Consideration of the issue of stopping the release of certain types of goods when the price falls below the level of variable costs;
• Maximization of profit due to a relative reduction in fixed costs;
• Use of the level of profitability with the development of production programs, the establishment of prices for goods.

Conclusion

Summarizing the above, it should be noted that the operating leverage can be increased by borrowing. A very high production leverage can be leveled using a financial lever. Considered in this article such effective economic instruments contribute to the achievement by the enterprise of the necessary return on the funds invested with the control of the level of risk.