78 how the strength of the operating lever is determined. Operating leverage effect (operating leverage)

Definition

Operating leverage effect ( English Degree of Operating Leverage, DOL) is a coefficient that shows the degree of efficiency in managing fixed costs and the degree of their impact on operating income ( English Earnings before interest and taxes, EBIT). In other words, the ratio shows how much the operating income will change if the volume of sales proceeds changes by 1%. Companies with a high ratio are more sensitive to changes in sales volume.

High or low operating lever

The low value of the operating leverage ratio indicates the prevailing share of variable expenses in the total expenses of the company. Thus, sales growth will have a weaker impact on operating income growth, but such companies need to generate lower sales revenue to cover fixed costs. Ceteris paribus, such companies are more stable and less sensitive to changes in sales.

The high value of the operating leverage ratio indicates the predominance of fixed costs in the structure of the company's total costs. Such companies receive a higher increase in operating income for each unit of increase in sales, but are also more sensitive to its decrease.

It is important to remember that a direct comparison of the operating leverage of companies from different industries is incorrect, since industry specifics largely determine the ratio of fixed and variable costs.

Formula

There are several approaches to calculating the effect of operating leverage, which, nevertheless, lead to the same result.

IN general view it is calculated as the ratio of the percentage change in operating income to the percentage change in sales.

Another approach to calculating the operating leverage ratio is based on the marginal profit ( English Contribution Margin).

This formula can be transformed as follows.

where S - sales revenue, TVC - total variable costs, FC - fixed costs.

Also, the operating leverage can be calculated as the ratio of the contribution margin ratio ( English Contribution Margin Ratio) to the operating margin ( English Operating Margin Ratio).

In turn, the marginal profit ratio is calculated as the ratio of marginal profit to sales proceeds.

The operating profit ratio is calculated as the ratio of operating income to sales revenue.

Calculation example

IN reporting period companies showed the following indicators.

Company A

• Percent change in operating income +20%
• Percent change in sales revenue +16%

Company B

• Sales proceeds 5 mln.
• Total variable costs 2.5 million c.u.
• Fixed costs 1 million c.u.

Company B

• Sales proceeds 7.5 mln.
• Cumulative marginal profit of 4 million c.u.
• Operating profit ratio 0.2

The operating leverage ratio for each of the companies will be as follows:

Let's assume that each company has a 5% increase in sales. In this case, Company A's operating income will increase by 6.25% (1.25×5%), Company B's by 8.35% (1.67×5%), and Company C's by 13.35% ( 2.67×5%).

If all companies experience a 3% decrease in sales, Company A's operating income will decrease by 3.75% (1.25×3%), Company B's by 5% (1.67×3%), and Company B by 8% (2.67×3%).

A graphical interpretation of the impact of operating leverage on the amount of operating income is shown in the figure.

As you can see from the chart, Company B is the most vulnerable to a decline in sales, while Company A will show the most resilience. On the contrary, with an increase in sales volume, Company B will show the highest growth rate of operating income, and Company A will show the lowest.

conclusions

As mentioned above, companies with high operating leverage are vulnerable to even small declines in sales. In other words, a few percent drop in sales can result in a significant loss of operating income or even an operating loss. On the one hand, such companies must carefully manage their fixed costs and accurately predict changes in sales volume. On the other hand, in favorable market conditions they have higher operating income growth potential.

Plan

Introduction

1 Essence, concept and methods of calculating operational 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 tracking dependency financial results firms from production (sales) volumes, is an effective method for prompt and strategic planning. The task of operational analysis is to find the most profitable combination of variable and fixed costs, price and sales volume. Key elements operating analysis are gross margin, operating and financial leverage, profitability threshold 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.

The purpose of this study is to study methods for calculating and analyzing the operating leverage in managing the financial mechanism of an 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

IN modern conditions on Russian enterprises 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. 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 related to profit maximization through supply and demand, pricing policy, profitability of products, 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 lever or production leverage(leverage in literal translation - a lever) 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.

Necessary condition 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 specific gravity fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

As already mentioned, there are two types of costs in the enterprise: 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 value of the effect of the operating leverage (leverage) is used, reciprocal safety 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 revenue from the sale of products in the traditional way or using operating leverage.

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 when choosing profitable assortment policy options - the 50:50 rule.

The calculation of the above values ​​allows us to evaluate the stability entrepreneurial activity companies and entrepreneurial risk associated with it.

And if in the first case the chain is considered:

Cost - Volume - Profit ( Gross profit), which makes it possible to calculate the indicator of profitability of turnover, the self-sufficiency ratio and the indicator of profitability of production in terms of 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 in the framework of working capital management and is overlooked in the analysis of 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 a more short periods, based on agreements for the repayment of accounts payable and receivable.

The use of the operational analysis of the standard model is complicated not only by the above limitations, but also by the specifics of the preparation of financial statements (once a quarter, half a year, 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, problems with the further distribution of allocated and "pure" fixed costs for a specific type of product, break-even point specific type production of the enterprise will be calculated with significant assumptions.

In order to obtain more timely information and limit assumptions on the assortment, it is proposed to use a methodology that takes into account the direct movement of financial flows (payments for cost items and receipts for a specific sold products, ultimately forming 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.

Low Operating Leverage

High operating leverage

1 - sales proceeds; 2 - operating profit; 3 - operating losses; 4 - total costs; 5 - breakeven point; 6- fixed costs s.

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. The action of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activity of the enterprise when the volume of production changes.

The strength of the 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. Reducing direct variable costs can be achieved by switching to new, more modern production materials or by switching 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 output in in kind. 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's profits decreased. 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 to positive effect the production lever began to appear, the enterprise at the beginning must 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 company needs to overcome a new break-even point or adapt its own production activities. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

In an unfavorable environment commodity market, which determines a possible decrease in sales volume, as well as in the early stages life cycle enterprises, when they have 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 the industry specifics of the activity, which determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with a high value of 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 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 in 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) a favorable value of the impact force of the operating lever 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 instrument in the investment policy of the company. Thus, production risk in all industries can be regulated to a certain extent by managers, for example, when choosing projects with large or small 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 money and financial resources enterprises, obtain 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 management costs involves quite diverse approaches to accounting and analysis of costs, profits, entrepreneurial 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 operating lever, as already noted, depends on relative magnitude fixed costs, which are difficult to reduce with a decrease in the income of the enterprise. The high 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. For small businesses, specializing in the production of one type of product, is characterized by high degree entrepreneurial risk. In the same direction, the instability of demand and prices for finished products, prices for raw materials and energy resources.

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

With its help, you can plan a change in the organization's profit depending on the change in the volume of sales, 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 costs into fixed and variable. 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.

As already mentioned, there are two types of costs in the enterprise: variables and constants. Their structure as a whole, and in particular the level of fixed costs, in the total revenue of an enterprise or in revenue 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 profitability, 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 revenue from an additional unit of goods can be expressed in a significant sharp 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 volume. The essence of its action lies in the fact that with the growth of revenue there is a higher growth rate of profit, but this higher growth rate is limited by the ratio of fixed and variable costs. The lower the proportion of fixed costs, the lower this constraint will be.

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

Price operating leverage(Pc) is calculated by the formula:

Rts = V / P

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

Given that V \u003d P + Zper + Zpost, the formula for calculating the price operating leverage can be written as:

Rts \u003d (P + Zper + Zpost) / P \u003d 1 + Zper / P + Zpost / P

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

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

Rn \u003d (V-Zper) / P \u003d (P + Zpost) / P \u003d 1 + Zpost / P

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

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

the value operating leverage can be considered an indicator of the riskiness of not only the enterprise itself, but also the type of business in which this enterprise is engaged, since the ratio of fixed and variable costs in the overall cost structure is a reflection of not only the features this enterprise and his accounting policy, but also industry specifics of activity.

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

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

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

32 Analysis of operating leverage.

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

Operating leverage shows its effect in the fact that any change in sales generates a stronger change in profits. At the same time, the strength of the operating leverage (COP) reflects the degree of entrepreneurial risk: more value operating leverage, the higher the entrepreneurial risk.

Since the growth in sales revenue causes a corresponding increase in variable costs when a larger volume of raw materials, materials, labor production costs, etc. is consumed, then part of the additional revenue received will become a source of their coverage. Another part of the current costs, the so-called fixed costs (not related to the functional dependence on the volume of production), in the context of expanding the scale of the business, may also increase. This growth will be recognized as justified only if the sales proceeds grow faster. Restraining the growth of fixed costs while increasing sales of products will contribute to the generation of additional profits, as the effect of operating leverage will manifest itself.

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

SOS = Profit Margin / Sales Profit = (Sales Revenue - Variable Expenditure)/ Profit = (Profit + Post Expenditure)/Profit = Psot. expenses/profit +1

We will analyze the operating lever of an enterprise and its impact on production and economic activities, consider the formulas for calculating the price and natural leverage and analyze its assessment using an example.

Operating lever. Definition

Operating lever (operating leverage, production leverage) - shows the excess of the growth rate of profit from sales over the growth rate of the company's revenue. The purpose of the functioning of any enterprise is to increase profits from sales and, accordingly, net profit, which can be directed to increasing the productivity of the enterprise and increasing its financial efficiency (value). The use of operating leverage allows you to manage the future profit from the sales of the enterprise by planning future revenue. The main factors that affect the amount of revenue are: product price, variable, fixed costs. Therefore, the goal of management becomes the optimization of variable and fixed costs, the regulation of pricing policy to increase sales profits.

Formula for calculating price and natural operating leverage

Formula for calculating price operating leverage	The formula for calculating natural operating leverage
where: Op. leverage p - price operating leverage; Revenue - sales revenue; Net Sales - sales profit (operating profit); TVC (Total variable Costs) – total variable costs; TFC (Total Fixed Costs)	where: Op. leverage n - natural operating leverage; Revenue - sales revenue; Net Sales - sales profit (operating profit); TFC (Total Fixed Costs) - total fixed costs.

What does the operating lever show?

Price operating leverage reflects price risk, that is, the impact of price changes on the amount of profit from sales. shows the production risk, that is, the variability of profit from sales depending on the volume of output.

High operating leverage reflects a significant excess of revenue over sales profit and indicates an increase in fixed and variable costs. The increase in costs may be due to:

• Modernization of existing facilities, expansion of production facilities, increase production staff, introduction of innovations and new technologies.
• Decrease in sales prices of products, inefficient growth in the cost of wages for low-skilled personnel, an increase in the number of defects, a decrease in the efficiency of the production line, etc. This leads to an inability to provide the necessary sales volume and, as a result, reduces the margin of financial safety.

In other words, any costs at the enterprise can be both effective, increasing the production, scientific, technological potential of the enterprise, and vice versa, hindering development.

Operating leverage. How does productivity affect profits?

Operating leverage effect

Operational (production) effect leverage lies in the fact that a change in the company's revenue has a stronger impact on sales profit.

As we can see from the above table, the main factors affecting the size of the operating leverage are variable, fixed costs, and also profit from sales. Let's take a closer look at these leverage factors.

fixed costs- these are costs that do not depend on the volume of production and sale of goods, they, in practice, include: rent for production areas, wage management personnel, loan interest, unified social tax deductions, depreciation, property taxes, etc.

Variable costs - these are costs that vary depending on the volume of production and sale of goods, they include the costs of: materials, components, raw materials, fuel, etc.

Revenue from sales depends primarily on the volume of sales and the pricing policy of the enterprise.

Operational leverage of the enterprise and financial risks

The operating leverage is directly related to the financial strength of the enterprise through the ratio:

Op. Leverage - operating leverage;

ZPF - a margin of financial strength.

With the growth of the operating leverage, the financial strength of the enterprise decreases, which brings it closer to the threshold of profitability and inability to ensure sustainable financial development. Therefore, the company needs to constantly monitor its production risks and their impact on financial ones.

Consider an example of calculating the operating leverage in Excel. To do this, you need to know the following parameters: revenue, profit from sales, fixed and variable costs. As a result, the formula for calculating the price and natural operating leverage will be as follows:

Price operating leverage=B4/B5

Natural operating lever=(B6+B5)/B5

Example of calculating operating leverage in Excel

Based on the price leverage, it is possible to evaluate the impact of the company's pricing policy on the amount of profit from sales, so if the price of products increases by 2%, the profit from sales will increase by 10%. And with an increase in production volumes by 2%, the profit from sales will increase by 3.5%. Similarly, the opposite is true, with a decrease in price and volume, the resulting value of profit from sales will decrease in accordance with the leverage.

Summary

In this article, we examined the operating (production) lever, which allows us to evaluate the profit from sales, depending on the pricing and production policy of the enterprise. High leverage values ​​increase the risk of a sharp reduction in the company's profits in an unfavorable economic situation, which, as a result, can bring the company closer to the break-even point, when profits equal losses.

There are 2 main approaches to profit maximization:

1) based on matching marginal indicators: costs, income and revenue;

2) on the basis of identifying the relationship between the indicators "revenue-costs-profit".

At the core both methods is the classification of costs depending on the impact on them of changes in production volumes.

Fixed (or Fixed) Costs are not directly dependent on changes in the volume of production. These include depreciation, interest on a loan, rent, salaries of management personnel, and administrative expenses. With a relative increase in output, these costs do not change significantly and, in terms of a unit of output, their share decreases, which is a reserve for reducing the cost of production.

variable costs(proportional) change in proportion to the change in output. These are the costs of purchasing raw materials, materials, electrical energy, shipping costs, commissions, etc. But in practice, the proportionality of the dependence " variable costs- volume of production" is not so hard. For example, by increasing the volume of purchases of raw materials, you can save on a discount.

Full (total) costs are a combination of fixed and variable costs.

The economic meaning of dividing costs into fixed and variable is manifested in the following:

Firstly, the issue of maximizing the mass and the rate of profit growth due to the relative reduction of certain costs is being solved;

Secondly, this classification makes it possible to determine the "margin of financial strength" and is the basis for operational analysis.

Purpose of Operational Analysis - trace the relationship between the financial results of the company, costs and production volumes. This is the most effective method operational and strategic financial planning.

Elements of operational analysis:

Operating lever;

Stock of financial strength.

The results of operational analysis may constitute a trade secret of the enterprise.

The operation of the operating lever is manifested in the fact that any change in sales revenue always generates a stronger change in profit, that is, the percentage of profit growth is always more than a percent revenue growth.

For example.

Sales proceeds - 11 million rubles.

Variable costs - 9.3 million rubles

Fixed costs - 1.5 million rubles.

Total costs - 10.8 million rubles.

Profit at the same time will be - 0.2 million rubles

Let's say revenue increased to 12 million rubles. (+9.1%), then variable costs will increase to 10.15 million rubles. (9.3 * 109.1/100), while fixed costs will not change and will amount to 1.5 million rubles. In this case, the total costs will be equal to 10.15 + 1.5 = 11.65 million rubles, profit will increase to 0.35 million rubles (12 - 11,65)

As can be seen from the calculations, sales revenue increased by 9.1%, and profit by 75% (0.35: 0.2 * 100 - 100).

Solving the problem of profit maximization, it is possible to increase or decrease not only variable, but also fixed costs and, depending on this, calculate by how much% the profit will increase.

The strength of the operating leverage is determined by the formula:

where is the impact force of the operating lever;

Gross margin (fixed costs + profit), in the economic literature, this indicator is called the amount of coverage.

In our example, F 0 \u003d (11 million rubles - 9.3 million rubles): 0.2 \u003d 8.5.

The number 8.5 means that with a possible increase in sales proceeds, for example, by 3%, the profit will increase by 3%´8.5=25.5%.

With a decrease in sales revenue by 10%, profit will decrease by 10%´8.5=85%, and an increase in revenue by 9.1% will give an increase in profit by 9.1´8.5 by 77% (see above calculation).

The operating leverage formula allows you to answer the question of how sensitive the gross margin is to changes in sales volume.

The higher the fixed costs and the lower the profit, the stronger the operating leverage.

The strength of the operating leverage indicates the degree of entrepreneurial risk than more strength impact, the higher the entrepreneurial risk.

makes it possible to determine the amount of profit depending on the change in revenue.