Manufacturing leverage formula. Leverage is

Production leverage is the relationship between the structure of production costs and earnings before interest and taxes. This operating profit management mechanism is also called "operating leverage". The operation of this mechanism is based on the fact that the presence in the operating costs of any amount of their fixed types leads to the fact that when the volume of sales of products changes, the amount of operating profit always changes even faster. In other words, fixed operating costs (expenses) by the very fact of their existence cause a disproportionately higher change in the amount of the enterprise's operating profit with any change in the volume of sales of products, regardless of the size of the enterprise, industry specifics of its operating activities and other factors.

However, the degree of such sensitivity of operating profit to changes in the volume of product sales is ambiguous at enterprises with a different ratio of fixed and variable operating costs. The higher the share of fixed costs in the total operating costs of the enterprise, the more the amount of operating profit changes in relation to the rate of change in the volume of sales.

The ratio of fixed and variable operating costs of the enterprise, which means the level of production leverage is characterized by "operational leverage ratio", which is calculated using the following formula:

Where:
Number - operating leverage ratio;

Ipost - the amount of fixed operating costs;

Io - the total amount of transaction costs.

The higher the value of the operating leverage ratio at the enterprise, the more it is able to accelerate the growth rate of operating profit in relation to the growth rate of sales volume. Those. at the same rate of growth in sales volume, an enterprise with a higher operating leverage ratio, ceteris paribus, will always increase the amount of its operating profit to a greater extent compared to an enterprise with a lower value of this ratio.

The specific ratio of the increase in the amount of operating profit and the amount of sales volume, achieved at a certain operating leverage ratio, is characterized by the indicator "operational leverage effect". The principal formula for calculating this indicator is:

Eol - the effect of operating leverage, achieved at a specific value of its coefficient at the enterprise;

ΔVOP - growth rate of gross operating profit, in %;

ΔOR - growth rate of sales volume, in%.

The effect of the impact of the production leverage (operating leverage) is a change in sales proceeds leading to a change in profit

The growth rate of the volume expressed in% is determined by the formula:

I - change, meaning the growth rate, in%;
P.1 – volume indicator obtained in the 1st period, in rubles;

P.2 - volume indicator obtained in the 2nd period, in rubles.

financial leverage.

Financial leverage is the relationship between the structure of sources of funds and the value net profit.

financial leverage characterizes the use of borrowed funds by the enterprise, which affects the change in the return on equity. Financial leverage arises with the advent of borrowed funds in the amount of capital used by the enterprise and allows the enterprise to receive additional profit on equity.

An indicator that reflects the level of additional return on equity with a different share of the use of borrowed funds is called the effect of financial leverage (financial leverage).

The effect of financial leverage is calculated by the formula:

EFL - the effect of financial leverage, which consists in the increase in the return on equity ratio,%;

C - income tax rate, expressed as a decimal fraction;

KVR - gross profitability ratio of assets (the ratio of gross profit to the average value of assets),%;

PC - the average size interest on a loan paid by an enterprise for the use of borrowed capital (price of borrowed capital), %;

ZK - the amount of borrowed capital used by the enterprise;

SC - the amount of equity capital of the enterprise.

The formula has three components.

1. Tax corrector of financial leverage (1 - C).

2. Differential financial leverage (KVR - PC).

3. Coefficient of financial leverage or "shoulder" of financial leverage (LC / SC).

Using the effect of financial leverage allows you to increase the level of profitability of the company's own capital. When choosing the most appropriate structure of sources, it is necessary to take into account the scale of current income and profits when expanding activities through additional investment, capital market conditions, interest rate dynamics and other factors.

The minimum amount of revenue required to cover all expenses is called the break-even point, in turn, how much revenue can decrease so that the company operates without loss shows a margin of financial strength.

A change in revenue can be caused by a change in price, a change in physical volume of sales, and a change in both of these factors.

At the heart of the change in the effect of the production lever is the change specific gravity fixed costs in the total cost of the enterprise. At the same time, it should be borne in mind that the sensitivity of profit to changes in sales volume can be ambiguous in organizations that have a different ratio of constants and variable costs. The lower the share of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in sales proceeds.

The value of the operating (production) leverage may vary under the influence of: price and sales volume; variable and fixed costs; combinations of any of the above factors.

It should be noted that in specific situations, the manifestation of the operating lever mechanism has a number of features that must be taken into account in the process of its use.

These features are as follows:

1. The positive impact of the production lever begins to manifest itself only after the enterprise has overcome the break-even point of its activity, i.e. the enterprise at the beginning must receive a sufficient size marginal income to cover your fixed costs. This is due to the fact that the company is obliged to reimburse its fixed costs regardless of the specific sales volume, therefore, the higher the amount of fixed costs, the later, all other things being equal, it will reach the break-even point of its activities.

In this regard, until the enterprise has ensured the break-even of its activities, a high level of fixed costs will be an additional negative factor on the way to reaching the break-even point.

2. As sales increase further and further away from the break-even point, the effect of production leverage begins to decline. Each subsequent percentage increase in sales will lead to an increasing rate of increase in the amount of profit.

3. The mechanism of industrial leverage also has the opposite direction - with any decrease in sales, the size of the enterprise's profit will decrease even more.

4. There is an inverse relationship between the production leverage and the profit of the enterprise. The higher the profit of the enterprise, the lower the effect of production leverage and vice versa. This allows us to conclude that production leverage is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out production activities.

5. The effect of production leverage appears only in a short period. This is determined by the fact that the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as the next jump in the amount of fixed costs occurs in the process of increasing sales, the company needs to overcome a new break-even point or adapt its own production activities. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

Understanding the mechanism of manifestation of production leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of production and economic activities under various trends in the commodity market and stage life cycle enterprises.

With an unfavorable market structure that determines a possible decrease in sales, as well as in the early stages of the company's life cycle, when it has not yet overcome the break-even point, it is necessary to take measures to reduce fixed costs. And vice versa, with a favorable commodity market situation and the presence of a certain margin of safety, the requirements for the implementation of a regime of saving fixed costs can be significantly weakened. During such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing fixed production assets.

When managing fixed costs, it should be borne in mind that their high level is largely determined by the industry specifics of the activity, which determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with a high value of production leverage lose flexibility in managing their costs.

Despite these objective limitations, each enterprise has enough opportunities to reduce, if necessary, the amount and proportion of fixed costs.

These reserves include:

Significant reduction of overhead costs (management costs) in case of unfavorable commodity market conditions;
- sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation charges;
- widespread use of short-term forms of machinery and equipment instead of acquiring them in ownership;
- reduction in the volume of a number of consumed utilities and others.

When managing variable costs, the main guideline should be to ensure their constant savings, since there is a direct relationship between the amount of these costs and the volume of production and sales. Ensuring these savings before the company overcomes the breakeven point leads to an increase in marginal income, which allows you to quickly overcome the threshold of profitability. After breaking the break-even point, the amount of variable cost savings will provide a direct increase in the company's profit.

The main reserves for saving variable costs include:

Reducing the number of employees in the main and auxiliary industries by ensuring the growth of their labor productivity;
- reduction of stocks of raw materials, materials and during periods of unfavorable commodity market conditions;
- ensuring favorable conditions for the supply of raw materials and materials for the enterprise, and others.

The use of the mechanism of operating leverage, targeted management of fixed and variable costs, the rapid change in their ratio under changing business conditions will increase the potential for generating profits for the enterprise.

An analysis of the properties of the operating lever, arising from its definition, allows us to draw the following conclusions:

1. With the same total costs, the greater the operating leverage, the smaller the share of variable costs or the greater the share of fixed costs in the total cost.
2. The higher the operating leverage, the closer to the break-even point the volume of actual sales is “located”, which is the reason for the high risk.
3. The situation with low production leverage is associated with less risk, but also with less reward in the profit formula.

According to the results of the operational analysis, it can be concluded that the company is attractive to investors because it has:

Sufficient (more than 10%) margin of financial strength;
a favorable value of the impact force of the operating lever with a reasonable proportion of fixed costs in the total cost.

It can be noted that the weaker the impact force of the operating lever, the more stock financial strength.

The strength of the impact of the operating lever, as already noted, depends on the relative magnitude of fixed costs, which, with a decrease in the income of the enterprise, are difficult to reduce. High impact force of the operating lever in conditions economic instability, the fall in the effective demand of consumers means that each percentage of the decline in revenue leads to a significant drop in profits and the possibility of the company entering the zone of losses.

If we define the risk of a particular enterprise as an entrepreneurial risk, then we can trace the following relationship between the strength of the operating leverage and the degree of entrepreneurial risk: with a high level of fixed costs of the enterprise and the absence of their reduction during the period of falling demand for products, entrepreneurial risk increases.

For small firms, specializing in the production of one type of product, is characterized by a high degree of entrepreneurial risk. In the same direction, the instability of demand and prices for finished products, prices for raw materials and energetic resources.

In this way, modern management costs involves quite diverse approaches to accounting and analysis of costs, profits, entrepreneurial risk. You have to master these interesting tools to ensure the survival and development of your business.

Understanding the essence of the operating lever and the ability to manage it is additional features for use this instrument in the investment policy of the company. Thus, production risk in all industries can be regulated to a certain extent by managers, for example, when choosing projects with higher or lower fixed costs. With the release of products with a high market capacity, with the confidence of managers in sales volumes that are significantly higher than the break-even point, it is possible to use technologies that require high fixed costs, the implementation investment projects for the installation of highly automated lines, other capital-intensive technologies. In the areas of activity, when the company is confident in the possibility of conquering a stable market segment, as a rule, it is advisable to implement projects that have a lower proportion of variable costs.

Summing up, we can say:

An enterprise with a higher operational risk is more likely to take risks in the event of a deterioration in market conditions, and at the same time, it has advantages in the case of an improvement in the conjuncture;
the enterprise must navigate the market situation and adjust the cost structure accordingly.

Cost management in connection with the use of the effect of operating leverage allows you to quickly and comprehensively approach the use of enterprise finances. You can use the 50/50 rule for this. All types of products are divided into two groups depending on the share of variable costs. If it is more than half, then it is more profitable for the given types of products to work on reducing costs. If the share of variable costs is less than 50%, then it is better for the company to increase sales volumes - this will give a higher gross margin.

Operating leverage effect

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 physical 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 volume 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 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. The level of operating leverage is greatest 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 value 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. 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.

The strength of the operating lever

The effect of production leverage is one of the most important indicators, since it shows how much the balance sheet profit will change, as well as economic profitability assets when the volume of sales or proceeds 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 particular enterprise, the result from the sale of products after reimbursement of variable costs (VC), which is often called marginal income, will be used.

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

The effect of operating leverage is that any change in sales revenue (due to a change in volume) leads to an even greater change in profit. The action of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activity of the enterprise when the volume of production changes.

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

Thus, modern cost management involves quite diverse approaches to accounting and analysis of costs, profits, business risk. You have to master these interesting tools to ensure the survival and development of your business. Production risk is associated with the concept of operational, or production, leverage, and financial - with the concept of financial leverage.

There are three main measures of operating leverage:

A) the share of fixed production costs in the total cost, or, equivalently, the ratio of fixed and variable costs;
b) the ratio of the rate of change in profit before interest and taxes to the rate of change in the volume of sales in natural units;
c) the ratio of net profit to fixed production costs Any serious improvement in the material and technical base towards an increase in the share of non-current assets is accompanied by an increase in the level of operating leverage and production risk.

The method of controlling the level of fixed costs is a method for calculating the critical volume of sales. Its meaning is to calculate at what volumes of production in natural units the marginal profit (i.e. the difference between sales proceeds and variable costs non-financial or direct variable costs) will be equal to the sum of conditionally fixed costs. This method allows you to find the minimum amount of production that is necessary to cover conditionally fixed costs, i.e. costs that do not depend on the volume of output.

Among indicators for assessing the level of financial leverage, two are the most famous: the ratio of debt and equity capital and the ratio of the rate of change in net profit to the rate of change in earnings before interest and taxes.

As part of the overall financial strategy of an economic entity, the management of borrowed funds involves a preliminary analysis of their attraction and use, adjustment of the attraction policy or development of a new policy. The analysis involves studying the volumes, dynamics, forms of attraction, types of credit, terms of attraction, credit conditions, the composition of creditors, the efficiency of use and the progress of repayment of borrowed funds.

The borrowing policy includes the definition of:

A) the reasons and prerequisites for such involvement;
b) targeted nature of the use of borrowed funds;
c) limits (maximum volumes) of attraction;
d) conditions (including terms and prices of attraction);
e) general composition, structure;
f) forms of attraction;
g) creditors, etc.

The impact of the operating lever

The strength of operating leverage, as already noted, depends on the relative magnitude of fixed costs. For enterprises burdened with cumbersome production assets, the high strength of the operating leverage poses a significant danger: in conditions of economic instability, a drop in the effective demand of customers and severe inflation, every percentage of a decrease in revenue turns into a catastrophic drop in profits and the entry of an enterprise into a loss zone. Management is blocked, i.e. devoid of most of the options for choosing productive solutions.

The strength of the impact of the operating lever, which depends largely on the amount of fixed costs and the mass of profits, and hence the demand and prices for products, prices for material resources and energy, characterizes the magnitude of entrepreneurial risk.

The strength of operating leverage depends very much on the relative magnitude of fixed costs. The income of an enterprise weighed down by a cumbersome OPF ( oil industry), the high strength of the operating lever implies a significant danger, since in conditions of economic instability and a drop in the solvency of the company's clients due to the high level of inflationary expectations, any percentage of a decrease in revenue can turn into a catastrophic drop in profits and. Therefore, operational analysis is called break-even analysis. it allows you to calculate such an amount (quantity) of sales at which the income is equal to the expense, i.e. The business does not incur losses, but it does not generate income either. Selling below the break-even point results in a loss, while selling above the break-even point results in a profit.

The strength of the impact of the operating lever shows the degree of entrepreneurial risk, i.e. the risk of loss of profit associated with fluctuations in the volume of sales.

The strength of the impact of the operating lever, calculated, as a rule, for a certain sales volume, for a given sales proceeds, largely depends on the average industry level of capital intensity: the higher the value of fixed assets, the greater the fixed costs, and the higher the fixed costs and the lower the profit , the stronger the operating lever acts.

The strength of the operating leverage indicates the degree of entrepreneurial risk associated with a given company: the greater the strength of the operating leverage, the greater the entrepreneurial risk.

Whether The strength of the operating leverage, as already noted, depends on the relative magnitude of fixed costs. For enterprises burdened with cumbersome production assets, the high strength of the operating leverage poses a significant danger: in conditions of economic instability, a drop in the effective demand of customers and severe inflation, every percentage of a decrease in revenue turns into a catastrophic drop in profits and the entry of an enterprise into a loss zone. Management is blocked, i.e. devoid of most of the options for choosing productive solutions.

If the strength of the operating leverage is three, then with a reduction in revenue by (100%: 3) 33%, the company has zero profit.

The operating leverage formula will now help us answer the question of how sensitive the gross margin, or the net result of the operation of investments, is to changes in the physical volume of product sales.

The greater the force of operating leverage, the lower the elasticity of demand required to maintain and increase profits when prices fall.

So, the greater the force of operating leverage (or the greater the fixed costs), the more sensitive the net result of the operation of investments to changes in sales and sales proceeds; the higher the level of financial leverage, the more sensitive the net earnings per share to changes in the net result of the operation of investments.

What factors determine the strength of the impact of the operating lever and how it is determined.

So, the greater the impact of the operating leverage (or the greater the fixed costs), the more sensitive the net result of the operation of investments to changes in sales and revenue from sales; the higher the level of financial leverage, the more sensitive the net earnings per share to changes in the net result of the operation of investments.

In practical calculations, to determine the strength of the impact of operating leverage, the ratio of the so-called gross margin (the result of sales after recovering variable costs) to profit is used. Gross margin is the difference between sales revenue and variable costs. This indicator in the economic literature is also referred to as the amount of coverage. It is desirable that the gross margin is enough not only to cover fixed costs, but also to generate profits.

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

In practical calculations, to determine the strength of the impact of operating leverage, the gross margin (VM) indicator is used - the results from sales after reimbursement of variable costs.

In practical calculations, to determine the strength of the impact of operating leverage, the ratio of the so-called gross margin to profit is used. Gross margin is the difference between sales revenue and variable costs, in other words, it is the result of sales after recovering variable costs. Since the gross margin is the sum of the coverages, it is desirable that the gross margin is enough not only to cover fixed costs, but also to generate profits.

This is easy to show by converting the formula for the force of operating leverage: GROSS MARGIN / PROFIT (FIXED COSTS PROFIT) / PROFIT.

When sales revenue declines, operating leverage increases. Each percentage reduction in revenue then results in a larger and larger percentage reduction in profits. This is how the formidable power of operating leverage manifests itself.

As revenue moves away from its threshold value, the impact of operating leverage weakens, and the margin of financial safety increases. This is due to the relative decrease in fixed costs in the relevant range.

The strength of the operating leverage indicates the degree of entrepreneurial risk associated with a given company: the greater the strength of the operating leverage, the greater the entrepreneurial risk.

For doubters, we remind you that (1 - FIXED COSTS / GROSS MARGIN) is the reciprocal of the operating leverage.

By what percentage should fixed costs be reduced so that with a 25% reduction in revenue and the same value of the operating leverage, the company retains 75% of the expected profit.

At the stage of product maturity, the enterprise maintains a sufficient amount of profit by reducing costs, and, moreover, mostly constant; the force of the operating lever, as a rule, decreases.

Each successive dose of investment or, which is the same, each jump in fixed costs associated with investments leads to an increase in the share of fixed costs in their total amount and to an increase in the strength of the impact of the operating lever with all the ensuing consequences that we described in detail earlier.

At the stages of introducing a product to the market and increasing sales of the main financial purpose enterprises becomes a steady increase in profits; at the same time, it should be taken into account that at these stages, especially at the stage of growth, profit maximization turns into maximization of the amount (after crossing the threshold of profitability, with a rapid increase in profits, the force of operating leverage is dangerously high); a lot of trouble can be delivered by swelling receivables.

Therefore, further reductions are not feasible as production approaches the threshold. The strength of the impact of the operating lever, equal to four, indicates a high operational dependence of enterprises on changes in the volume of production.

The results of calculations using this formula indicate the level of total risk associated with this enterprise and answering the question: by what percentage does net income per share change when the volume of sales proceeds changes by 1 percent. The strength of the operating leverage is calculated by the ratio of gross margin to profit and shows how many percent of the change in profits gives any percentage change in revenue.

The greater the force of operating leverage, the smaller the decrease in revenue is considered as unacceptable. Thus, with an operating leverage of 20, even a five percent reduction in revenue is unacceptable.

DD The greater the force of operating leverage, the smaller the decrease in revenue is considered as unacceptable. Thus, with an operating leverage of 20, even a five percent reduction in revenue is unacceptable.

How and why the strength of the impact of operating leverage and the margin of financial safety change as revenue moves away from the profitability threshold.

Everything converges, and now we have not one, but several ways to calculate the strength of the operating lever - according to any of the intermediate links in the chain of our formulas. Note also that the force of operating leverage is always calculated for a certain volume of sales, for a given sales proceeds. The proceeds from sales change - the strength of the impact of the operating lever also changes. The strength of the impact of the operating lever largely depends on the industry average level of capital intensity: the greater the cost of fixed assets, the greater the fixed costs - this, as they say, is an objective factor.

Operating lever formula

The effect of operating leverage characterizes the coefficient, which is calculated by the formula:

Sales profit growth rate (operating), % divided by Revenue growth rate, %

This formula allows you to answer the question of what will be the increase in profit, depending on the specific increase in sales with the current cost structure.

Enterprise operating lever

Key elements operational analysis are: operating leverage, the threshold of profitability and the margin of market strength of the enterprise.

Operating leverage 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 profit of the organization 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 a 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: variable and fixed. Their structure as a whole, and in particular the level of fixed costs, in the total revenue of an enterprise or in revenue per unit of production can significantly affect the trend in profits or costs. This is due to the fact that each additional unit of production brings some additional 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 level is reached, profit appears, which begins to grow faster than sales. The operating lever is a tool for defining and analyzing this dependence. In other words, it is designed to establish the impact of profit on the change in sales volume.

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, you can predict the change in profit with a change in revenue. Distinguish price and natural price leverage.

The price operating leverage (Рц) is calculated by the formula:

Rts = V / P
where, B - sales revenue; P - profit from sales.

Given that B = 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 leverage (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 of 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.

Operating leverage calculation

It is desirable that the margin is enough to cover fixed costs and generate profits. The strength of operating leverage is close to the profitability threshold and decreases as sales revenue increases. The relationship between the effects of financial and operating leverage is as follows: an enterprise, using loans, increases the volume of production, which positively affects its profitability.

This effect of operating leverage occurs up to a certain limit: gradually the increase in production increases overhead and fixed costs, which leads to a decrease in profits. Operational risks are associated with operating leverage. The values ​​of the operating leverage for enterprises of various industries are different and cannot be determined unambiguously, therefore, we should talk about some kind of framework. On the one hand, this will be the volume of production corresponding to the threshold of profitability, on the other hand, the volume of production of these goods, which will require a one-time increase in fixed costs.

Let's consider an example of calculating operating leverage using the formula and procedure for calculating the effect of operating leverage.

Alfa LLC's revenue reporting period amounted to 650 million rubles, total costs (costs) amounted to 340 million rubles, including fixed costs amounted to 35 million rubles, variable costs 305 million rubles.

To determine the effect of operating leverage, the value of marginal income (revenue minus variable costs) is determined.

In our example, the gross margin is 345 million rubles. (650-305 = 345), operating profit ( gross profit), the difference between revenue and cost is 310 million rubles.

Then the strength of the operating leverage (the ratio of marginal profit to gross profit) will be 1.11 (345/310).

Thus, a 10% increase in revenue should give an 11.1% increase in gross profit (10% * 1.11), and a 3% decrease in sales will reduce operating profit by 3.34% (3% * 1.11 ).

Consider another small example:

Alpha LLC provides cleaning services. The number of consumers of services is 150 people per month. The price of the service for one consumer per month is 20 thousand rubles. Fixed costs are 400 thousand rubles, variables per consumer per month - 14 thousand rubles. Let's determine whether such an activity is profitable?

Profit \u003d (p - v) Q - FC \u003d (20 - 14) * 150 - 400 \u003d 500 thousand rubles

Demand for services is growing and the organization is increasing its customer base by 20 customers per month. There is no need to purchase additional equipment and state expansion. How will the profit of the organization change in this case?

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

At the same time, the volume of services increased by 13.3% ((170-150)/150*100% = 13.3%), while profit increased by 24% ((620-500)/500 = 24%). This is the operating lever in action. If revenue increases by 13.3%, then profit increases by 24%. By reducing the data, we get the effect of operating leverage: with a 1% increase in revenue, profit increases by 1.8%.

Production leverage shows how much the rate of change in profit exceeds the rate of change in revenue. The effect is manifested due to the presence of fixed costs in the cost structure.

The effect of operating leverage is that any change in revenue from the sale of goods, the provision of services leads to an even stronger change in profit. The effect is associated with a disproportionate impact of conditionally fixed and conditionally variable costs on the financial result when the volume of production and sales changes.

The higher the share of semi-fixed costs and production costs, the stronger the impact of operating leverage. Conversely, with an increase in the volume of sales, the share of semi-fixed costs falls, and the impact of operating leverage decreases.

The effect of production leverage is manifested only in the short period. This is determined by the fact that the fixed costs of the organization remain unchanged only for a short period of time. As soon as the next jump in the amount of fixed costs occurs in the process of increasing sales, the enterprise needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

Operating leverage margin of financial strength

The indicator of operating leverage allows you to quickly (without preparing a full income statement) to determine how changes in sales volume will affect the company's profit. Multiply the percentage change in sales by the level of operating leverage to determine the percentage change in profit.

One of the main tasks of the analysis of the ratio "costs - volume - profit" is the selection of the most profitable combinations of variable and fixed costs, sales prices and sales volumes. The value of marginal income (both gross and specific) and the value of the marginal income ratio are key in making decisions related to the costs and income of companies. Moreover, the adoption of these decisions does not require the preparation of a new income statement, since only an analysis of the growth of those items that are supposed to be changed can be used.

When using the analysis, you should be clear about the following:

First, a change in fixed costs changes the position of the break-even point, but does not change the size of marginal income.
- secondly, a change in variable costs per unit of production changes the value of the marginal income indicator and the location of the break-even point.
- thirdly, the simultaneous change in fixed and variable costs in the same direction causes a strong shift in the break-even point.
- Fourthly, a change in the sale price changes the marginal income and the location of the break-even point.

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

Operating Leverage = (Revenue - Variable Costs) / (Revenue - Variable Costs - Fixed Costs)

Operating leverage measures the percentage change in earnings for a one percent change in revenue. Thus, by setting a certain rate of growth in the volume of sales (revenue), it is possible to determine the extent to which the amount of profit will increase with the strength of the operating leverage prevailing at the enterprise. Differences in the effect achieved at different 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 improve the efficiency of the current activities of the enterprise. This management is reduced to changing the value of the strength of the operating lever under various trends in the conjuncture of the commodity market and stages of the life cycle of the enterprise.

With unfavorable commodity market conditions, as well as in the early stages of the life cycle of an enterprise, its policy should be aimed at reducing the strength of the operating lever by saving on fixed costs. With favorable market conditions and with a certain margin of safety, the requirement for the implementation of a fixed cost savings regime can be significantly weakened. During such periods, an enterprise can expand the volume of real investments by modernizing fixed production assets. It should be noted that fixed costs are less amenable to rapid change, so enterprises with greater operating leverage lose flexibility in managing their costs. As for variable costs, the basic principle of managing variable costs is to ensure their constant savings.

Stock of financial strength \u003d (sales proceeds - profitability threshold) / sales proceeds

The margin of financial strength is the edge of the enterprise's safety. The calculation of this indicator makes it possible to assess the possibility of an additional reduction in revenue from sales of products within the break-even point. Therefore, the financial safety margin is nothing more than the difference between the sales proceeds and the profitability threshold. The margin of financial strength is measured either in monetary terms or as a percentage of the proceeds from product sales:

So, 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. All this taken together generates entrepreneurial risk.

One of the factors that “weight” fixed costs is the increase in the effect of “financial leverage” with an increase in interest on a loan in the capital structure. In turn, operating leverage generates stronger earnings growth than sales growth (revenues), increasing earnings per share, and thereby enhancing financial leverage. Thus, financial and operational levers are closely linked, mutually reinforcing each other.

The combined effect of operational and financial leverage is measured by the level of the conjugate effect of the action of both levers, which is calculated using the following formula:

The level of conjugate effect of operating and financial leverage = the strength of the impact of the operating lever X the strength of the impact of financial leverage

The level of the conjugate effect of the action of both levers indicates the level of the total risk of the enterprise and shows the percentage change in earnings per share when the volume of sales (sales proceeds) changes by 1%.

The combination of strong operating leverage with strong financial leverage can be detrimental to an enterprise, as entrepreneurial and financial risks 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. High level of financial leverage combined with low operating leverage.
2. Low level of financial leverage combined with strong operating leverage.
3. Moderate levels of financial and operational leverage effects, which is the most difficult to achieve.

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. As you know, this is achieved through a compromise between risk and return.

The level of the conjugate effect of operating and financial leverage makes it possible to make planned calculations of the future value of earnings per share, depending on the planned volume of sales (revenue), which means the possibility of direct access to the company's dividend policy.

Introduction

1 The concept of leverage, its significance for a market economy

T ermin "leverage" represents barbarism, i.e. direct borrowing of an American term « leverage» , already quite widely used in domestic special literature; note that in the UK the term is used for the same purpose « Gearing». Some monographs use the term "lever arm", which should hardly be recognized as successful even in a linguistic sense, since in a literal translation in English the lever is " lever", but not "1everege».

In economics, or rather in management, under the word leverage understand - the process of managing the assets and liabilities of an enterprise, aimed at increasing (increasing) profits.

The main performance indicator is the net profit of the company, which depends on many factors, and therefore various factor expansions of its change are possible. In particular, it can be represented as the difference between revenue and expenses of two main types: production nature and financial nature. They are not interchangeable, but the amount and share of each of these types of costs can be controlled. Such a presentation of the factor structure of profit is extremely important in a market economy and freedom in financing a commercial organization with the help of loans from commercial banks, which differ significantly in their interest rates.

From the position of financial management of the activities of a commercial organization, net profit depends; firstly, on how rationally the financial resources provided to the enterprise are used, i.e. what they are invested in, and, secondly, on the structure of the sources of funds.

The first point is reflected in the volume and structure of fixed and current assets and the efficiency of their use. The main elements of the cost of production are variable and fixed costs, and the ratio between them can be different and is determined by the technical and technological policy chosen by the enterprise. Changing the cost structure can significantly affect the amount of profit. Investing in fixed assets is accompanied by an increase in fixed costs and, at least in theory, a decrease in variable costs. However, the dependence is non-linear, so finding the optimal combination of fixed and variable costs is not easy. It is this relationship that is characterized by the category of production, or operational, leverage, the level of which, in addition, determines the amount of production risk associated with the company.

Leverage in the application to the financial sector, it is interpreted as a certain factor, a small change in which can lead to a significant change in the resulting indicators.

In financial management, there are the following types of leverage:

financial

production (operational)

production and financial

Every enterprise is a source of risk. In this case, the risk arises on the basis of factors of an industrial and financial nature. These factors form the costs of the enterprise. Production and financial costs are not interchangeable, however, the value and structure of production and financial costs can be controlled. This management takes place in conditions of freedom of choice of sources of financing and sources of formation of production costs. As a result of using various sources of financing, a certain ratio is formed between equity and borrowed capital, and, since borrowed capital is paid, and financial costs are formed on it, it becomes necessary to measure the impact of these costs on the final result of the enterprise. That's why financial leverage characterizes the impact of the capital structure on the amount of profit of the enterprise, and different ways of including credit costs in the cost price affect the level of net profit and net return on equity.

2 Operating (production) leverage and its effect

Operational (production) leverage depends on the structure of production costs and, in particular, on the ratio of semi-fixed and semi-variable costs in the cost structure. Therefore, production leverage characterizes the relationship between the cost structure, output and sales, and profit. Production leverage shows the change in profit depending on the change in sales volumes.

Operating leverage- this is a potential opportunity to influence the balance sheet profit by changing the cost structure and output volume (fixed and variable costs, optimization).

concept operating leverage associated with the cost structure and, in particular, with the ratio between conditionally fixed and conditionally variable costs. Consideration of the cost structure in this aspect allows, firstly, to solve the problem of profit maximization due to the relative reduction of certain costs with an increase in the physical volume of sales, and, secondly, the division of costs into conditionally fixed and conditionally variable allows us to judge the payback costs and provides an opportunity to calculate the margin of financial strength of the enterprise in case of difficulties, complications in the market, thirdly, it makes it possible to calculate the critical sales volume that covers costs and ensures the break-even activity of the enterprise.

The solution of these problems allows us to come to the following conclusion: if an enterprise creates a certain amount of semi-fixed costs, then any change in sales proceeds generates an even stronger change in profit. This phenomenon is called operating leverage effect.

For example: Suppose in the reporting year, sales revenue amounted to 10 million rubles. with total variable costs of 8.3 million rubles. and fixed costs of 1.5 million rubles. Profit \u003d 0.2 million rubles.

Suppose that in the planned year it is planned to increase revenue due to the physical volume of sales by 10%, i.e. 11 million rubles Fixed costs \u003d 1.5 million rubles.

Variable costs increase by 10%, i.e. 8.3 * 1.1 \u003d 9.13 million rubles.

Profit from sales = 0.37 million rubles, i.e. 11-9.13-1.5.

Profit growth rate (370/200)*100 = 185%.

Revenue growth rate = 110%. For each increase in revenue, we have an increase in profit of 8.5%, i.e. EOL = 85%/10% = 8,5%

That. the strength (effect) of operational leverage can be considered as a characteristic of the business risk of an enterprise arising in a given business area or in connection with its industry affiliation. And this effect can be measured as the percentage change in profit from sales after reimbursement of variable costs (or NREI) at a given percentage change in the physical volume of sales:

where Q- physical volume of sales,

R– price,

- revenues from sales,

- the rate of variable costs for output,

- fixed costs

(5)

(6)

These formulas allow you to answer the question of how sensitive marginal income is ( MD) to a change in the volume of production and sales, and how much would be enough MD not only to cover fixed costs, but also to generate profits.

In connection with the concept of the effect of production leverage, the concept of a financial safety margin arises ( ZFP), which ensures the profit of the enterprise, and the concept of the safety margin (break-even volume of production and sales or critical sales volume):

(8)

where VRF– sales proceeds (actual),

- critical volume in value terms,

ZFP- a margin of financial strength.

The action of operational leverage is associated with the different nature and behavior of the current costs of production and sales of products. Depending on the change in the volume of production X, there are variable costs and semi-fixed costs, the study of which is the subject of break-even analysis.

The analytical representation of the break-even model is the break-even formula:

Revenue = Costs

All basic parameters are derived from this formula:

critical (break-even) production volume = profitability threshold;

the critical value of the selling price;

critical value of fixed costs;

critical value of variable costs.

Break even chart

Revenue

Full costs

fixed costs

Rice. one

For each of these parameters, margin of safety- this is the percentage ratio of the planned, or actual, and critical value of the parameter. For the volume of production, this margin is called the margin of financial safety of the enterprise. It shows by how many percent, if the situation on the market changes, the volume of production can fall, up to a critical one.

Important concepts in production volume management are:

Contribution margin(marginal income) is the difference between the price and unit variable costs.

Critical production volume- this is the number of products, the total marginal income from sales, which covers conditionally fixed costs.

Sales volume in natural units ( X1), which provides a given gross income, calculated by the formula:

(11)

where FC- fixed costs

- given gross income,

KM- contributory margin.

3 Leverage in manufacturing plants

Production leverage is a mechanism for managing the profit of an enterprise based on optimizing the ratio of fixed and variable costs. With it, you can predict the profits of the enterprise depending on changes in sales, as well as determine the break-even point.

The condition for applying the mechanism of production 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 profit changes in relation to the rate of change in the company's revenue.

Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits. The mechanism of production leverage is based on the change in the share of fixed costs in the total cost of the enterprise. 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.

The manifestation of the mechanism of production leverage has the following features:

1) the positive impact of production leverage begins to manifest itself only after the company has overcome the break-even point of its activities.

In order for the positive effect of production leverage to begin to manifest itself, the enterprise must first receive a sufficient marginal income to cover its fixed costs. This is due to the fact that the company is obliged to recover its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities. In this regard, until the enterprise has ensured the break-even of its activities, a high level of fixed costs will be an additional obstacle on the way to reaching the break-even point;

2) as sales increase further and move away from the break-even point, the effect of production leverage begins to decline. Each subsequent percentage increase in sales will lead to an increasing rate of increase in the amount of profit;

3) the mechanism of production leverage also has the opposite direction - with any decrease in sales, the size of the enterprise's profit will decrease even more;

4) there is an inverse relationship between the production leverage and the profit of the enterprise. The higher the profit of the enterprise, the lower the effect of production leverage, and vice versa. This allows us to conclude that production leverage is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out production activities;

5) the effect of production leverage is manifested only in a short period. This is determined by the fact that the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as the next jump in the amount of fixed costs occurs in the process of increasing sales, the enterprise needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

Understanding the mechanism of manifestation of production leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of production and economic activities under various trends in the commodity market and the stage of the life cycle of an enterprise.

With unfavorable commodity market conditions that determine a possible decrease in sales, as well as in the early stages of the life cycle of an enterprise, when it has not yet overcome the break-even point, it is necessary to take measures to reduce the fixed costs of the enterprise. And vice versa, with a favorable commodity market situation and the presence of a certain margin of safety, the requirements for the implementation of a regime of saving fixed costs can be significantly weakened. During such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing fixed production assets.

When managing fixed costs, it should be borne in mind that their high level is largely determined by the industry specifics of the activity, which determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with a high value of production leverage lose flexibility in managing their costs.

Each enterprise has enough opportunities to reduce (if necessary) the amount and proportion of fixed costs. These reserves include: a significant reduction in overhead costs (management costs) in case of unfavorable commodity market conditions; sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation charges; widespread use of short-term forms of leasing machinery and equipment instead of acquiring them as property; reduction in the volume of a number of consumed utilities.

When managing variable costs, the main guideline should be to ensure their constant savings, because. between the sum of these costs and the volume of production and sales there is a direct relationship. Providing these savings before the enterprise overcomes the break-even point leads to an increase in marginal income, which allows you to overcome this point faster. After breaking the break-even point, the amount of savings in variable costs will provide a direct increase in the profit of the enterprise. The main reserves for saving variable costs include a decrease in the number of employees in the main and auxiliary industries by ensuring the growth of their labor productivity; reduction in the size of stocks of raw materials, materials and finished products during periods of unfavorable commodity market conditions; ensuring favorable conditions for the supply of raw materials and materials for the enterprise.

The use of the mechanism of production leverage, targeted management of fixed and variable costs, the rapid change in their ratio under changing business conditions will increase the potential for generating profits for the enterprise.

For domestic enterprises, the break-even analysis method of production is not yet officially recommended, and therefore, so far it is used mainly for predictive calculations of price, profit, and sales proceeds. Manufacturers working in a real market economy can appreciate the analytical capabilities of this method.

Conclusion

When writing this term paper, the basic concepts of leverage, its tasks, functions were described, as well as its use in enterprises in a market economy was justified. Let's briefly describe the main points:

Leverage is a complex system for managing the assets and liabilities of an enterprise. Any enterprise strives to achieve two main goals of its activities, i.e.:

♦ profit increase;

♦ increase in the value of the enterprise itself.

Under these conditions, leverage becomes the very tool that allows you to achieve these goals, by influencing changes in the ratios and return on equity and borrowed capital.

Leverage is divided into three main types:

♦ financial;

♦ operational;

♦ financial and operational.

Depending on the tasks set at the enterprise aimed at improving the financial situation of the enterprise, one or another type of leverage is used.

When performing this course work, the following conclusions were made, certain shortcomings were identified and the following recommendations were proposed.

An enterprise can partially attract borrowed capital with a fixed return on assets and thereby increase the return on equity, by making the most efficient use of own funds(capital). But financial leverage also has significant drawbacks, since there are financial (leverage) risks that can make an enterprise dependent on borrowed funds (credits, loans, loans) in the event of a lack of funds to pay for loans.

In this case, the company experiences a loss of liquidity or financial stability, which can gradually lead to the bankruptcy of the enterprise, but this is quite rare, and most often due to an incorrect structure of enterprise and financial management in general.

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Production leverage is a mechanism for managing the profit of an enterprise based on optimizing the ratio of fixed and variable costs. With its help, you can predict the change in the profit of the enterprise depending on the change in sales volume, as well as determine the break-even point.

A necessary condition for the application of the mechanism of production leverage is the use of the marginal method based on the division of the company's 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.

Production leverage is determined using one of two formulas:

Apple = TCM / ? (one),

Apple = (TFC + ?) / ? = 1 + (TFC / ?) (2)

where Apple is the effect of production leverage; TCM - total marginal income; TFC - total fixed costs; ? - profit.

The value of the effect of production leverage found using formula (1) further serves to predict the change in profit depending on the change in the company's revenue. To do this, use the following formula:

Y? =?? / ?TR (3)

where?? - profit change, %; ?TR - change in sales revenue, %.

For clarity, consider the effect of production leverage using an example:

1. The amount of sales (revenue) - 375,000 rubles.
2. Variable costs - 250,000 rubles.
3. Marginal income (p. 1 - p. 2) - 125,000 rubles.
4. Fixed costs - 80,000 rubles.
5. Profit (p. 3 - p. 4) - 45,000 rubles.
6. The volume of products sold - 500 pcs.
7. Price per unit - 750 rubles.
8. The effect of production leverage (p. 3 / p. 5) - 2.78.

Using the mechanism of industrial leverage, we predict the change in the profit of the enterprise depending on the change in revenue, and also determine the break-even point. For our example, the production leverage effect is 2.78 units (12,5000 / 45,000). This means that with a decrease in the company's revenue by 1%, the profit will decrease by 2.78%, and with a decrease in revenue by 36%, we will reach the profitability threshold, i.e. profit will be zero. Let's assume that the revenue will be reduced by 10% and will amount to 337,500 rubles. (375,000 - 375,000 * 10 / 100). Under these conditions, the profit of the enterprise will be reduced by 27.8% and amount to 32,490 rubles. (45,000 - 45,000 * 27.8 / 100).

Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits. The value of production leverage may change under the influence of:

• prices and sales volume;
• variable and fixed costs;
• combinations of these factors.

Let's consider the influence of each factor on the effect of production leverage based on the above example.

An increase in the selling price by 10% (up to 825 rubles per item) will lead to an increase in sales volume up to 412,500 rubles, marginal income - up to 162,500 rubles. (412,500 - 250,000) and profits - up to 82,500 rubles. (162,500 - 80,000). At the same time, the marginal income per unit of product will also increase from 250 (125,000 rubles / 500 pieces) to 325 rubles. (162,500 rubles / 500 pcs.). Under these conditions, a smaller volume of sales will be required to cover fixed costs: the break-even point will be 246 units. (80,000 rubles / 325 rubles), and the marginal margin of safety of the enterprise will increase to 254 units. (500 pieces - 246 pieces), or by 50.8%. As a result, the company can receive additional profit in the amount of 37,500 rubles. (82,500 - 45,000). At the same time, the effect of production leverage will decrease from 2.78 to 1.97 units (162,500 / 82,500).

Reducing variable costs by 10% (from 250,000 rubles to 225,000 rubles) will lead to an increase in marginal income up to 150,000 rubles. (375,000 - 225,000) and profits - up to 75,000 rubles. (150,000 - 80,000). As a result, the break-even point (profitability threshold) will increase to 200,000 rubles. , what in in kind will be 400 pcs. (200,000: 500). As a result, the marginal margin of safety of the enterprise will be 175,000 rubles. (375,000 - 200,000), or 233 pcs. (175,000 rubles / 750 rubles). Under these conditions, the effect of production leverage at the enterprise will decrease to 2 units (150,000 / 75,000). With a decrease in fixed costs by 10% (from 80,000 rubles to 72,000 rubles), the profit of the enterprise will increase to 53,000 rubles. (375,000 - 250,000 - 72,000), or 17.8%. Under these conditions, the break-even point in monetary terms will be 216,000 rubles. , and in kind - 288 pcs. (216,000 / 750). At the same time, the marginal margin of safety of the enterprise will correspond to 159,000 rubles. (375,000 - 216,000), or 212 pcs. (159,000 / 750). As a result of a 10% reduction in fixed costs, the effect of production leverage will be 2.36 units (125,000 / 53,000) and, compared to the initial level, will decrease by 0.42 units (2.78 - 2.36).

The analysis of the above calculations allows us to conclude that the change in the effect of production leverage is based on the change in the share of fixed costs in the total cost of the enterprise. At the same time, it should be borne in mind that the sensitivity of profit to changes in sales volume can be ambiguous in enterprises with a different ratio of fixed and variable costs. The lower the share of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

It should be noted that in specific situations, the manifestation of the mechanism of production leverage may have features that must be taken into account in the process of its use. These features are as follows:

1. The positive impact of production leverage begins to manifest itself only after the company has overcome the break-even point of its activities. In order for the positive effect of production leverage to begin to manifest itself, the enterprise must first receive a sufficient marginal income to cover its fixed costs. This is due to the fact that the company is obliged to recover its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities. Therefore, until the enterprise has ensured the break-even of its activities, a high level of fixed costs will be an additional “burden” on the way to reaching the break-even point.
2. As sales increase further and further away from the break-even point, the effect of production leverage begins to decline. Each subsequent percentage increase in sales will lead to an increasing rate of increase in the amount of profit.
3. The mechanism of production leverage also has the opposite direction: with any decrease in sales, the size of the enterprise's profit will decrease even more.
4. There is an inverse relationship between the production leverage and the profit of the enterprise. The higher the profit of the enterprise, the lower the effect of production leverage, and vice versa. This allows us to conclude that production leverage is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out production activities.
5. The effect of production leverage is manifested only in the short period. This is determined by the fact that the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as the next jump in the amount of fixed costs occurs in the process of increasing sales, the enterprise needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

Understanding the mechanism of manifestation of production leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of production and economic activities under various trends in the commodity market and the stage of the life cycle of an enterprise.

With unfavorable commodity market conditions that determine a possible decrease in sales, as well as in the early stages of the life cycle of an enterprise, when it has not yet overcome the break-even point, it is necessary to take measures to reduce the fixed costs of the enterprise. And vice versa, with a favorable commodity market situation and the presence of a certain margin of safety, the requirements for the implementation of a regime of saving fixed costs can be significantly weakened. During such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing fixed production assets.

When managing fixed costs, it must be borne in mind that their high level largely depends on the industry-specific characteristics of the activity that determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with a high value of production leverage lose flexibility in managing their costs.

However, despite these objective limitations, each enterprise has enough opportunities to reduce, if necessary, the amount and proportion of fixed costs. These reserves include:

• significant reduction in overhead costs (management costs);
• sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation charges;
• widespread use of short-term forms of leasing machinery and equipment instead of acquiring them as property;
• reduction in the volume of consumption of some utilities, etc.

When managing variable costs, the main guideline should be to ensure their constant savings, since there is a direct relationship between the amount of these costs and the volume of production and sales. Providing these savings before the enterprise overcomes the break-even point leads to an increase in marginal income, which allows you to overcome this point faster. After breaking the break-even point, the amount of savings in variable costs will provide a direct increase in the profit of the enterprise. The main reserves for saving variable costs include:

• reduction in the number of employees of the main and auxiliary industries by ensuring the growth of their labor productivity;
• reduction in the size of stocks of raw materials, materials and finished products during periods of unfavorable commodity market conditions;
• ensuring favorable conditions for the supply of raw materials and materials for the enterprise, etc.

The use of the mechanism of production leverage, targeted management of fixed and variable costs, the rapid change in their ratio under changing business conditions will increase the potential for generating profits for the enterprise.

Alexander Nikolaevich Khopin, Doctor of Economics, Professor, Department of Accounting, Analysis and Audit, Faculty of Economics, Moscow State University

• Leadership and Management

Keywords:

1 -1

The concept, essence and significance of leverage in assessing the effectiveness of an enterprise's investment policy and the degree of production and financial risk. Methodology for determining and analyzing the levels of production, financial and production-financial leverage.

The process of optimizing the structure of assets and liabilities of an enterprise in order to increase profits in financial analysis called leverage. There are three types of leverage: production, financial and production-financial. In the literal sense, "leverage" is a lever, with a little effort which can significantly change the results of the production and financial activities of the enterprise.

To reveal its essence, we present the factorial model of net profit (PE) as the difference between revenue ( IN) and production costs (IP) and financial nature (IF):

PE \u003d V-IP-IF. (24.1)

Production costs - is the cost of producing and selling products total cost). Depending on the volume of production, they are divided into fixed and variable. The ratio between these parts of the costs depends on the technical and technological strategy of the enterprise and its investment policy. Capital investment in fixed assets causes an increase in fixed costs and a relative reduction in variable costs. The relationship between the volume of production, constants and variable costs expressed as an indicator of production leverage (operating leverage).

By definition of V.V. Kovalev, production leverage — the potential opportunity to influence the profit of the enterprise by changing the structure of the cost of production and the volume of its output.

The level of production leverage is calculated by the ratio of the growth rate of gross profit ( P%) (before payment of interest and taxes) to the growth rate of sales volume in natural, conditionally natural units or in value terms ( VRP%):

It shows the degree of sensitivity of gross profit to changes in the volume of production. With its high value, even a slight decline or increase in production leads to a significant change in profit. A higher level of production leverage usually has enterprises with a higher level of technical equipment of production. With an increase in the level of technical equipment, there is an increase in the share of fixed costs and the level of production leverage. With the growth of the latter, the degree of risk of shortfall in revenue required to reimburse fixed costs increases. You can verify this in the following example (Table 24.7).

The table shows that the largest value of the coefficient of production leverage is the enterprise, which has a higher ratio of fixed costs to variables. Each percentage increase in output under the current cost structure ensures an increase in gross profit at the first enterprise of 3%, at the second - 4.125, at the third - 6%. Accordingly, with a decline in production, profit at the third enterprise will decrease 2 times faster than at the first. Consequently, the third enterprise has a higher degree of production risk. Graphically, this can be represented as follows (Fig. 24.2).

On the abscissa axis, the volume of production is plotted on an appropriate scale, and on the ordinate axis, the increase in profit (in percent). The point of intersection with the abscissa axis (the so-called "dead point", or equilibrium point, or break-even sales volume) shows how much each company needs to produce and sell products in order to reimburse fixed costs. It is calculated by dividing the sum of fixed costs by the difference between the price of the product and specific variable costs. Under the current structure, the break-even volume for the first enterprise is 2000, for the second - 2273, for the third - 2500. The larger the value this indicator and the angle of inclination of the graph to the x-axis, the higher the degree of production risk.

The second component of the formula(24.1) - financial costs (debt servicing costs). Their value depends on the amount of borrowed funds and their share in the total amount of invested capital. As already noted, an increase in the leverage of financial leverage (the ratio of debt and equity capital) can lead to both an increase and a decrease in net profit.

The relationship between profit and the ratio of own and borrowed capital is what financial leverage is. According to V.V. Kovalev's definition, financial leverage is a potential opportunity to influence the profit of an enterprise by changing the volume and structure of equity and borrowed capital.

Its level is measured by the ratio of net profit growth rates ( state of emergency%) to the growth rate of gross profit ( P%):

It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess (see paragraph 13.4) is provided by the effect of financial leverage, one of the components of which is its leverage (the ratio of debt to equity). By increasing or decreasing the leverage, depending on the prevailing conditions, you can influence the profit and return on equity.

An increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible shortage of funds to pay interest on loans and borrowings. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production.

Let's spend comparative analysis financial risk with different capital structure. According to Table. 24.8 calculate how the return on equity will change when the profit deviates from the baseline by 10%.

If an enterprise finances its activities only from its own funds, the financial leverage ratio is equal to 1, i.e. there is no leverage effect. In this situation, a 1% change in gross profit results in the same increase or decrease in net profit. It is easy to see that with an increase in the share of borrowed capital, the range of variation in the return on equity increases. (PCK), financial leverage ratio and net profit. This indicates an increase in the degree of financial risk of investing with a high leverage. Graphically, this dependence is shown in Fig.

Features of the production leverage ratio

The abscissa shows the value of gross profit on an appropriate scale, and the ordinate shows the return on equity as a percentage. The point of intersection with the x-axis is called the financial critical point, which shows the minimum amount of profit required to cover the financial costs of servicing loans. At the same time, it also reflects the degree of financial risk. The degree of risk is also characterized by the steep slope of the graph to the x-axis.

The general indicator is the production and financial leverage — the product of the levels of production and financial leverage. It reflects the general risk associated with a possible lack of funds to cover production costs and the financial costs of servicing external debt.

For example, the increase in sales is 20%, gross profit - 60%, net profit - 75%:

Kp.l= 60/20=3, Cf.l=75/60=1,25, Kp-f.l=3 x 1.25=3.75.

Based on these data, we can conclude that with the current cost structure at the enterprise and the structure of capital sources, an increase in production by 1% will ensure an increase in gross profit by 3% and an increase in net profit by 3.75%. Each percentage increase in gross profit will result in a 1.25% increase in net profit. In the same proportion, these indicators will change with a decline in production. Using them, it is possible to evaluate and predict the degree of production and financial investment risk.

Production leverage (lever)

Production leverage

Page 1

Production leverage shows the degree of influence of fixed costs on profits (losses) and changes in production volume. The level of production leverage is calculated as the ratio of sales proceeds minus variable costs (or marginal income) to balance sheet profit. Production leverage characterizes the degree of risk in case of a decrease in sales proceeds. With its high value, even a slight decline or increase in production leads to a significant change in profit.

Production leverage determines the potential opportunity to influence gross income by changing the cost structure and output volume.

Production leverage represents the relationship between sales income, gross income and production costs, which include the total costs of the enterprise, reduced by the amount of external debt service costs.

Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits.

Production leverage shows the degree of sensitivity of gross profit to changes in the volume of production. The point of intersection with the axis (the so-called dead point or equilibrium point or break-even sales volume) shows how much each company needs to produce and sell products in order to reimburse fixed costs.

The effect of production leverage is manifested in the fact that when the company's revenue changes, the profit also changes, and the higher the level of production leverage, the stronger this effect.

The production leverage method is similar to the sensitivity analysis using the ray diagram method, however, the analyzed final indicator in it is gross profit (earnings before taxes and payment of dividends on shares), and the analyzed parameter is the volume of sales.

The mechanism of production leverage also has the opposite direction - with any decrease in sales, the size of the enterprise's profit will decrease even more.

The effect of production leverage is manifested only in the short period, since the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as the next jump in fixed costs occurs with the growth in sales, the company needs to overcome a new break-even point or adapt its activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

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

A similar pattern of production leverage is observed, according to G.Yu. Boyarko, at alluvial deposits with production costs close to the closing ones, when comparing technologies for open-pit separate sand mining and dredging. The use of less profitable separate mining may also be preferable here than dredge mining, for which production risks turn out to be greater due to a smaller margin of financial stability.

The value of the level of production leverage depends on the base level of production volume, from which the countdown is based.

Using the mechanism of industrial leverage, we predict the change in the profit of the enterprise depending on the change in revenue, and also determine the break-even point.

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Financial and operational leverage

Leverage Formula

The concept of operating leverage

The purpose of the functioning of any company is the growth of profit from sales, including net profit, which should be aimed at maximizing productivity and increasing the financial efficiency (value) of the enterprise.

The operating leverage formula gives you the ability to manage sales profits in the future by planning revenue in the future.

The main factors affecting the volume of revenue are:

• product prices,
• Variable costs, which change depending on changes in the volume of production;
• Fixed costs that do not depend on production volumes.

The goal of any enterprise is to optimize variable and fixed costs, adjust the pricing policy, thereby increasing the profit from the sale.

Leverage Formula

The calculation method according to the operating leverage formula is as follows:

OR \u003d (V - Trans.Z) / (V - Trans.Z - Constant.Z)

OR \u003d (V - Lane. Z) / P

OR=VM/P=(P+Cons.Z)/P=1+(Cons.Z/P)

Here OR is an indicator of operating leverage,

B is the revenue

Per.Z - variable costs,

Post.Z - fixed costs,

P - the amount of profit,

VM - gross margin

Operational leverage and financial safety margin

The indicator of operating leverage is directly related to the margin of financial safety through the ratio:

RR = 1/FFP

Here OP is the operating lever,

ZFP - a margin of financial strength.

With an increase in the indicator of operating leverage, the company's financial strength decreases, which contributes to its approaching the threshold of profitability.

In this situation, the company is not able to ensure sustainable financial development. To prevent this situation, it is recommended to constantly monitor production risks and their impact on financial performance.

What does the operating lever show

The operating lever can be of two types:

• Price operating leverage that reflects price risk (the impact of price changes on profit margins);
• Natural operating leverage is the production risk or the dependence of profit on output.

The high value of the operating leverage reflects a significant excess of revenue over profit, which indicates an increase in fixed and variable costs.

The increase in costs is due to the following reasons:

• Modernization of used capacities, increase in production areas, increase in the number of production workers, introducing innovations and improving technologies.
• Minimization of prices for products, inefficient growth of costs for wages low-skilled personnel, an increase in the number of defective products, a decrease in the efficiency of production lines, etc.

So everything production costs can be effective, which increase the production and scientific and technological potential, as well as inefficient, which hinder the development of the enterprise.

Examples of problem solving