Operating leverage formula. Production (operating) lever

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

With its help, you can plan changes in the organization’s profit depending on changes in sales volume, as well as determine the break-even point. A necessary condition The application of the operating leverage mechanism is the use of the marginal method, based on dividing costs into fixed and variable. The lower specific gravity fixed costs in total amount expenses of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

As we know, there are two types of costs in an enterprise: variables and constants. Their structure as a whole, and in particular the level of fixed costs in the total revenue of the enterprise or in revenue per unit of production, can significantly influence the trend in profit 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 overall increase in income from an additional unit of goods can be expressed in a significant sharp change in profit. Once the break-even level is reached, profits appear and begin to grow faster than sales.

Operating leverage is a tool for determining and analyzing this relationship. In other words, it is intended to establish the impact of profit on changes in sales volume. The essence of its action is that with an increase in revenue, a greater growth rate of profit is observed, but this greater growth rate is limited by the ratio of fixed and variable costs. The lower the share of fixed costs, the lower this limitation will be.

Production (operating) leverage is quantitatively characterized by the ratio between fixed and variable expenses in their total amount and the value of the indicator “Earnings before interest and taxes”. Knowing the production lever, you can predict changes in profit when revenue changes. There are price levers and natural price levers.

Price operating (production) lever

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

Rc = V/P

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

Considering that V = P + Zper + Zpost, the formula for calculating price operating leverage can be written as:

Rts = (P + Zper + Zpost)/P = 1 + Zper/P + Zper/P

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

Natural operating (production) leverage

Natural operating leverage (RN) is calculated using the formula:

Rn = (V-Zper)/P = (P + Zpost)/P = 1 + Zpost/P Where,
B - sales revenue;
P - profit from sales;
Zper - variable costs;
Postage - fixed costs.

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

Size 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 expenses in general structure costs is a reflection not only of the characteristics of a given enterprise and its accounting policy, but also industry characteristics 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, just as it is impossible 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 a business can very quickly “fall” below the break-even level. In other words, a company with a higher level of operational leverage is riskier.

Since operating leverage shows the change in operating profit in response to a change in the company's revenue, and financial leverage characterizes the change in pre-tax profit after paying interest on loans and borrowings in response to a change in operating profit, total leverage gives an idea of ​​how much percent the profit before taxes will change after interest is paid when revenue changes by 1%.

So small operating leverage can be strengthened by raising borrowed capital. High operating leverage, on the contrary, can be offset by low financial leverage. With the help of these effective tools - operational and financial leverage - an enterprise can achieve the desired return on invested capital at a controlled level of risk.

In conclusion, we list the tasks that are solved using operating leverage (production leverage):

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;

determining the production critical point and using it in acceptance management decisions and setting prices for work;

making decisions on additional orders (answering the question: will an additional order lead to growth fixed costs?);

making a decision to stop producing goods or providing 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 profitability threshold when developing production programs and setting prices for goods, work or services.

The effect of operating leverage is the presence of a relationship between changes in sales revenue and changes in profit. The strength of operating leverage is calculated as the quotient of sales revenue after reimbursement of variable costs by profit. The action of operating leverage generates entrepreneurial risk.

The effect of operating leverage (power of influence) is determined by the percentage change in operating profit with a one percent change in sales volume from a fixed level Q. The assessment of the effect is based on the general concept of elasticity

To calculate the effect or force of a lever, use whole line indicators. This requires dividing costs into variable and fixed using an intermediate result. This value is usually called gross margin, coverage amount, contribution.

These indicators include:

gross margin = sales profit + fixed costs;

contribution (coverage amount) = sales revenue - variable costs;

leverage effect = (revenue from sales - variable costs) / profit from sales.

Operating leverage manifests itself in cases where an enterprise has fixed costs, regardless of production (sales) volume. In the short term, unlike constant ones, variable costs can change under the influence of adjustments in production (sales) volume. In the long term, all costs are variable.

The production leverage effect arises due to the heterogeneous cost structure of the enterprise. Changes in variable costs are directly proportional to changes in production volume and sales revenue, and fixed costs over a fairly long period of time almost do not respond to changes in production volume. A sharp change in the amount of fixed costs occurs due to a radical restructuring organizational structure enterprises during periods of mass replacement of fixed assets and quality

"technological leaps" Thus, any change in sales revenue generates an even stronger change in book profit.

The strength of the production lever depends on the share of fixed costs in the total costs of the enterprise.

The effect of production leverage is one of the most important indicators of financial risk, since it shows by what percentage the balance sheet profit, as well as the economic profitability of assets, will change when the sales volume or revenue from the sale of products (works, services) changes by one percent.

In practical calculations, to determine the strength of the impact of operating leverage on a specific enterprise, the result from the sale of products after compensation will be used variable costs(VC), often called contribution margin:

MD=OP-VC
where OP is the volume of sales, goods; VC - variable costs.

where FC - fixed costs; EBIT - operating profit (profit from sales - before deduction of interest on loans and income tax).

Kmd=MD/OP,
where KMD is the marginal income coefficient, fractions of one.

It is desirable that marginal income not only covers fixed costs, but also serves as a source of operating profit (EBIT)/

After calculating the marginal income, you can determine the strength of the production lever (SVPR):

SVPR=MD/EBIT
This ratio expresses how many times contribution margin exceeds operating profit.

Operating leverage is always calculated for a certain sales volume. As sales revenue changes, so does its impact. Operating leverage allows you to assess the degree of influence of changes in sales volumes on the size of the organization's future profit. Operating leverage calculations show by what percentage profit will change if sales volume changes by 1%.

The effect of operating leverage comes down to the fact that any change in sales revenue (due to a change in volume) leads to an even stronger 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 activities of the enterprise when production volume changes.

The strength of the operating leverage shows the degree of business risk, that is, the risk of loss of profit associated with fluctuations in sales volume. The greater the effect of operating leverage (the greater the share of fixed costs), the greater the business risk.

Thus, modern management costs involves quite diverse approaches to accounting and analysis of costs, profits, and business risk. We have to master these interesting tools to ensure the survival and development of your business.

The assertion that an increase (decrease) in revenue directly affects profit margins underlies the interpretation of the actions of operating leverage. A conclusion about the strength of operating leverage is made based on a formula presented as the ratio of sales revenue minus variable costs (gross margin) to profit.

It is assumed that the margin amount should cover fixed costs enterprises and generate profits. The level of influence of operating leverage approaches the profitability threshold and decreases in proportion to the growth of sales revenue. Business structure, receiving financial support(loans), has the opportunity to increase production, increase profits, it is in such a logical chain that the relationship between the consequences of the influence of financial and operating leverage is established.

But this happens up to a certain point: as production volumes increase, there is a corresponding increase in costs and a decrease in profits. There is a pattern of changes in the relationship between operating leverage and production risks. There are no uniform standards for the size of operating leverage. Its meaning varies depending on the industry in which the enterprise operates and certain boundaries of meaning are established. This is the size of production, which, firstly, meets the profitability limit, and secondly, causes a one-time increase in fixed costs.

Let's look at several examples of the procedure for calculating operating leverage for symbolic business structures.

Example 1. The initial data will be information base financial statements: in this case, the revenue is 650 million rubles, the cost (total costs) is 340 million rubles, including fixed costs of 35 and variable costs of 305 million rubles. The methodology is based on the formula for the effect of operating leverage.

To begin with, we will determine the amount of marginal income (revenue minus variable costs), which is the basis for determining the effect of operating leverage. In accordance with the conditions of the example, the margin will be:
650 million rubles–305 million rubles=345 million rubles.

We will calculate gross (operating) profit by subtracting cost from revenue, according to the example, the difference will be:

650 million rubles -340 million rubles=310 million rubles.

The strength of operating leverage will be presented as the ratio of margin to gross profit. Based on the calculated data, the value of this coefficient will be:

345 million rubles/310 million rubles=1.11

The presented calculations make it possible to conclude that a 10% increase in revenue will make it possible to increase gross profit by 11.1% (10% * 1.11), a decrease in sales by 3% will lead to a decrease in operating profit by 3.34% (3% * 1.11).

Example 2. It is necessary to determine whether the activity of an enterprise that serves 150 clients per month for the provision of services is profitable; fixed costs amount to 400 thousand rubles. (PZ), variable costs per client are 14 thousand rubles. (Per.Z). In this case, the price of the service for the client is 20 thousand rubles. (C). Based on the given parameters, the estimated amount of profit will be equal to:

Profit=(C - Per.Z)*O–PZ=(20-14)*150-400=500 (thousand rubles)

How will the amount of profit change if the increase in the number of clients per month is 20 (∆О) and the amount of costs remains at the same level?

Profit=(20-14)*170-400=620 (thousand rubles)

From the calculations it follows that the effect of operating leverage will be reflected as an increase in the volume of services by 13.3% ((170-150)/150*100% = 13.3%), with an increase in profit by 24% ((620-500)/ 500 = 24%). With an increase in sales of 13.3%, profit increases by 24%, therefore, a 1% increase in revenue leads to an increase in profit by 1.8% (24/13.3).

From the above calculations we can conclude that production leverage, due to the fact that fixed costs are included in the cost structure, reflects the ratio of the rate of change in profit and revenue.

The operating leverage effect reflects the relationship between changes in revenue relative to changes in profit. The impact of the effect palette is expressed through the disproportionate influence of semi-fixed and semi-variable costs on the results of an enterprise’s activities, taking into account changes in sales (production).

It is also true that an increase in sales volumes leads to a decrease in semi-fixed costs, and the degree of operating leverage decreases. The opposite statement is the regularity that the greater the specific gravity semi-fixed expenses and production costs, the more intense the operating leverage.

Due to the fact that the enterprise's fixed costs remain stable for a relatively short time, the effect of production leverage is short-term. If the amount of fixed costs changes, it is necessary to recalculate the break-even point and conduct your activities in accordance with the new indicators. With such a change, the effect of production leverage takes place in new conditions in a new way.

The effect of operating leverage (operational leverage). The essence and methods of calculating the force of influence of operating leverage (level of operating leverage)

The effect of operating leverage is that any change in revenue from sales of products always generates a stronger change in profit. The degree of sensitivity of profit to changes in sales revenue - the strength of 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 greater the strength of operating leverage. This means that enterprises that use expensive equipment and have a high share of non-current assets on their balance sheet have greater operating leverage. Conversely, the lowest level of operating leverage is observed in those enterprises where the share of variable costs is high. At enterprises with high operating leverage, profits are very sensitive to changes in sales revenue. Even a small decrease in revenue can lead to a significant decrease in profits. The action of operating leverage gives rise to special types of risk: production risk, the risk of excessive fixed costs in conditions of deteriorating market conditions, since fixed costs will interfere with the reorientation of production, preventing the ability to quickly diversify assets or change the market niche. Thus, production risk is a function of the production cost structure.

Under favorable conditions, an enterprise with high operating leverage (high capital intensity) will have additional financial gain. Obviously, increasing the capital intensity of production should be done with great caution when there is confidence that product sales volumes will grow.

Let's look at an example of the operation of operating leverage.

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

The traditional calculation of profit is given in table. 1

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 operating leverage.

Operating leverage measures how much profit will change if revenue changes by one percent. According to our example, the strength of the operating leverage is: (11,000 rubles - 9,300 rubles): 200 rubles. = 8.5. This means that with revenue growth of 9.1%, profit will increase by 77.3% (9.1% * 8.5). If sales revenue decreases by 10%, profit will decrease by 85% (10% * 8.5).

Thus, by setting a particular rate of increase in sales volume, it is possible to determine the extent to which the amount of profit will increase given the existing strength of operating leverage at the enterprise. Differences in the achieved effect at enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of the current activities of the enterprise. This management comes down to changing the value of the strength of the operating leverage at different trends in the commodity market conditions and stages life cycle enterprises.

The basic principle of managing variable costs is their constant savings.

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

The margin of financial strength is measured either in monetary terms or as a percentage of revenue from product sales.

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

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

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

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

At the same time, operating leverage generates stronger profit growth compared to growth in product sales (revenue), increasing earnings per share and helping to strengthen the power of financial leverage. Thus, financial and operating levers are closely related, mutually reinforcing each other.

The combined effect of operating and financial leverage is expressed in the conjugate effect of the action of both levers when they are mutually multiplied.

The level of the conjugate effect of both levers indicates the level of total risk of the enterprise and shows by what percentage the earnings per share changes when sales revenue changes by 1%.

The combination of these powerful levers can be disastrous for an enterprise, since business and financial risks mutually multiply, multiplying adverse effects. The interaction of operating and financial leverage exacerbates negative impact declining revenue by the amount of net profit.

The task of reducing the overall risk of an enterprise comes down to choosing one of three options:

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

In the very general view the criterion for choosing one or another option is the maximum possible market value of the enterprise's shares at minimal risk, which is achieved through a trade-off between risk and return.

The level of the conjugate effect of operating and financial levers allows you to do planned calculations the amount of profit per share depending on the planned volume of sales (revenue), providing the opportunity to implement the dividend policy of the enterprise.

The effect of operating leverage is based on dividing costs into fixed and variable, as well as comparing revenues with these costs. The effect of production leverage is manifested in the fact that any change in revenue leads to a change in profit, and profit always changes more than revenue.

The greater the share of fixed costs, the higher the production leverage and business risk. To reduce the level of operating leverage, it is necessary to strive to convert fixed costs into variable ones. For example, production workers can be transferred to piecework payment labor. Also, to reduce depreciation costs, production equipment can be leased.

Methodology for calculating operating leverage

The effect of operating leverage can be determined using the formula:

Let's look at the effect of production leverage using a practical example. Let's assume that in the current period the revenue amounted to 15 million rubles. , variable costs amounted to 12.3 million rubles, and fixed costs – 1.58 million rubles. Next year the company wants to increase revenue by 9.1%. Using the force of operating leverage, determine by how much percent profit will increase.

Using the formula, we calculate gross margin and profit:

Gross margin = Revenue – Variable costs = 15 – 12.3 = 2.7 million rubles.

Profit = Gross margin – Fixed costs = 2.7 – 1.58 = 1.12 million rubles.

Then the effect of operating leverage will be:

Operating Leverage = Gross Margin / Profit = 2.7 / 1.12 = 2.41

The operating leverage effect shows how much profit will decrease or increase if revenue changes by one percent. Therefore, if revenue increases by 9.1%, then profit will increase by 9.1% * 2.41 = 21.9%.

Let's check the result and calculate how much the profit will change traditional way(without using operating leverage).

As revenue increases, only variable costs change, while fixed costs remain unchanged. Let's present the data in an analytical table.

Thus, profit will increase by:

1365,7 * 100%/1120 – 1 = 21,9%