Operating leverage is equal. Financial and operational leverage

Fomina Irina Alexandrovna
professor of St. Petersburg state university civil aviation,
Candidate of Economic Sciences, Associate Professor 196210, St. Petersburg, st. Pilotov, 38
Pie Anna Igorevna


Vorontsova Alexandra Mikhailovna
postgraduate student of St. Petersburg State University
civil aviation 196210, St. Petersburg, st. Pilotov, 38
ECONOMICS AND MANAGEMENT
N 3 (65) 201

The article discusses issues of management accounting in order to improve the activities of the enterprise. The authors come to the conclusion that in order to solve this problem and more effectively manage profits, it is necessary to calculate the final performance indicators of the enterprise based on the marginal approach, as demonstrated by the example of UTair airline.

Margin approach is an integral part of adoption management decisions at enterprises various fields activities.

Comprehensive performance assessment economic activity characterizes the level and dynamics of the final performance indicators of the enterprise.

In accordance with the purpose of any commercial activity, such final indicators are sales revenue and profit.

Margin analysis (break-even analysis) is widely used in countries with developed market relations. It allows you to study the dependence of profit on a small circle of the most important factors and on this basis manage the process of forming its value.

The main capabilities of marginal analysis are to determine:

break-even sales volume (profitability threshold, cost recovery) at given ratios of price, fixed and variable costs;

safety (break-even) zones of the enterprise;

the required sales volume to obtain a given amount of profit;

critical level of fixed costs at a given level of marginal income;

critical selling price for a given sales volume and level of variables and fixed costs.

With the help of marginal analysis, other management decisions are justified: the choice of options for changing production capacity, equipment options, production technology, purchasing components, assessing the effectiveness of accepting an additional order, product range, prices for a new product, etc.

In modern conditions at Russian enterprises, the issues of regulating the mass and dynamics of profits are coming to one of the first places in management financial resources. Resolving these issues is within the scope of operational (production) financial management.

The basis of financial management is financial economic analysis, during which analysis of the cost structure acquires paramount importance.

It is known that entrepreneurial activity is associated with many factors influencing its result, which are usually divided into two groups. The first group of factors is associated with maximizing profits through pricing policy, product profitability, and its competitiveness. The second group of factors is related to the identification critical indicators by volume of products sold, the best combination of marginal revenue and marginal costs, dividing costs into variable and fixed.

Analysis of production costs allows us to determine their impact on the volume of profit from sales, but if we look deeper into these problems, the following becomes clear.

This division:

helps solve the problem of increasing the amount of profit due to the relative reduction of certain costs;

allows you to search for the optimal combination of variable and fixed costs that provide an increase in profit;

allows you to judge the return on costs and financial stability in the event of a deterioration in the economic situation.

The following indicators can serve as criteria for selecting the most cost-effective products:

gross margin per unit;

share of gross margin in unit price;

gross margin per unit of limited factor.

When considering the behavior of variable and fixed costs, one should analyze the composition and structure of costs per unit of production in a certain period of time and for a certain number of sales. The behavior of variable and fixed costs when production volume changes is characterized as follows (Table 1).

Table 1. Behavior of fixed and variable costs when production volume changes

The cost structure is not so much a quantitative relation as a qualitative one. Nevertheless, the influence of the dynamics of variable and fixed costs on the formation of financial results when production volume changes is very significant. The concept of operating leverage is closely related to the cost structure.

An analysis of the dynamics of sales revenue and enterprise profits shows that a change in sales revenue causes a stronger change in profit. This effect is called production (operating) leverage.

To calculate the effect, or force of influence, of a lever, a number of indicators are used. This requires dividing costs into variable and fixed using an intermediate result. This value is usually called gross margin (coverage amount, contribution).

These indicators include:

gross margin = sales profit + fixed costs;

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

operating leverage force = (sales revenue - variable costs)/sales profit;

operating leverage effect = profit growth rate/revenue growth rate.

If we interpret the effect of operating leverage as a change in the gross margin, then its calculation will answer the question of how much the profit changes from an increase in the volume (production, sales) of products.

Between the value of production (operating leverage) and the ratio of constants and variable expenses there is a direct relationship:

1) the value of the lever is greater, the higher the level of relationship fixed costs to variables;

2) the lower the level of the ratio of fixed costs to variable costs, the lower the value of the lever. The calculation of the effect of operating leverage in the system of marginal analysis of the activities of UTair airline is presented in table. 2.

Table 2. Calculation of the profitability threshold, financial strength margin, and the strength of the operating leverage of UTair Airlines

Source: the table is compiled on the basis of the author’s calculations based on data from the UTair Airlines website: www.utair.ru. Note: B - revenue from the sale of aviation services; VC - variable costs; FC - fixed costs; VM - gross margin; KVM - gross margin coefficient; ZFP - margin of financial strength; PR - profitability threshold; OR - operating lever; P - operating profit; R - operating costs.

Analysis of the data obtained shows that the company's revenue is above the profitability threshold. In turn, this indicates that the profitability threshold was overcome for all analyzed periods and the airline is in the profit zone, i.e., it receives profit from its main activities.

It is also clear that the gross margin covers fixed costs and forms the profit of the enterprise both in 2008 and in 2007 and 2006.

The margin of financial strength shows that even if the airline experienced a drop in revenue by 7,681,347 thousand. rub. [Ibid], then the UTair group could have withstood this before incurring losses. The same is true for 2007 and 2006. It can be seen that in 2006, although the margin of financial strength existed, it was insignificant, which indicated a warning about danger. However, by 2008, a so-called “safety cushion” had formed due to an increase in the margin of financial strength. It is advisable to say that the degree of risk becomes lower every year.

Based on the results of the operating leverage indicator, it can be judged that sales revenue is increasing, therefore, the strength of the operating leverage is decreasing. Each percentage increase in revenue results in less and less operating leverage. Based on the foregoing, we can conclude that the degree of business risk is decreasing, since the strength of the operating leverage decreases every year.

Thus, based on the marginal analysis carried out, we can talk about the successful functioning of UTair airline in the air transportation market.

There are other, more complex, modifications of the formula for calculating the effect of operating leverage, which differ from the one presented by us. However, despite the differences in the algorithms for determining the effect of operating leverage, the content of the mechanism for managing operating profit by influencing the ratio of fixed and variable costs of the enterprise remains unchanged.

In specific situations of an enterprise's operating activities, the manifestation of the operating leverage mechanism has a number of features that must be taken into account in the process of using it to manage profits. Let us formulate the main ones.

1. The positive impact of operating leverage begins to appear only after the enterprise has passed the break-even point of its operating activities.

2. After overcoming the break-even point, the higher the operating leverage ratio, the greater strength The enterprise will have an impact on profit growth by increasing the volume of product sales.

3. The greatest positive impact of operating leverage is achieved in the field as close as possible to the break-even point (after it has been overcome).

4. The operating leverage mechanism also has the opposite direction - with any decrease in the volume of product sales in another to a greater extent gross operating profit will decrease.

5. The effect of operating leverage is stable only in the short term.

This is determined by the fact that operating costs, classified as fixed costs, remain unchanged only for a short period of time. As soon as, in the process of increasing the volume of product sales, another jump in the amount of fixed operating costs occurs, the enterprise needs to overcome the new break-even point or adapt its operating activities to it. In other words, after such a jump, which causes a change in the operating leverage ratio, its effect manifests itself in a new way in new business conditions.

Understanding the mechanism of manifestation of operational leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of operating activities. This management comes down to changing the value of the operating leverage ratio for various trends in the product market conditions and stages life cycle enterprises.

In case of unfavorable conditions on the commodity market, which determines a possible decrease in the volume of product sales, as well as early stages life cycle of an enterprise, when it has not yet overcome the break-even point, it is necessary to take measures to reduce the value of the operating leverage ratio. And vice versa, with favorable conditions on the commodity market and the presence of a certain margin of safety (margin of safety), the requirements for the implementation of a regime for saving fixed costs can be significantly weakened - during such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing production fixed assets.

Operating leverage can be managed by influencing both fixed and variable operating costs.

When managing fixed costs, it should be borne in mind that their high level is largely determined by the industry characteristics of operating activities, which determine different levels of capital intensity of manufactured products, differentiation of the level of mechanization and automation of labor.

It should be noted that fixed costs are less amenable to rapid change, so enterprises with a high operating leverage ratio lose flexibility in managing their costs. Despite these objective limitations, if necessary, each enterprise has sufficient opportunities to reduce the amount and share of fixed operating costs.

Such reserves include a significant reduction in overhead costs (management costs) in the event 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 of machinery and equipment instead of purchasing them as property; reduction in the volume of a number of consumed utilities and some others.

When managing variable costs, the main guideline should be to ensure constant savings, since there is a direct relationship between the amount of these costs and the volume of production and sales of products. Providing these savings before the enterprise overcomes the break-even point leads to an increase in the amount of marginal profit, which allows it to quickly overcome this point.

Once the break-even point is passed, the amount of variable cost savings will provide a direct increase in gross operating profit. The main reserves for saving variable costs include:

reducing the number of workers in primary and auxiliary production by ensuring an increase in their labor productivity;

reducing the size of stocks of raw materials, supplies, and finished products during periods of unfavorable commodity market conditions;

ensuring favorable terms for the enterprise for the supply of raw materials and materials, and others. Targeted management of fixed and variable costs, prompt changes in their ratio under changing business conditions make it possible to increase the potential for generating an enterprise's operating profit.

Operating leverage (leverage) is an indicator that answers the question how many times the rate of change in sales profit exceeds the rate of change in sales revenue. In other words, when planning an increase or decrease in sales revenue, using the operating leverage indicator allows you to simultaneously determine the increase or decrease in profit. And vice versa, if in the planning period the company needs a certain amount of profit from sales, using the operating lever it is possible to determine what sales revenue will provide the required profit.

The mechanism for applying operating leverage depends on what factors influence the change in sales revenue in the planning period compared to the base period: price dynamics, or dynamics of natural sales volume, or both factors together.

As a rule, in practice, revenue increases or decreases under the influence of the simultaneous action of both factors. But when planning profits, the degree and direction of the impact of each factor on revenue are of utmost importance.

The dynamics of sales revenue as a result of a decrease or increase in prices for products sold (work, services) affects the amount of profit differently than the dynamics of revenue as a result of an increase or decrease in the physical volume of sales.

If a change in demand for products is expressed only through a change in prices, and the natural volume of sales remains at the base level, then the entire amount of increase or decrease in sales revenue simultaneously becomes the amount of increase or decrease in profit.

If base prices are maintained, but the natural volume of sales changes, then the increase or decrease in profit is the amount of the increase or decrease in revenue, reduced by the corresponding change in the value of variable costs.

Consequently, changes in prices have a greater impact on the dynamics of sales profits than changes in the natural volume of sales. It has already been said that operating leverage is a measure of the excess of the rate of profit dynamics over the rate of revenue dynamics.

Thus, even without making any calculations, we can state the following: the operating leverage indicator when revenue changes only due to prices will always be higher than when revenue changes only due to natural sales volume.

Based on the above, we can conclude that it is advisable to use the marginal approach when calculating the final performance indicators of an airline in order to make informed management decisions.

Literature

1. Galitskaya S.V. Financial management. The financial analysis. M.: Eksmo, 2009.

2. Campbell M.R., Brew S.L. Economics: Principles, problems and policies. In 2 vols. T. 2. / Transl. from English M.: Republic, 1992.

3. Karpova G. A. Analysis of financial stability commercial organizations// http://www.gasu.ru/vmu/arhive.

4. Kovalev A. I., Privalov V. P. Analysis of the financial state of the enterprise. M.: Center for Economics and Marketing, 2001.

5. http://www.utair.ru.

6. Savitskaya G.V. Analysis of the economic activity of the enterprise. M.: New Knowledge LLC, 2009.

7. Sheremet A.D. Management accounting: Textbook. allowance. M.: ID FBK-PRESS, 2000.

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

Operational analysis is an analysis of the results of an enterprise's activities based on the ratio of production volumes, profits and costs, allowing one to determine the relationship between costs and income at different production volumes. His task is to find the most profitable combination of variable and fixed costs, price and sales volume. This type of analysis is considered one of the most effective means of planning and forecasting the activities of an enterprise.

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

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

CVP analysis allows:

Determine the amount of profit for a given sales volume.

Plan the volume of product sales that will provide the desired profit.

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

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

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

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

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

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

Target operational analysis- establish what will happen to financial results if production volume changes.

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

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

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

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

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

Costs and revenue depend on production volume.

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

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

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

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

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

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

Kivp = (Revenue for the current year - Revenue for last year) / Revenue for last year

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

Kvm = Gross Margin / Sales Revenue

Auxiliary coefficients are calculated in a similar way:

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

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

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

Kchp = Net profit / Sales revenue

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

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

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

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

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

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

Profitability threshold = Fixed costs / Gross margin ratio

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

5. Margin of financial strength. The excess of actual sales revenue over the profitability threshold.

Margin of financial strength = enterprise revenue - profitability threshold

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

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

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

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

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

P.P.S. The results of operational analysis, unlike the results of other types of financial analyzes of an enterprise's activities, are usually a trade secret of the enterprise.

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

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

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

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

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

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

Rc = V/P

where, B – sales revenue; P – profit from sales.

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

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

where, Zper – variable costs; Postage – fixed costs.

Natural operating leverage(Рн) is calculated by the formula:

Rn = (V-Zper)/P = (P + Zpost)/P = 1 + Zpost/P

where, B – sales revenue; P – profit from sales; Zper – variable costs; Postage – fixed costs.

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

Size operating leverage can be considered an indicator of the riskiness of not only the enterprise itself, but also the type of business in which this enterprise is engaged, since the ratio of fixed and variable expenses in general structure costs are a reflection not only of the characteristics of a given enterprise and its accounting policies, but also of the industry characteristics of its activities.

However, it is impossible to consider that a high share of fixed expenses in the cost structure of an enterprise is a negative factor, just as it is impossible to absolutize the value of marginal income. An increase in production leverage may indicate an increase in the production capacity of the enterprise, technical re-equipment, and an increase in labor productivity. The profit of an enterprise with a higher level of production leverage is more sensitive to changes in revenue. With a sharp drop in sales, such a business can very quickly “fall” below the break-even level. In other words, a company with a higher level of operational leverage is riskier.

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

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

In conclusion, we list the tasks that are solved using the operating lever:

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

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

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

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

solving the problem of maximizing profits through a relative reduction in fixed costs;

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

Financial leverage is the ratio of a company's borrowed capital to its own budget. Thanks to it, you can study the financial position of the company, the degree of risk of failure of the enterprise or the likelihood of its success. The lower the leverage ratio, the more stable the company's position. But do not forget that with the help of a loan, many small businesses grow into larger ones, and large ones, having received additional profit to their own capital, improve their situation.

Purpose of financial leverage

Financial leverage in economics can be called credit leverage, leverage, financial leverage, but the meaning does not change. A lever in physics helps to lift heavier objects with less effort, and the same in economics. The financial leverage ratio allows you to get greater profits. It takes less effort and time to make your dreams come true. Sometimes you can find the following definition: “Financial leverage is an increase in the profitability of an enterprise’s personal income due to the use of borrowed funds.”

Changing the capital structure of an enterprise (shares of equity and borrowed funds) allows you to increase the company's net profit. As a rule, additional capital received as a result of leverage is used to create new assets, improve company productivity, expand branches, etc.
How more money rotates within the enterprise, the more expensive cooperation with owners is for investors and shareholders, and this, undoubtedly, plays into the hands of general directors.
Based on the concept of leverage, it can be argued that the effect of financial leverage is the ratio of borrowed capital to own profit, expressed as a percentage.

Who needs to know what leverage is and why?

It is important not only for investors and lenders to understand and be able to assess the structure of the investment market. However, for an investor or banker, the amount of leverage serves as an excellent guide for further cooperation with the enterprise and the size of lending rates.

Entrepreneurs themselves, company owners, and financial managers need to know the structure of leverage and be able to evaluate it in order to understand the financial condition of the company and dependence on external loans. If inexperienced entrepreneurs neglect knowledge of leverage, they can easily lose financial independence due to large loans and external debts. If the directors decide that the company is developing well even without a credit history, then they will miss the opportunity to increase the return on assets, and, therefore, will slow down the process of the company’s rise on the “career ladder.”
External loans make it possible to increase a company's productivity faster and more efficiently, but they can also draw it into economic dependence on loans.

It is also worth remembering that an entrepreneur should never take unjustified loans (unnecessary for a given stage of the company’s development). When applying for a loan, you must accurately understand the amount of funds needed to expand your business or increase sales.

Formula for financial leverage.

There are many nuances in economics, without knowing which, beginners easily fall for credit tricks and fail to achieve their goals, blaming financial leverage for everything. Its formula should be firmly rooted in the brains of both business beginners and professionals.

EGF = (1 - Сн) x D x FR
EFR - effect of financial leverage;
Сн - direct tax on the profit of the organization, expressed in decimal(may vary depending on the type of activity of the enterprise);
D - differential, the difference between the profitability ratio (ROR) of assets and the percentage of the loan rate;
FR - financial leverage, the ratio of the average borrowed capital of an enterprise to the value of its own.

Patterns of leverage

In accordance with the formula, several patterns of leverage can be derived.

The differential must always be positive. This is an important impetus for the action of credit leverage, which allows the borrower to understand the degree of risk of lending large amounts to an entrepreneur. The higher the indicator, the lower the risk for the banker.
The shoulder (LR) also contains fundamentally important information for both participants in the process. The higher it is, the higher the risk for both the banker and the entrepreneur.
Based on these two aspects, it is obvious how leverage helps improve profitability. Financial leverage serves to increase not only one’s own profits, but also to determine the amount of credit that an entrepreneur can attract.

Average leverage ratio

Using practical methods, the optimal value of the financial leverage indicator (as a percentage) was determined. For the average enterprise, the debt-to-equity ratio ranges from 50 to 70%. If this indicator decreases by at least 10%, the entrepreneur’s chance to develop his company and achieve success is lost, and if it increases to 80 or 90%, the financial independence of the entire enterprise is put at great risk.
However, one should not forget that normal level leverage also depends on the industry of production, scale (size of business, number of branches, etc.) and even on the method of organizing management and approach to building the structure of the company.

Main components of financial leverage

Financial leverage largely depends on secondary factors. Each of them needs to be disassembled separately. The financial leverage indicator is equal to the ratio of loan capital to equity capital. Consequently, the factor that changes the indicator of the leverage effect in the first place is return on assets, that is, the ratio of the net profit of the enterprise (for the year) to the value of all assets (the balance of the enterprise).

Financial leverage ratio - leverage, showing what share in the overall structure of the company is occupied by borrowed or other funds required to be repaid (loans, courts, etc.). Using leverage, the power of influence on the net profit of borrowed funds is determined.

Why do you need a tax corrector?

When using financial leverage in calculations, experienced economists refer to such a definition as a tax adjuster. Thanks to it, you can find out how the effect of financial leverage changes when income taxes increase or decrease. Let us remember that everyone pays income tax. legal entities RF (OJSC, CJSC, etc.), and its rate is different and depends on the type of activity and the amount of real income. So, the tax corrector is used only in three cases:

1. If there are different tax rates;
2. If the enterprise uses benefits (for certain types of activities);
3. If subsidiaries (branches) are located in free economic zones states where preferential treatment exists or branches are located in foreign countries with the same zones.

Thus, when the tax burden is reduced for one of these reasons, the dependence of the effect of financial leverage on the adjuster is noticeably reduced.

Operating leverage

Operating and financial leverage in the stock market keep pace. The first indicator indicates changes in the growth rate of sales profit. If you know what operating leverage is, you can accurately predict the change in profit for the year when your monthly revenue changes.

In the market, there is the concept of a break-even point, which shows the amount of income needed to cover expenses. At this point, if you display it on the coordinate line, the net profit is zero, the left side is negative (the company incurs losses), the right side is positive (the company covers expenses and net profit remains). This straight line is called an indicator of the financial strength of the company.

Operating leverage effect

The strength with which the operating lever operates in an enterprise depends on the average weight of fixed costs in the total cost of costs (fixed and variable). Thus, the production leverage effect is the most important indicator of an enterprise’s budget risk, calculated using the following formula:

• EOR = (Fibreboard+PR)/Fibreboard
• EOR - effect of operating leverage;
• EBI - income before interest (taxes and debts);
• PR - fixed production costs (the indicator does not depend on revenue).

Why does the effectiveness of financial leverage decrease?

The financial leverage of an enterprise, of course, shows how competently the owner handles his own and borrowed funds, but risk always exists, especially if there are problems with the economic situation in the market. So what factors reduce the effectiveness of financial leverage and why does this happen?

When the financial situation in the market worsens, the cost of borrowing sharply increases, which will certainly affect the indicator of financial leverage depending on the entrepreneur’s choice: take out a loan at new rates or use his own income.

Reduced financial stability of the company due to the economic crisis or inept handling of money ( permanent loans, large expenses) leads to an increased risk of bankruptcy of the company. Interest rates for such people they increase, and, therefore, the indicator of financial leverage decreases. Sometimes it can go to zero or take a negative value.

A decrease in demand for a product leads to a decrease in income. Thus, the return on assets decreases, and this factor is the most important in the formation of financial leverage.
It follows that the effectiveness of financial leverage decreases due to external factors(market conditions), and not through the fault of the entrepreneur or accountants.

Entrepreneurship - risk or delicate work?

Thus, financial leverage determines the most important indicator of the state of an enterprise in the economy, is calculated as the ratio of borrowed capital to equity and has a so-called average value of 50 to 70%, depending on the type of activity. However, many young entrepreneurs, due to their inexperience, do not attach due importance to leverage and do not notice how they become financially dependent on larger corporations or bankers.

That is why people who connect their lives with the economy and the stock market need to know all the subtleties, nuances and aspects of entrepreneurship.

Under operating leverage usually understand the degree of influence of the cost structure on revenue from product sales. Operating leverage shows the degree of sensitivity of profit to changes in sales volume. The effect of operating leverage is manifested in the fact that any change in sales revenue always entails a stronger change in profit. Due to the different impact of fixed and variable costs on profit, profit and revenue always change at different rates.

Let’s assume that in the first (base) year, revenue from product sales will be 5,480 thousand rubles. with variable costs equal to 2061.4 thousand rubles, and fixed costs in the amount of 541.4 thousand rubles. (Table 6.4). In the next (second) year, sales revenue will increase to 5929.36 thousand rubles, or by 8.2% compared to the base year. Accordingly, variable costs will increase by 8.2%, their value will be 2230.43 thousand rubles, and fixed costs will not change. At the same time, profit will increase to 3157.53 thousand rubles, or 10% more than the profit of the base year. Consequently, an 8.2% increase in revenue caused a 9.76% increase in profit. In the third year, the same changes relative to the base year are maintained as in the second, but fixed costs have increased by 1.3%. Their value amounted to 548.4 thousand rubles. Profit increases no longer by 10%, but only by 9.4% compared to the first year.

It should be noted that if in the second year, under the same conditions, fixed costs could be reduced by 2%, and their value would be 530.6 thousand rubles, then the profit would be equal to 3168.33 thousand rubles. , which is 7.32% more than in the first year.

The calculation of operating leverage is usually measured by the ratio of marginal income (D_(()_(\text(M)))) and profit (P) (formula 6.22) or profit growth (\Delta P\%) to revenue growth (formula 6.23):

SV_(\text(or))= D_(()_(\text(M)))\,\colon P\,

SV_(\text(or))= \Delta P\%\,\colon \Delta VR\%\,.

Let's calculate the strength of the operating leverage based on the data in Table. 2.2, using formulas 6.22 and 6.23:

SV_(\text(or))= (5480-2061,\!4)\,\colon 2877,\!2= 1,\!19 or SV_(\text(or))= 9,\!76\,\colon 8,\!2= 1,\!19.

The calculation results confirm the conclusions about the strength of the operating leverage: with a possible increase in sales revenue, for example, by 2%, profit will increase by 2.38% (2% x 1.19); with a decrease in sales revenue by 6%, profit will decrease by 7.14% (6% x 1.19). Thus, with a high value of operating leverage, even a slight increase in sales volume leads to a very significant increase in profit, and a slight decline in production and sales, on the contrary, affects a significant decrease in profit (Fig. 6.10).

Operating leverage effect

Operating leverage effect(EER) can be controlled precisely on the basis of taking into account the dependence of the strength of its impact on the value of fixed costs. The greater the fixed costs, while the sales revenue remains unchanged, the stronger the operating leverage, and vice versa. This can be clearly shown by transforming formula (6.22) into the following form:

EOR= D_(()_(\text(M)))\,\colon P= (I_(\text(post))+ P)\,\colon P\,.

With a decrease in sales revenue, the strength of the operating leverage may increase both with an increase and a decrease in the share of fixed costs in the total amount of costs. At the same time, the impact of operating leverage increases at a much higher rate than the growth of fixed costs.

As sales revenue increases and its actual value exceeds the critical level, the strength of the operating leverage decreases. Each percentage increase in revenue gives a smaller and smaller percentage increase in profit. At the same time, the share of fixed costs in their total amount decreases.

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

1. For 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 costs.

2. The higher the operating leverage, the closer the actual sales volume is to the break-even point, which is associated with a high risk.

3. A low operating leverage situation involves less risk but also less reward in the profit formula.

Based on the results of the operational analysis (Table 6.5), we can conclude that the enterprise is attractive to investors because it has:

a) sufficient (more than 10%) margin of financial strength;

b) a favorable value of the operating leverage force with a reasonable share of fixed costs in the total cost.

It can be noted that the weaker the operating leverage, the greater the margin of financial strength. The strength of the impact of operating leverage, as already noted, depends on the relative size of fixed expenses, which are difficult to reduce when the company’s income decreases.

The high impact of operating leverage in conditions of economic instability and a fall in effective consumer demand means that every percent decrease in revenue leads to a significant drop in profits and the possibility of the enterprise entering a loss zone.

If we define the risk of the activity of a particular enterprise as a business risk, then we can trace the following relationships between the strength of the operating leverage and the degree of business risk: with a high level of fixed expenses of the enterprise and the absence of their reduction during a period of falling demand for products, business risk increases. Small enterprises specializing in the production of one type of product are characterized by a high degree of business risk. The instability of demand and prices for finished products, prices for raw materials and energy resources.

The risk of an enterprise's activities is associated with another source: instability of financial lending conditions, uncertainty of owners of ordinary shares in receiving dividends, i.e. financial risk arises. Financial risk is determined by the action of financial leverage.

Financial leverage effect

Financial leverage characterizes the enterprise's use of borrowed funds, which affect the measurement of the profitability ratio equity. Financial leverage is an objective factor that arises with the appearance of borrowed funds in the amount of capital used by an enterprise, allowing it to obtain additional profit on invested capital.

An indicator reflecting the level of additionally generated profit on equity capital at different shares of borrowed funds is called the effect of financial leverage.

Financial leverage effect(EFF) - increase in profitability own funds thanks to the use of credit resources, despite the payment of the latter. The effect of financial leverage (EFF), or the strength of the impact of financial leverage, is determined by the formula:

EFR= (1-N)\cdot (K_(()_(\text(RA)))-\overline(SP))\cdot \overline(ZK)\,\colon \overline(SK)\,

where N is the income tax rate; K_(()_(\text(RA)))- return on assets ratio, which is the ratio of accounting (total) profit to the average value of assets for the analyzed period, %; \overline(SP) average calculated interest rate for credit resources, which is understood as the ratio of actual costs for all loans for the analyzed period to the total amount of borrowed funds used in the analyzed period, %; \overline(ZK) - the average amount of borrowed capital used by the enterprise for the period, rub.; \overline(SK) - average amount of the enterprise’s equity capital for the period, rub.

In the structure of formula 6.25, three main components can be distinguished:

– tax corrector (1-N), which shows the extent to which the effect of financial leverage is manifested, taking into account different amounts of profit taxation;

– differential (strength) of financial leverage (K_(()_(\text(RA)))-\overline(SP)), characterizing the difference between the return on assets of the enterprise and the average interest rate for the loan;

– coefficient (leverage) of financial leverage (\overline(ZK)\,\colon \overline(SK)), reflecting the amount of borrowed capital used by the enterprise per unit of equity capital.

The selection of these components allows the enterprise to regulate the strength of the impact of financial leverage. Wherein tax corrector depends to a small extent on the activities of the enterprise, since the income tax rate is established for all enterprises by the legislation of the country. At the same time, in the process of managing financial leverage, a differential tax adjuster can be used if differentiated profit tax rates are established for various types of activity of an enterprise or if the enterprise uses tax benefits on profits.

Financial leverage differential is the main condition creating its positive effect. The level of return on assets should be higher than the average interest rate for a loan. The higher the value of the financial leverage differential, the higher the other equal conditions there will be an effect from its use.

Financial leverage ratio is the main generator of both the growth of profit on equity and the financial risk of losing this profit and, possibly, the enterprise as a whole (with a constant value of the differential). In this case, the amount of profit increases by the amount of interest paid for credit resources and reflected in other expenses of the enterprise. The calculation of the magnitude of the effect of financial leverage is given in table. 6.6:

EFR\,\%= (1-0,\!25)\cdot (18,\!5-25)\cdot 0,\!25 = 1,\!22\%\,.

Thus, thanks to the attraction of credit resources, the return on equity has increased by 6.1%.

At the same time, it is necessary to pay attention to the dependence of the effect of financial leverage on the ratio of the return on assets ratio and the level of interest for the use of borrowed capital. If the gross return on assets ratio is greater than the level of interest on the loan, then the effect of financial leverage is positive. If these indicators are equal, the effect of financial leverage is zero. If the level of interest on a loan exceeds the gross return on assets ratio, the effect of financial leverage is negative.

The mechanism of formation of the effect of financial leverage can be expressed graphically (Fig. 6.11). The effect of financial leverage can be represented as a change in net profit by ordinary share, caused by this change in the net result of the operation of investments. In this case, the net result of the operation of investments is understood as profit, including the amount of interest on the loan.

The higher the level of financial leverage, the more sensitive net earnings per share are to changes in earnings before interest on loans. The higher the financial leverage ratio, the greater the financial risk for the company, since the risk of non-repayment of the loan with interest for creditors and a fall in dividends and share prices for investors increases.

The financial leverage ratio is the lever that causes a positive or negative effect obtained through its corresponding differential. At positive value differential, any increase in the financial leverage ratio will cause an even greater increase in the return on equity ratio, and when negative value differential, an increase in the financial leverage ratio will lead to an even greater rate of decline in the return on equity ratio. In other words, an increase in the financial leverage ratio causes an even greater increase in its effect (positive or negative depending on the positive or negative value of the financial leverage differential).

Knowledge of the mechanism of influence of financial capital on the level of profitability of equity capital and the level of financial risk allows you to purposefully manage both the cost and capital structure of the enterprise.

The level of total risk, which is called the associated effect of operating and financial leverage (EOFL), can be determined by the formula:

EOFR= EOR\cdot EFR\,.

For joint stock companies This indicator shows by what percentage net earnings per share will change if sales revenue changes by 1%. The strength of the impact of operating leverage can be calculated as the ratio of the percentage change in the net result of the operation of investments to the percentage change in sales volume.

In addition, based on indicators of the strength of the impact of operating and financial leverage and their associated effect, it is possible to calculate what the amount of net profit per share will be for a given percentage change in sales revenue:

CHP_(a)^(p)= CHP_(a)^(\phi)\cdot (1+ EOFR\cdot \Delta VR\%\,\colon 100),

where CHP_(a)^(p) is net profit per share in the forecast period; CHP_(a)^(\phi) - net profit per share in the reporting period; EOFR is the combined effect of operating and financial leverage; \Delta VR\% - percentage change in sales revenue.

If sales revenue is planned to grow by 8%, and net profit per share in the current period is 600 rubles. with operating leverage of 1.19 and financial leverage of 1.22, then next year net profit may reach the level:

600\cdot (1+ 1,\!19\cdot 1,\!22\cdot 8\,\colon 100)= 669,\!7 rub.

The combination of high operating and financial leverage may have a negative impact on financial condition enterprises, since high business and financial risks are mutually multiplied. Reducing the overall risk is possible using one of the following options:

1) high level the strength of the impact of financial leverage in combination with the weak impact of operating leverage;

2) low level the strength of financial leverage combined with strong operating leverage;

3) moderate levels of effects of financial and operating leverage.

Operating leverage (production leverage) is the potential ability to influence a company's profit by changing the cost structure and production volume.

The effect of operating leverage is that any change in sales revenue always leads to a larger change in profit. This effect is caused by different degrees of influence of the dynamics of variable costs and fixed costs on the financial result when the volume of output changes. By influencing the value of not only variable, but also fixed costs, you can determine by how many percentage points your profit will increase.

The level or strength of the operating leverage (Degree operating leverage, DOL) is calculated using the formula:

DOL = MP/EBIT = ((p-v)*Q)/((p-v)*Q-FC)

Where,
MP - marginal profit;
EBIT - earnings before interest;
FC - semi-fixed production costs;
Q - production volume in physical terms;
p - price per unit of production;
v - variable costs per unit of production.

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

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

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

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

DOL = (S-VC)/(S-VC-FC) = (EBIT+FC)/EBIT

Where, S - sales revenue; VC - variable costs.

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

In practice, greater operating leverage is possessed by those companies that have a large share of fixed assets and intangible assets (intangible assets) in the balance sheet structure and large management expenses. Conversely, the minimum level of operating leverage is inherent in companies that have a large share of variable costs.

Thus, understanding the mechanism of operation of production leverage allows you to effectively manage the ratio of fixed and variable costs in order to increase the profitability of the company’s operational activities.