home Self-development Operating leverage is defined. Operating (production) lever

Operating leverage is defined. Operating (production) lever

Operational analysis is used to identify the dependence of financial performance on costs and sales volumes.

Operational analysis is an analysis of the results of an enterprise's activities based on the ratio of production volumes, profits and costs, which makes it possible to determine the relationship between costs and incomes at different production volumes. Its task is to find the most advantageous combination of variables and fixed costs, price and sales volume. This type of analysis is considered one of the most effective means of planning and forecasting the activities of an enterprise.

Operational analysis, also known as cost-volume-profit or CVP analysis, is an analytical approach to studying the relationship between costs and profits at different levels of output.

CVP - analysis, according to Likhacheva O.I., considers the change in profit as a function of the following factors: variables and fixed costs, prices of products (works, services), volume and assortment products sold.

CVP - analysis allows you to:

Determine the amount of profit for a given sales volume.

Plan volume product sales, which will provide the desired profit value.

Determine the sales volume for the break-even operation of the enterprise.

Establish a margin of financial strength of the enterprise in its current state.

Evaluate how profit will be affected by changes in selling price, variable costs, fixed costs and production volume.

Determine to what extent it is possible to increase / decrease the strength of the operating leverage, maneuvering variable and fixed costs, and thereby change the level of operational risk of the enterprise.

Determine how changes in the range of products sold (works, services) will affect potential profit, break-even and target revenue.

Operational analysis is not only a theoretical method, but also a tool that enterprises widely use in practice to make management decisions.

The purpose of operational analysis is to determine what will happen to financial results if the volume of production changes.

This information is essential for a financial analyst, since knowledge of this relationship allows you to determine the critical levels of output, for example, to set the level when the company has no profit and does not incur losses (is at the breakeven point).

The economic model of CVP - analysis shows the theoretical relationship between total income (revenue), costs and profits, on the one hand, and production volume, on the other.

When interpreting operational analysis data, you need to be aware of the important assumptions on which this analysis is based:

Costs can be accurately divided into fixed and variable components. Variable costs change in proportion to the volume of production, and fixed costs remain unchanged at any level of production.

They produce one product, or an assortment that remains the same throughout the analyzed period (with a wide range of sales, the CVP analysis algorithm is complicated).

Costs and revenues depend on the volume of production.

The volume of production is equal to the volume of sales, i.e. at the end of the analyzed period, the enterprise does not have stocks of finished products (or they are insignificant).

All other variables (except for the volume of production) do not change during the analyzed period, for example, the price level, the range of products sold, labor productivity.

The analysis is applicable only to a short time period (usually a year or less) during which the output of the enterprise is limited by the existing production facilities.

Gavrilova A.N. identifies the following main indicators of operational analysis: break-even point (profitability threshold); determination of the target sales volume; margin of financial strength; analysis of assortment policy; operating lever.

The most commonly used financial ratios for operational analysis are as follows:

1. The coefficient of change in gross sales(Kivp), characterizes the change in the volume of gross sales of the current period in relation to the volume of gross sales of the previous period.

Kivp = (Revenue for the current year - Revenue for last year) / Last year's revenue

2. Gross margin ratio(Kvm). Gross margin (the amount to cover fixed costs and generate profits) is defined as the difference between revenue and variable costs.

Kvm = Gross Margin / Sales Revenue

Auxiliary coefficients are calculated in a similar way:

Production Cost of Goods Sold Ratio = Cost of Goods Sold / Sales Revenue

General and administrative cost ratio = Sum of general and administrative costs / Sales revenue, etc.

3. Net profit and the net profit ratio (profitability of sales) (Knp).

Kchp = Net profit / Sales proceeds

This ratio shows how effectively the entire management team “worked”, including production managers, marketers, financial managers, etc.

4. Break even point(profitability threshold) is such revenue (or the amount of production) that provides full coverage of all variable and semi-fixed costs with zero profit. Any change in revenue at this point results in a profit or loss.

The profitability threshold can be determined both graphically (see Figure 1) and analytically. With the graphical method, the break-even point (profitability threshold) is found as follows:

1. we find the value of fixed costs on the Y axis and draw a line of fixed costs on the graph, for which we draw a straight line parallel to the X axis; 2. select any point on the X axis, i.e. any value of sales volume, we calculate the value of total costs (fixed and variable) for this volume. We build a straight line on the graph corresponding to this value; 3. choose again any amount of sales on the x-axis and for it we find the amount of sales proceeds.

We construct a straight line corresponding to this value. The break-even point on the chart is the point of intersection of the straight lines built according to the value of total costs and gross revenue (Figure 1). At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The amount of profit or loss is shaded. If the company sells products less than the threshold sales volume, then it suffers losses; if more, it makes a profit.

Figure 1. Graphical definition of the break-even point (profitability threshold)

Margin Threshold = Fixed Costs / Gross Margin Ratio

You can calculate the profitability threshold of both the entire enterprise and individual types of products or services. The company begins to make a profit when the actual revenue exceeds the threshold. The greater this excess, the greater the margin of financial strength of the enterprise and the greater the amount of profit.

5. Margin of financial strength. Excess of actual sales proceeds over the threshold of profitability.

Margin of financial strength \u003d revenue of the enterprise - profitability threshold

The strength of the impact of the operating lever (shows how many times the profit will change when the sales proceeds change by one percent and is defined as the ratio of gross margin to profit).

P.S. When conducting an operational analysis, it is not enough just to calculate the coefficients, it is necessary to draw the right conclusions based on the calculations:

develop possible scenarios for the development of the enterprise and calculate the results to which they can lead;

to find the most favorable ratio between variable and fixed costs, the price of products and the volume of production;

decide which areas of activity (production of which types of products) need to be expanded, and which ones should be curtailed.

P.P.S. Results of operational analysis in contrast to the results of other types financial analyzes the activities of an enterprise are usually a trade secret of the enterprise.

Since the listed assumptions of the CVP-analysis model are not always feasible in practice, the results of the break-even analysis are to some extent conditional. Therefore, a complete formalization of the procedure for calculating the optimal volume and structure of sales is impossible in practice, and a lot depends on the intuition of workers and heads of economic services, based on their own experience. To determine the approximate sales volume for each product, a formal (mathematical) apparatus is used, and then the resulting value is adjusted taking into account other factors (long-term strategy of the enterprise, limitations on production capacities, etc.).

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

With its help, you can plan 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 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.

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 between price and natural 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 its 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 a higher level of 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- operating and financial leverage- the enterprise can achieve the desired return on invested capital with a controlled level of risk.

In conclusion, we list the tasks that are solved with the help of the operating lever:

calculation of the financial result for the organization as a whole, as well as for types of products, works or services based on the “costs - volume - profit” scheme;

determination of the critical point of production and its use in the adoption management decisions and setting prices for works;

making decisions on additional orders (the answer to the question: will an additional order lead to an increase in fixed costs?);

making a decision to stop the production of goods or the provision of services (if the price falls below the level of variable costs);

solving the problem of profit maximization due to the relative reduction of fixed costs;

using the threshold of profitability in the development of production programs, setting prices for goods, works or services.

The effect of operating leverage (operating leverage). Essence and methods of calculating the impact force of the operating leverage (the level of operating leverage)

The effect of operating leverage is that any change in sales revenue always generates a larger change in profits. The degree of profit sensitivity to changes in sales proceeds -- the strength of the operating leverage depends on the ratio of fixed and variable costs in the total costs of the enterprise. The higher the share of fixed costs in the total cost of production and sales of products, the more strength operating lever. It means that greater strength operating leverage is possessed by enterprises that use expensive equipment and have a high share of non-current assets in the balance sheet. Conversely, the lowest level of operating leverage is observed in those enterprises where the proportion of variable costs is high. In enterprises with great strength operating profit leverage is very sensitive to changes in sales revenue. Even a slight decrease in revenue can lead to a significant decrease in profits. The action of the operating leverage generates special types of risk: production risk, the risk of excessive fixed costs in a deteriorating market environment, since fixed costs will interfere with the reorientation of production, making it impossible to quickly diversify assets or change the market niche. Thus, production risk is a function of the cost structure of production.

Under favorable conditions, an enterprise with a large operating leverage (high capital intensity) will have an additional financial gain. Obviously, it is necessary to increase the capital intensity of production with great caution, when there is confidence that the volume of sales of products will grow.

Consider an example of the operation of the operating lever.

The company's revenue in the reporting year amounted to 11,000 thousand rubles. at variable costs 9,300 thousand rubles. and fixed costs 1,500 thousand rubles. What will happen to the profit with an increase in the volume of sales in the planned year to 12,000 thousand rubles?

The traditional calculation of profit is given in table. one

Table 1

Profit calculation

The effect of operating leverage is that sales revenue increased by 9.1%, and profit - by 76.8%.

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

Operating leverage measures the percentage change in earnings for a one percent change in revenue. According to our example, the strength of the operating lever is: (11,000 rubles - 9300 rubles): 200 rubles. = 8.5. This means that with a 9.1% increase in revenue, profit will increase by 77.3% (9.1% * 8.5). With a decrease in sales revenue by 10%, profit will decrease by 85% (10% * 8.5).

Thus, by setting one or another growth rate of sales volume, it is possible to determine in what amounts the amount of profit will increase with the force of operating leverage prevailing at the enterprise. Differences in the effect achieved at enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to increase efficiency current activities enterprises. This control is reduced to changing the value of the strength of the operating lever under various market trends commodity market and stages life cycle enterprises.

The basic principle of managing variable costs is to save them continuously.

The margin of financial strength is the level of enterprise security. The calculation of this indicator allows us to assess the possibility of an additional reduction in revenue from sales of products within the break-even point. Margin of financial strength-the difference between the proceeds from sales and the threshold of profitability.

The margin of financial safety is measured either in monetary terms, or as a percentage of the proceeds from the sale of products.

According to the previous example, the profitability threshold is 9709 thousand rubles. .

The margin of financial strength is 1291 thousand rubles. (11,000 rubles 9,709 rubles), or 12%.

The strength of the operating lever depends on the share of fixed costs in their total amount and determines the degree of flexibility of the enterprise, causing the emergence of entrepreneurial risk.

An increase in fixed costs due to an increase in interest on a loan in the capital structure contributes to an increase in the effect of financial leverage.

At the same time, operating leverage generates stronger earnings growth than sales (revenue) growth, boosting earnings per share and helping to increase financial leverage. Thus, financial and operational levers are closely linked, mutually reinforcing each other.

The cumulative effect of operational and financial leverage is expressed in the conjugated effect of the action of both levers when they are mutually multiplied.

The level of the conjugated effect of the action of both levers indicates the level of the total risk of the enterprise and shows how many percent the earnings per share change when the sales proceeds change by 1%.

The combination of these powerful levers can be disastrous for the enterprise, as entrepreneurial and financial risks mutually multiply, multiplying adverse effects. The interaction of operating and financial leverage exacerbates the negative impact of declining revenue on net income.

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

1) a combination of a high level of financial leverage with a weak impact of operating leverage;
2) combination low level the effect of financial leverage with strong operating leverage;
3) a combination of moderate levels of financial and operational leverage effects.

In the very general view The criterion for choosing one or another option is the maximum possible market value of the company's shares with minimal risk, which is achieved through a compromise between risk and profitability.

The level of the conjugate effect of the action of operational and financial leverage allows you to do planned calculations the amount of profit per share depending on the planned volume of sales (revenue), providing the possibility of implementing the company's dividend policy.

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.

Exist 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 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 relationship between the main 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- the potential 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 a high share of the technological component have a fairly high level of operating leverage.

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.

The traditional way:

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.

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. Necessary condition 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.

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.

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 not only of the characteristics of this enterprise and its accounting policy, but also industry specifics of activity.

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 the help of these powerful tools - operational and financial leverage - an enterprise can achieve the desired return on invested capital at 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 with the consumption of more raw materials, materials, labor production costs etc., then a part of the additionally received revenue 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 terms 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 profit, 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

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 financial results 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)
Where,
MP - marginal profit;
EBIT - earnings before interest;
FC - semi-fixed production costs;
Q is the volume of production in natural terms;
p - price per unit of production;
v - variable costs per unit of output.

The level of operating leverage allows you to calculate the percentage change in profit depending on the dynamics of sales by one percentage point. In this case, the change in EBIT will be DOL%.

The larger the share of the company's fixed costs in the cost structure, the higher the level of operating leverage, and therefore, the more business (production) risk is manifested.

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 associated with a relative decrease in the fixed costs of the enterprise.

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

DOL = (S-VC)/(S-VC-FC) = (EBIT+FC)/EBIT
Where, S - sales proceeds; VC - variable costs.

The level of operating leverage is not 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 the profitability of the company's operations.