Natural operating lever formula. Financial analysis and investment assessment of the enterprise

• Gurfova Svetlana Adalbievna, Candidate of Sciences, Associate Professor, Associate Professor
• Kabardino-Balkarian State Agrarian University named after V.I. V.M. Kokova

• OPERATING LEVER POWER
• OPERATING LEVER
• VARIABLE COSTS
• OPERATIONAL ANALYSIS
• FIXED COSTS

The ratio "Volume - Costs - Profit" allows you to quantify changes in profit depending on sales volume based on the mechanism of operating leverage. The operation of this mechanism is based on the fact that profit always changes faster than any change in the volume of production, due to the presence of fixed costs as part of operating costs. In the article, using the example of an industrial enterprise, the magnitude of the operating leverage and the strength of its impact are calculated and analyzed.

• Characteristics of approaches to the definition of the concept of "financial support of the organization"
• Financial and economic state of Kabarda and Balkaria in the post-war period
• Features of the nationalization of industrial and commercial enterprises in Kabardino-Balkaria
• Influence of the sustainability of agricultural formations on the development of rural areas

One of the most effective methods of financial analysis for the purpose of operational and strategic planning is operational analysis, which characterizes the relationship of financial performance with costs, production volumes and prices. It helps to identify the optimal proportions between variable and fixed costs, price and sales volume, minimizing entrepreneurial risk. Operational analysis, being an integral part of management accounting, helps the financiers of the enterprise to get answers to many of the most important questions that arise before them at almost all the main stages of the organization's cash flow. Its results may constitute a trade secret of the enterprise.

The main elements of operational analysis are:

• operating lever (leverage);
• profitability threshold;
• stock of financial strength of the enterprise.

Operating leverage is defined as the ratio of the rate of change in sales profit to the rate of change in sales revenue. It is measured in times, shows how many times the numerator is greater than the denominator, that is, it answers the question of how many times the rate of change in profit exceeds the rate of change in revenue.

Let's calculate the amount of operating leverage based on the data of the analyzed enterprise - JSC "NZVA" (Table 1).

Table 1. Calculation of the operating leverage at OJSC NZVA

Calculations show that in 2013. the rate of change in profit was approximately 3.2 times higher than the rate of change in revenue. In fact, both revenue and profit changed upwards: revenue - by 1.24 times, and profit - by 2.62 times compared to the level of 2012. At the same time, 1.24< 2,62 в 2,1 раза. В 2014г. прибыль уменьшилась на 8,3%, темп ее изменения (снижения) значительно меньше темпа изменения выручки, который тоже невелик – всего 0,02.

For each specific enterprise and each specific planning period, there is its own level of operating leverage.

When a financial manager aims to maximize the rate of profit growth, he can influence not only variable costs, but also fixed costs by applying increment or decrement procedures. Depending on this, he calculates how the profit has changed - increased or decreased - and the magnitude of this change as a percentage. In practice, to determine the strength of operating leverage, a ratio is used in which the numerator is sales revenue minus variable costs (gross margin), and the denominator is profit. This figure is often referred to as the coverage amount. It is necessary to strive to ensure that the gross margin covers not only fixed costs, but also forms a profit from sales.

To assess the impact of a change in sales revenue on profit, expressed as a percentage, the percentage of revenue growth is multiplied by the strength of the impact of operating leverage (COR). Let's determine the SVOR at the assessed enterprise. The results are presented in the form of table 2.

Table 2. Calculation of the force of the impact of the operating lever on JSC "NZVA"

As shown in Table 2, the amount of variable costs for the analyzed period increased steadily. Yes, in 2013. it amounted to 138.9 percent compared to the level of 2012, and in 2014. - 124.2% compared to the level of 2013. and 172.5% to the level of 2012. The share of variable costs in the total costs for the analyzed period is also steadily increasing. Share of variable costs in 2013 increased compared to 2012. from 48.3% to 56%, and in 2014. - another 9 percentage points compared to the previous year. The force with which the operating lever acts steadily decreases. In 2014 it decreased by more than 2 times compared with the beginning of the analyzed period.

From the point of view of the financial management of the organization's activities, net profit is a value that depends on the level of rational use of the financial resources of the enterprise, i.e. the direction of investment of these resources and the structure of sources of funds are very important. In this regard, the volume and composition of fixed and working capital, as well as the effectiveness of their use, are being studied. Therefore, the change in the level of strength of the operating leverage was also influenced by the change in the structure of the assets of NZVA OJSC. In 2012 the share of non-current assets in the total assets amounted to 76.5%, and in 2013. it increased to 92%. The share of fixed assets accounted for 74.2% and 75.2%, respectively. In 2014 the share of non-current assets decreased (to 89.7%), but the share of fixed assets increased to 88.7%.

Obviously, the greater the share of fixed costs in the total cost, the greater the force of the production lever and vice versa. This is true when sales revenue increases. And if sales revenue decreases, then the force of production leverage, regardless of the share of fixed costs, increases even faster.

Thus, we can conclude that:

• the structure of the organization's assets, the share of non-current assets, has a significant impact on the SVOR. With the growth of the cost of fixed assets, the proportion of fixed costs increases;
• a high proportion of fixed costs limits the ability to increase the flexibility of current cost management;
• with the increase in the force of the impact of the production lever, the entrepreneurial risk increases.

The SVOP formula helps answer the question of how sensitive the gross margin is. Later, by progressively transforming this formula, we will be able to determine the strength with which operating leverage operates, based on the price and magnitude of variable costs per unit of goods, and the total amount of fixed costs.

The strength of the impact of operating leverage, as a rule, is calculated for a known volume of sales, for a given specific sales proceeds. With a change in sales revenue, the strength of the impact of operating leverage also changes. SIDS is largely determined by the influence of the average industry level of capital intensity as an objective factor: with the growth in the cost of fixed assets, fixed costs increase.

However, the effect of production leverage can still be controlled using the dependence of the SVOP on the amount of fixed costs: with an increase in fixed costs and a decrease in profit, the effect of the operating lever increases, and vice versa. This can be seen from the transformed formula for the force of the operating lever:

VM / P \u003d (Z post + P) / P, (1)

where VM– gross margin; P- profit; Z post- fixed costs.

The strength of operating leverage increases with an increase in the share of fixed costs in the gross margin. At the analyzed enterprise in 2013. the share of fixed costs decreased (since the share of variable costs increased) by 7.7%. Operating leverage decreased from 17.09 to 7.23. In 2014 - the share of fixed costs decreased (with an increase in the share of variable costs) by another 11%. Operating leverage also decreased from 7.23 to 6.21.

With a decrease in sales revenue, an increase in SVOR occurs. Each percentage decrease in revenue causes an increasing decrease in profits. This reflects the strength of the operating leverage.

If, on the other hand, sales revenue increases, but the break-even point has already been passed, then the operating leverage decreases, and faster and faster with each percentage increase in revenue. At a small distance from the threshold of profitability, the SRR will be maximum, then it will start to decrease again until the next jump in fixed costs with the passage of a new point of cost recovery.

All these points can be used in the process of forecasting income tax payments when optimizing tax planning, as well as in developing detailed components of the company's commercial policy. If the expected dynamics of sales revenue is sufficiently pessimistic, then fixed costs cannot be increased, since the decrease in profit from each percentage decrease in sales revenue can become many times greater as a result of the cumulative effect caused by the influence of large operating leverage. However, if an organization assumes an increase in demand for its goods (works, services) in the long term, then it can afford not to save heavily on fixed costs, since a large share of them is quite capable of providing a higher increase in profits.

In circumstances that contribute to a decrease in the income of the enterprise, it is very difficult to reduce fixed costs. In other words, a high proportion of fixed costs in their total amount indicates that the enterprise has become less flexible, and, therefore, more weakened. Organizations often feel the need to move from one area of ​​activity to another. Of course, the possibility of diversification is at the same time a tempting idea, but also very difficult in terms of organization, and especially in terms of finding financial resources. The higher the cost of tangible fixed assets, the more reasons the company has to stay in its current market niche.

In addition, the state of the enterprise with a high share of fixed costs significantly increases the effect of operating leverage. In such conditions, a decrease in business activity means for the organization a multiplied loss of profit. However, if the revenue is growing at a sufficiently high rate, and the company has a strong operating leverage, then it will be able not only to pay the necessary amounts of income tax, but also to provide good dividends and adequate funding for its development.

SVOR indicates the degree of entrepreneurial risk associated with a given business entity: the greater it is, the higher the entrepreneurial risk.

In the presence of a favorable market situation, an enterprise characterized by a greater strength of the operating leverage (high capital intensity) receives an additional financial gain. However, capital intensity should be increased only in the case when an increase in the volume of sales of products is really expected, i.e. with great care.

Thus, by changing the growth rate of sales volume, it is possible to determine how the amount of profit will change with the force of operating leverage that has developed at the enterprise. The effects achieved at enterprises will vary depending on variations in the ratio of fixed and variable costs.

We have considered the mechanism of operation of the operating lever. Its understanding allows for purposeful management of the ratio of fixed and variable costs and, as a result, to improve the efficiency of the current activities of the enterprise, which actually involves the use of changes in the value of the strength of the operating lever under various trends in the commodity market and different stages of the cycle of functioning of an economic entity.

When product market conditions are not favorable, and the company is in the early stages of its life cycle, its policy should identify possible measures that will help reduce the strength of operating leverage by saving fixed costs. With favorable market conditions and when the enterprise is characterized by a certain margin of safety, the work on saving fixed costs can be significantly weakened. During such periods, the enterprise may be recommended to expand the volume of real investments on the basis of the comprehensive modernization of fixed production assets. Fixed costs are much more difficult to change, so enterprises with greater operating leverage are no longer flexible enough, which negatively affects the effectiveness of the cost management process.

The SIDS, as already noted, is significantly affected by the relative value of fixed costs. For enterprises with heavy fixed assets, high values ​​of the operating leverage indicator are very dangerous. In the process of an unstable economy, when customers are characterized by low effective demand, when the strongest inflation takes place, every percent reduction in sales revenue entails a catastrophic wide-ranging drop in profits. The company is in the loss zone. Management seems to be blocked, that is, the financial manager cannot use most of the options for choosing the most effective and productive managerial and financial decisions.

The introduction of automated systems relatively weighs down fixed costs in the unit cost of production. Indicators react differently to this circumstance: gross margin ratio, profitability threshold and other elements of operational analysis. Automation, with all its advantages, contributes to the growth of entrepreneurial risk. And the reason for this is the tilt of the cost structure towards fixed costs. When an enterprise implements automation, it should carefully weigh its investment decisions. It is necessary to have a well-thought-out long-term strategy for the organization. Automated production, having, as a rule, a relatively low level of variable costs, increases operating leverage as a measure of the involvement of fixed costs. And because of the higher profitability threshold, the margin of financial safety is usually lower. Therefore, the overall level of risk caused by production and economic activities is higher with the intensification of capital than with the intensification of direct labor.

However, automated production implies greater opportunities for effective management of the cost structure than with the use of predominantly manual labor of workers. If there is a wide choice, the business entity must independently determine what is more profitable to have: high variable costs and low fixed costs, or vice versa. It is not possible to unequivocally answer this question, since any option is characterized by both advantages and disadvantages. The final choice will depend on the initial position of the analyzed enterprise, what financial goals it intends to achieve, what are the circumstances and features of its functioning.

Bibliography

1. Blank, I.A. Encyclopedia of financial manager. T.2. Management of assets and capital of the enterprise / I.A. Form. - M .: Publishing house "Omega-L", 2008. - 448 p.
2. Gurfova, S.A. - 2015. - V. 1. - No. 39. - P. 179-183.
3. Kozlovsky, V.A. Production and operational management / V.A. Kozlovsky, T.V. Markina, V.M. Makarov. - St. Petersburg: Special Literature, 1998. - 336 p.
4. Lebedev, V. G. Cost management at the enterprise / V. G. Lebedev, T. G. Drozdova, V. P. Kustarev. - St. Petersburg: Peter, 2012. - 592 p.

With an increase in sales revenue. It occurs under the influence of fixed costs for the production process and sales. At the same time, these costs remain unchanged, while revenues grow.

The strength of the operating leverage shows how many percent there will be a change in profit with an increase (decrease) in revenue by 1%. The higher the share of costs (fixed) used in production and sales, the more powerful the leverage. The formula for determining it is the difference between revenue and cost/profit.

The definition of "lever" is used in various sciences. This is a special device that allows you to increase the impact on a particular object. In economics, fixed costs act as such a mechanism. The operating lever reveals how much the company depends on the costs included in this indicator. This indicator characterizes business risk.

The effect of operating leverage is observed in the fact that even a small change in revenue leads to stronger growth or a decrease in profits. Suppose that the share of fixed costs in the cost of production is large, then the firm has a very high level of production leverage. Therefore, the business risk is significant. If such an enterprise changes even slightly the volume of sales, it will receive a significant fluctuation in profits.

Every organization has a break-even point. In it, the level of operating leverage tends to infinity. But with a slight deviation from this point, a quite significant change in profitability occurs. And the greater the deviation from the breakeven point, the less revenue the company receives. It should be borne in mind that almost all firms are engaged in the production or sale of several types of products. Therefore, the effect of operating leverage must be considered in terms of total sales proceeds and for each product (service) separately.

In the case when there is an increase in fixed costs, it is necessary to choose a strategy aimed at increasing sales volumes. In this case, even a decrease in the level does not matter. Only fixed costs affect the effect of operating leverage. Its analysis is important for financial managers. Learning operating leverage helps you choose the right strategy for managing profits, costs, and business risk.

There are several factors that affect the level of production leverage:

The price at which the product is sold;

Volume of sales;

Costs are mostly fixed.

If the market has developed an unfavorable conjuncture, then this leads to a decrease in sales. Typically, this situation develops at the first stage of the product life cycle. Then the break-even point has not yet been overcome. And this requires a significant reduction in fixed costs, the calculation of financial leverage. Conversely, when market conditions are favorable, cost control can be relaxed a little. A similar period can be used to modernize fixed assets, invest in new projects, purchase assets, etc.

The sectoral affiliation of the enterprise dictates certain requirements for the amount of capital investments, labor automation, for the qualifications of specialists, etc. If the organization works in the field of mechanical engineering, heavy industry, then the management of the operating lever is difficult. This comes with high fixed costs. But if the firm is engaged in the provision of services, then the regulation of operating leverage is quite simple.

Purposeful management of variable and fixed costs, changing them depending on the current market situation will reduce business risk and increase

The effect of operating leverage is based on the division of costs into fixed and variable, as well as on the comparison of revenue with these costs. The action 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 higher the share of fixed costs, the higher the production leverage and entrepreneurial risk. To reduce the level of operating leverage, it is necessary to seek to convert fixed costs into variables. For example, workers employed in production can be transferred to piecework wages. Also, to reduce depreciation costs, production equipment can be leased.

Methodology for calculating the operating leverage

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

Let's consider the effect of production leverage on 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%. Determine how much profit will increase using the force of operating leverage.

Using the formula, calculate the gross margin and profit:

Gross margin \u003d Revenue - Variable costs \u003d 15 - 12.3 \u003d 2.7 million rubles.

Profit \u003d Gross Margin - Fixed Costs \u003d 2.7 - 1.58 \u003d 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 measures the percentage increase or decrease in earnings for a one percent change in revenue. 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 in the traditional way (without using operating leverage).

When 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%

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

It is assumed that the amount of the margin should cover the fixed costs of the enterprise and form a profit. The level of influence of operating leverage approaches the threshold of profitability and decreases in proportion to the growth of sales revenue. A 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 consequence of the influence of financial and operational leverage is established.

But this happens up to a certain point: with the increase in production volumes, 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 the operating lever. Its value varies depending on the industry in which the enterprise operates and certain boundaries of values ​​are established. This is the size of production, which, firstly, corresponds to the margin of profitability, and secondly, causes a one-time increase in fixed costs.

Let's consider several examples of how to calculate operating leverage for symbolic business structures.

Example 1 The information base of financial statements will serve as the initial data: 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 method is based on the formula of the operating leverage effect.

First, let's 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 the gross (operating) profit by subtracting the cost price from the proceeds, respectively, the difference will be:

650 million rubles - 340 million rubles = 310 million rubles

The strength of operating leverage will be presented as a ratio of margin to gross profit. Based on the calculated data, the value of such a 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 (O) per month for the provision of services is profitable, fixed costs amount to 400 thousand rubles. (PZ), variable costs per client amount to 14 thousand rubles. (Per. Z). At the same time, the price of the service for the client is 20 thousand rubles. (C). According to the given parameters, the estimated amount of profit will be equal to:

Profit \u003d (P - Per. Z) * ​​O - PZ \u003d (20-14) * 150-400 \u003d 500 (thousand rubles)

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

Profit \u003d (20-14) * 170-400 \u003d 620 (thousand rubles)

It follows from the calculations that the effect of the operating leverage will be displayed as an increase in the volume of services by 13.3% ((170-150) / 150 * 100% \u003d 13.3%), with an increase in profit by 24% ((620-500) / 500 = 24%). With an increase in sales by 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 the production leverage, due to the fact that the cost structure includes fixed costs, reflects the ratio of the rate of change in profit and revenue.

The operating leverage effect displays the relationship between changes in revenue in relation 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 the enterprise, taking into account changes in sales (production).

It is also true that an increase in sales leads to a decrease in semi-fixed costs, the degree of operating leverage falls. The reverse statement is the pattern that the greater the share of semi-fixed costs and production costs, the more intense the effect of the operating lever.

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

At enterprises, the issues of regulating the dynamics of profit in the management of financial resources are in one of the first places. As a result of the volume of products produced and the change in the cost structure, operating leverage makes it possible to evaluate the entire economic benefit.

The concept of leverage, or operating leverage, is associated with the structure of the cost and, in particular, with a certain ratio of conditionally variable and conditionally fixed costs. If we consider the cost structure in this aspect, much can be achieved. Firstly, due to a certain reduction in costs with an increase in sales, namely physical, it is much easier to solve such a problem as profit maximization. Secondly, the distribution of all costs into conditionally variable and fixed makes it possible to talk about payback and allows you to calculate how big a given enterprise is in the event of any complications in the market or difficulties of varying complexity. And, finally, thirdly, it allows you to calculate the decisive sales volume, which fully covers all costs, and also ensures the operation of the enterprise without losses.

Operating or production leverage is a kind of process by which the liabilities and assets of a given enterprise are managed. Leverage is aimed at increasing the size of profit, that is, at the same time, operating leverage is a certain factor, the slightest change in which will necessarily lead to a significant, significant change in performance indicators.

Production leverage or operating leverage is a specific mechanism that is based on optimizing the ratio of variable and fixed costs, as well as managing the entire profit of the enterprise. Knowing all the work of the operating lever, you can easily predict what the change in the company's profit will be if the revenue changes, and besides, you can absolutely accurately determine the point at which the company will manage break-even activities.

The three main components of operating leverage are: price, its variable costs and fixed costs. All of them are to some extent connected with the volume of sales, changing them, you can have a significant impact on it.

A necessary condition for the use of operating leverage is the use of marginal analysis and clear cost management.

When conducting an analysis, the following aspects should be clearly and clearly presented:

First, a change in fixed costs necessarily changes the location of the enterprise, but at the same time, does not change the size of the so-called marginal income;

Secondly, any change in variable costs for just one unit of production also changes the position of the break-even point;

Thirdly, a parallel change in variable and fixed costs, and even in the same direction, will necessarily cause a strong change in the position of the break-even point;

Fourth, a change in price changes the location of the break-even point and marginal return.

The production lever is, at the same time, an indicator that helps managers choose the most optimal strategy, which is subsequently used in managing the profits of the enterprise and its costs.

The variation of the effect of the production lever depends on the change in the proportion of fixed costs. After all, the lower the share of fixed costs in their total amount, the higher the degree of change in the amount of profit in relation to the rhythms of change in the specific revenue of the enterprise.

In certain cases, the manifestation of the mechanism of production leverage has a number of features:

The manifestation of the positive impact of the production lever begins only after the enterprise has overcome the break-even point;

The effect of the production lever decreases gradually as the volume of sales increases and the break-even point is completely removed;

There is also a reverse direction of the mechanism of production leverage;

There is an inverse relationship between the profit of the enterprise and the production leverage;

Manifestation of the effect of production leverage is possible only in a short period.

Understanding the structure and functioning of the operating lever mechanism makes it possible to purposefully manage fixed and variable costs in order to increase the level of efficiency of a particular enterprise. This management means changing the value of the leverage strength under different market trends, stages and stages of the life cycle of a given company.

In case of unfavorable conjuncture of the commodity market or in the early stages of the operation of the enterprise, its policy should be maximally aimed at reducing the strength of the operating lever by saving on fixed costs.

If the current market conditions are favorable and suitable in all respects, and the presence of a margin of safety is significant, then the implementation of the fixed cost savings regime can be significantly weakened. During such periods, the company is able to expand the volume of its real investments by modernizing the main production assets.

It should be noted that fixed costs are less susceptible to rapid change, so many enterprises that have significant operating leverage lose flexibility in managing the costs of their enterprise. With regard to only variable costs, the basic rule or these costs is to implement their constant, continuous savings, which guarantees an increase in sales.