The effect of operational (production, economic) leverage is manifested in the fact that any change in sales revenue always generates a stronger change in profit.

Figure 5 - Schematic diagram organization's cash turnover

When solving the problem of maximizing the rate of profit growth, you can manipulate the increase or decrease not only of variables, but also fixed costs, and depending on this, calculate by what percentage the profit will increase.

In practical calculations, to determine the strength of the operating leverage, the ratio of gross margin (the result of sales after reimbursement of variable costs) to profit is used. Gross margin (coverage amount) is the difference between sales revenue and variable costs.

It is desirable that the gross margin is sufficient not only to cover fixed costs, but also to generate profit.

If we interpret the impact of operating leverage as a percentage change in the gross margin (or, depending on the purposes of the analysis, the net result of the operation of investments) for a given percentage change in the physical volume of sales, then formula (1) can be presented as follows:

(2)

where: K is the physical volume of sales.

ΔK – change in the physical volume of sales.

In this form, the formula for the impact of operating leverage can answer the question of how sensitive the gross margin, or the net result of operating investments, is to changes in the physical volume of product sales. Further sequential transformations of formula (2) will provide a method for calculating the strength of the operating leverage using the price of a unit of goods, variable costs per unit of goods and the total amount of fixed costs:

operating leverage force =

(3)

(4)

These are several ways to calculate the strength of operating leverage - using any of the intermediate links of formulas (1) - (4). The strength of operating leverage is always calculated for a certain sales volume, for a given sales revenue. As sales revenue changes, the strength of the operating leverage also changes. The strength of the impact of operating leverage largely depends on the industry average level of capital intensity: the higher the cost of fixed assets, the higher the fixed costs - this is an objective factor.

At the same time, the effect of operating leverage can be controlled precisely by taking into account the dependence of the force of influence of the lever on the value of fixed costs: the higher the fixed costs (with constant sales revenue), the stronger the effect of operating leverage, and vice versa (Transformation of the formula for the force of influence of operating leverage) - gross margin/profit = (fixed costs + profit)/profit.

If sales revenue decreases, the strength of the operating leverage increases with both an increase and a decrease in the share of fixed costs in their total amount.

As sales revenue increases, if the profitability threshold (cost breakeven point) has already been passed, the strength of the operating leverage decreases: each percentage increase in revenue gives a smaller and smaller percentage increase in profit (at the same time, the share of fixed costs in their total amount decreases). But when fixed costs jump, dictated by the interests of further increasing revenue or other circumstances, the enterprise has to pass a new profitability threshold. At a short distance from the profitability threshold, the strength of the operating leverage will be maximum, and then begin to decrease again... and so on until a new jump in fixed costs is overcome when the new profitability threshold is overcome.

All this turns out to be extremely useful for:

Planning of income tax payments, in particular advance payments;

Development of details of the enterprise's commercial policy.

With pessimistic forecasts for the dynamics of sales revenue, fixed costs cannot be increased, since the loss of profit from each percentage loss of revenue may be many times greater due to the too strong effect of operating leverage. At the same time, if there is confidence in the long-term prospect of an increase in demand for goods (services), then one can abandon the regime of austerity on fixed costs, because the organization with a larger share of them will receive a larger increase in profit.

When an organization's income decreases, it is very difficult to reduce fixed costs. Essentially this means that high specific gravity fixed costs in their total amount indicates a weakening of the flexibility of activities. The higher the cost of tangible fixed assets, the more the organization “gets bogged down” in its market niche. The increased share of fixed costs increases the effect of operating leverage, and a decrease in the organization's business activity leads to a loss of profit.

Thus, the strength of the operating leverage indicates the degree of business risk associated with a given firm: the greater the strength of the operating leverage, the greater the business risk.

Operating leverage (production leverage) is the potential ability to influence a 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 different degrees of influence of the dynamics of variable costs and fixed costs on the financial result when the volume of output changes. By influencing the value of not only variable, but also fixed costs, you can determine by how many percentage points your profit will increase.

The level or strength of the operating leverage (Degree operating leverage, DOL) is calculated using 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 - production volume in physical terms;
p - price per unit of production;
v- variable costs per unit of production.

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

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

As revenue moves away from the break-even point, the power of operating leverage decreases, and the organization’s margin of financial strength, on the contrary, increases. This Feedback associated with a relative decrease fixed costs enterprises.

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 revenue; VC - variable costs.

The level of operating leverage is not a constant value and depends on a certain, basic sales value. For example, with a break-even sales volume, the level of operating leverage will tend to infinity. Operating leverage is greatest at a point slightly above the break-even point. In this case, even a slight change in sales volume leads to a significant relative change in EBIT. The change from zero profit to any profit represents an infinite percentage increase.

In practice, greater operating leverage is possessed by those companies that have a large share of fixed assets and intangible assets (intangible assets) in the balance sheet structure and large management expenses. 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 operational activities.

The effect of operating leverage is based on dividing costs into fixed and variable, as well as comparing revenues with these costs. Action production leverage manifests itself 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, workers engaged in production can be transferred to piecework wages. 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 profit will change in the 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%

To identify the dependence of financial performance on costs and sales volumes, operational analysis is used.

Operational analysis is an analysis of the results of an enterprise's activities based on the ratio of production volumes, profits and costs, allowing one to determine the relationship between costs and income at different production volumes. His task is to find the most profitable combination of variable 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.

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

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

CVP analysis allows:

Determine the amount of profit for a given sales volume.

Plan volume sales of products, 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.

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

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

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

This information is essential for a financial analyst, since knowledge of this relationship allows one to determine critical levels of output, for example, to establish the level when the enterprise has no profit and does not incur losses (is at the break-even point).

The economic model of CVP analysis shows the theoretical relationship between total income (revenue), costs and profit, 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 the 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.

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 revenue depend on production volume.

The production volume is equal to the sales volume, i.e. At the end of the analyzed period, the enterprise has no inventories of finished products (or they are insignificant).

All other variables (except for production volume) 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 enterprise's output is limited by its existing production capacity.

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

The most commonly used financial indicators for conducting operational analysis are the following:

1. Gross sales change rate(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) / Revenue for last year

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

Kvm = Gross Margin / Sales Revenue

Auxiliary coefficients are calculated in a similar way:

Manufacturing cost of goods sold ratio = Cost of goods sold / Sales revenue

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

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

Kchp = Net profit / Sales revenue

This coefficient shows how effectively the entire management team “worked,” including production managers, marketing specialists, financial managers, etc.

4. Break-even point(profitability threshold) is such revenue (or quantity of products) that ensures 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. Using the graphical method, the break-even point (profitability threshold) is found as follows:

1. find the value of fixed costs on the Y axis and plot the line of fixed costs on the graph, for which we draw a straight line parallel to the X axis; 2. select a 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 construct a straight line on the graph corresponding to this value; 3. We again select any value of sales volume on the X-axis and for it we find the amount of sales revenue.

We construct a straight line corresponding to this value. The break-even point on the graph is the point of intersection of 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 a company sells products less than the threshold sales volume, then it suffers losses; if it sells more, it makes a profit.

Figure 1. Graphic determination of the break-even point (profitability threshold)

Profitability threshold = Fixed costs / Gross margin ratio

You can calculate the profitability threshold for both the entire enterprise and individual types of products or services. A company begins to make a profit when actual revenue exceeds a 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. The excess of actual sales revenue over the profitability threshold.

Margin of financial strength = enterprise revenue - profitability threshold

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

P.S. When conducting operational analysis, it is not enough to just 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;

find the most favorable relationship between variable and fixed costs, product price and production volume;

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

P.P.S. Results of operational analysis in contrast to results of other types financial analyzes 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, 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 employees and managers 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 enterprise strategy, production capacity limitations, etc.).

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 for using the operating leverage mechanism is the use of the marginal method, based on dividing costs into fixed and variable. The lower the share of fixed costs in the total cost of the enterprise, the more the profit changes in relation to the rate of change in the company's revenue.

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 and natural leverage.

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; Postage – fixed costs.

Natural operating leverage(Рн) is calculated by 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 a ratio marginal income to profit from sales. 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 not only of the enterprise itself, but also of the type of business in which this enterprise is engaged, since the ratio of fixed and variable expenses in the overall cost structure is a reflection not only of the characteristics of a given enterprise and its accounting policies, but also of the industry characteristics of its activities.

However, it is impossible to consider that a high share of fixed expenses 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 profit before taxes after paying interest on loans and borrowings in response to changes 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 the operating lever:

calculation financial result in general for the organization, as well as by type of product, work or service based on the “cost – 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 an increase in 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 maximizing profits through a relative reduction in fixed costs;

using the profitability threshold when developing production programs and setting prices for goods, work or services.