Characteristics of each formula for modifying the effect of operating leverage. Financial and operational leverage. Why do you need a tax corrector

The activities of almost any company are subject to risks. To achieve its goals, the company develops forecast financial performance, including forecasts for revenue, cost, profit, etc. In addition, the company attracts financial resources for the implementation of investment projects. Therefore, the owners expect that the assets will bring additional profit and provide a sufficient level of return on invested capital. (return on equity, ROE):

where NI (net income)- net profit; E (equity) - equity capital of the company.

However, due to competition in the market, recessions and upturns of the economy, a situation arises when the actual values ​​of revenue and other key indicators significantly differ from the planned ones. This type of risk is called operational (or production) risk (business risk), and it is associated with the uncertainty of obtaining operating income of the company due to changes in the situation on the sales market, falling prices for goods and services, as well as rising tariffs and tax payments. Rapid obsolescence of products has a great impact on production risks in the modern economy. Production risk leads to uncertainty in planning the profitability of the company's assets ( return on assets, ROA):

where A (assets)- assets; I (interests)- Percentage to be paid. In the absence of debt financing, the interest payable is zero, so the value ROA for a financially independent company is equal to profitability equity capital (ROE), and a company's production risk is determined by the standard deviation of its expected return on equity, or ROE.

One of the factors affecting a company's production risk is share fixed costs in its general operating expenses, which must be paid regardless of the revenue generated by its business. To measure the degree of influence of fixed costs on the company's profit, you can use the indicator of operating leverage, or leverage.

Operating lever (operating leverage) due to the fact that the company has fixed costs, as a result of which the change in revenue causes a disproportionate, stronger decrease or increase in the return on equity.

A high level of operating leverage is typical for capital-intensive industries (steel, oil, heavy engineering, forestry), which incur significant fixed costs, such as the maintenance and maintenance of buildings and premises, rental costs, fixed general production costs, utility bills, salaries of management personnel, tax on property and land, etc. The peculiarity of fixed costs is that they remain unchanged and with an increase in production volumes, their value per unit of output decreases (scale effect of production). At the same time, variable costs increase in direct proportion to the growth of production, however, per unit of output, they are constant. To study the relationship between the company's sales volume, costs and profits, a break-even analysis is carried out, which allows you to determine how much goods and services need to be sold in order to recover fixed and variable costs. This number of goods and services sold is called break-even point (break-even point), and calculations are carried out within break-even analysis (break-even analysis). The break-even point is the critical value of the volume of production, when the company does not yet make a profit, but no longer bears a loss. If the sales rise above this point, then a profit is generated. To determine the break-even point, first consider Fig. 9.4, which shows how the operating profit of the company is formed.

Rice. 9.4.

The break-even point is reached when the revenue covers the operating expenses, i.e. operating profit is zero, EBIT = 0:

where R- selling price; Q- the number of product units; V - variable costs per unit of production; F - total fixed operating costs.

where is the break-even point.

Example 9.2. Suppose that the company "Sharm", which produces cosmetic products, has fixed costs of 3,000 rubles, the unit price is 100 rubles, and variable costs are 60 rubles. per unit. What is the break-even point?

Solution

Calculations will be carried out according to the formula (9.1):

In Example 9.2, we showed that a company needs to sell 75 units. products to cover their operating costs. If you manage to sell more than 75 units. goods, then its operating profit (and, therefore, ROE in the absence of debt financing) will begin to grow, and if less, then its value will be negative. At the same time, as is clear from formula (9.1), the break-even point will be the higher, the more significant the value of the company's fixed costs. A higher level of fixed costs requires more products to be sold in order for the company to start making a profit.

Example 9.3. It is necessary to conduct a break-even analysis for two companies, the data for one of them - "Sharm" - we examined in example 9.2. The second company - "Style" - has higher fixed costs at the level of 6,000 rubles, but its variable costs are lower and amount to 40 rubles. per unit, product price - 100 rubles. for a unit. The income tax rate is 25%. Companies do not use debt financing, so the assets of each company are equal to the value of their equity capital, namely 15,000 rubles. It is required to calculate the break-even point for the "Style" company, as well as determine the value ROE for both companies with sales volumes of 0, 20, 50, 75, 100, 125, 150 units. products.

Solution

First, let's define the break-even point for the "Style" company:

Let's calculate the value of the return on equity of companies for different volumes of sales and present the data in table. 9.1 and 9.2.

Table 9.1

Sharm company

Table 9.2

Company "Style"

Due to the higher level of fixed costs of the Stil company, the break-even point is reached with a higher volume of sales, therefore, in order for the owners to make a profit, it is necessary to sell more products. It is also important for us to look at the change in profit that occurs in response to a change in sales, for this we will build graphs (Fig. 9.5). As you can see, due to lower fixed costs, the break-even point for the Sharm company (graph 1) is lower than for the Style company. The first company has 75 units, and the second - 100 units. After the company sells products in excess of the break-even point, the proceeds cover the operating expenses and generate additional income.

So, in the considered example, we showed that in the case of a higher share of fixed costs in costs, the break-even point is reached with a larger volume of sales. After reaching the break-even point, profit begins to grow, but as is clear from Fig. 9.4, in the case of higher fixed costs, profit grows faster for Style than for Charm. In the case of a decrease in the volume of activity, the same effect manifests itself, only a decrease in sales leads to the fact that losses grow faster for a company with higher fixed costs. Thus, fixed costs create leverage that, when production increases or decreases, causes more significant changes in profit or loss. As a result, the values ROE deviate more for companies with higher fixed costs, which increases the risk. By calculating the effect of operating leverage, you can determine how much the operating profit will change when the company's revenue changes. Operating Leverage Effect (degree of operating leverage, DOL) shows by what percentage the operating profit will increase / decrease if the company's revenue increases / decreases by 1%:

where EBIT- the operating profit of the company; Q- sales volume in units of products.

Moreover, the higher the share of fixed costs in the total operating expenses of the company, the higher the strength of the operating leverage. For a specific volume of production, the operating leverage is calculated using the formula

(9.2)

If the value of the operating leverage (leverage) is equal to 2, then with a sales growth of 10%, operating profit will increase by 20%. But at the same time, if the sales proceeds decrease by 10%, then the operating profit of the company will also decrease more significantly - by 20%.

Rice. 9.5.

If brackets are expanded in formula (9.2), then the value QP will correspond to the company's revenue, and the value QV - total variable costs:

where S- the company's revenue; TVС- total variable costs; F- fixed costs.

If the company has a high level of fixed costs in total costs, then the value of operating income will change significantly with fluctuations in revenue, and there will also be a high variance in the return on equity compared to a company that produces similar products, but has a lower level of operating leverage.

The results of the company's activity largely depend on the market situation (changes in GDP, fluctuations in the level of interest rates, inflation, changes in the exchange rate of the national currency, etc.). If a company is characterized by high operating leverage, then a significant share of fixed costs increases the consequences of negative changes in the markets and increases the company's risks. Indeed, variable costs will decrease following a decrease in production caused by the influence of market factors, but if fixed costs cannot be reduced, then profits will decrease.

Is it possible to reduce the level of production risk of the company?

To some extent, companies can influence the level of their operating leverage by controlling the amount of fixed costs. When choosing investment projects, the company can calculate the break-even point and operating leverage for different investment plans. For example, a sales company might analyze two selling options household appliances- v shopping centers or via the Internet. Obviously, the first option implies high fixed rental costs. sales areas, while the second trade option does not imply such costs. Therefore, in order to avoid high fixed costs and the associated risk, the company can provide a way to reduce them at the stage of project development.

To reduce fixed costs, a company may also go for sub-contracts with suppliers and contractors. The experience of Japanese companies using subcontracting is widely known, in which a significant part of the production of components is transferred to subcontractors, the parent company concentrates on the most complex technological processes, and fixed costs are reduced due to the transfer of certain capital-intensive production to subcontractors. The importance of managing fixed costs is also related to the fact that their share has a great influence on the financial leverage, on the formation of the capital structure, which we will discuss in the next paragraph.

However, it is not enough to simply assess the dynamics of the income received by the company, since Current activity is associated with serious operational risks, in particular, the risk of insufficient revenue to cover liabilities. Accordingly, the problem arises of assessing the degree of operational risk. It should be remembered that any change in sales proceeds generates even more significant changes in profit. This effect is commonly referred to as the Degree Operating Leverage (DOL) effect.

Obviously, an increase in sales proceeds, for example, by 15% will not automatically lead to an increase in profits by the same 15%. This is due to the fact that costs "behave" differently, i.e. the ratio between the individual components of the total cost is changing, which affects the financial results of the company.

In this case, we are talking about dividing costs into fixed (Fixed Cost, FC) and variables (Variable Cost, VC), depending on their behavior in relation to the volume of production and sales.

• Fixed costs - costs, the total amount of which does not change when the volume of production changes (rent, insurance, depreciation of equipment).
• Variable costs - costs, the total amount of which varies in proportion to the volume of production and sales (costs of raw materials and materials, transportation and packaging, etc.).

It is this classification of costs, which is widely used in management accounting, that makes it possible to solve the problem of maximizing profits by reducing the share of certain costs. The dynamics of fixed costs can lead to the fact that profit will change more significantly than revenue. The above classification is to some extent arbitrary: some costs are of a mixed nature, depending on the conditions, fixed costs may vary, otherwise costs behave per unit of production (unit costs). Detailed information on this is presented in the specialized literature on management accounting... In any case, dividing the costs into FC and VC, the term "relevance area" should be used. This is an area of ​​change in the volume of production, within which the behavior of costs remains unchanged.

Thus, the effect of operating leverage characterizes the relationship of indicators such as revenue ( Rs), cost structure (FC / VC) and profit before tax and interest payments (EBIT).

In fact, DOL is the coefficient of elasticity showing how much the percentage will change EBIT when it changes Rs by 1%.

The operating lever can be used to determine:

• optimal proportions for a given company between FC and VC;
• the degree of entrepreneurial risk, i.e. the rate of decline in profits with each percentage reduction in sales revenue.

Really, DOL acts as a kind of "lever" to increase financial results according to the costs incurred (the reverse is also true - with an unfavorable cost structure, losses may increase). The greater the difference between the additional fixed costs and the income they generate, the more significant the leverage effect.

Example 7.1

Suppose there is information about company "Z" for two notional reporting periods - 2XX8 and 2XX9.

Operating profit (P r) by the end of 2XX8 will be:

If the company plans to increase its revenue next year by 10%, leaving fixed costs unchanged, the profit of 2XX9 will be:

Profit growth rate:

With revenue growth of 10%, profit increased much more significantly - by 20%. This is a manifestation of the operating leverage effect.

Suppose that the share of depreciable non-current assets in company "Z" increased, which led to an increase FC(due to an increase in the amount of accumulated depreciation) by 2%.

Let us determine how the rate of profit growth will change with such a change in the cost structure.

2XX9:

Calculations show that an increase FC leads to a decrease in the rate of growth of profits. Hence, financial management the company should be focused on constant control over the dynamics of fixed costs and reasonable savings, as a result, the entrepreneur gets the opportunity to influence the financial result. Lack of control over the cost structure will inevitably lead to significant losses even with a slight decrease in sales volumes, since with an increase in fixed costs, operating profit ( EBIT) becomes more sensitive to factors affecting revenue.

In connection with the above, the following conclusions can be drawn.

• The operating leverage ratio depends on the company's cost structure, as well as on the achieved level of sales (Q).
• The higher the fixed costs, the higher DOL.
• The higher the profit margin (RS - VC), the lower DOL.
• The higher the achieved level of sales volumes Q, the lower DOL.

To answer the question, what will be the increase in profits depending on changes in sales and revenue, calculate an indicator called "the strength of the operating leverage."

Methods for calculating the force of influence of the operating lever 1

Operating leverage is related to the level of entrepreneurial risk: the higher it is, the higher the risk. Operating leverage is one of the indicators of the sensitivity of profit to changes in sales volumes (Q) or proceeds from sales ( Rs).

Operating Lever Force (Sj):

The calculation of the volume of sales of products (works, services) in physical terms is carried out in a similar way.

Dependence of the force of influence of the operating leverage on the cost structure (S 2):

7.3. Operating Leverage Effect

• S depends on cost structure (FC / VC) and Q level.
• The higher FC, the higher S.
• The higher the Q achieved, the lower the S.

Let us assume that the operating leverage in the analyzed company is 7.0. This means a 1% increase in sales this company has a 7% increase in operating profit.

In international practice, such an analysis is interpreted as an analysis of the source of remuneration required to compensate investors and creditors for the risks they assume.

Example 7.2

Let us determine what the rate of profit growth will be, provided that the volume of sales increases by 50%.

Company "A": T p (.EV1T) = 50 7 = 350%;

Company "B": T p (EB1T) = 50 3 = 150%.

Using this technique, you can carry out variant calculations for one company with different forecast data for changes in profit before interest and taxes (operating income).

Obviously, the impact of operating leverage can be both positive and negative. The condition for the positive influence of the operating leverage is that the company achieves a level of revenue that covers all fixed costs (breakeven). Along with this, with a decrease in sales volumes, a negative effect of operating leverage is possible, manifested in the fact that the profit will decrease the faster the higher the share of fixed costs.

There is a definite relationship between the strength of the operating leverage (S) and the company's return on sales ( ROS):

The higher the proportion FC in revenue, the greater the decrease in profitability of sales ( ROS) has a company.

Factors affecting S:

• fixed costs FC;
• unit variable costs VCPU;
• unit price p.

Companies using a mixed business financing scheme (having equity and borrowed funds in the capital structure) are forced to control not only operating, but also financial risks... In the language of financial analysts, this is called conjugate leverage(Degree of Combined Leverage, DCL) is an indicator of the company's overall business risk (Fig. 7.2).

The associated effect shows the percentage of the change in net profit when the income from sales changes by 1%. It is calculated as the product of the financial impact force and the impact force of operating levers (Fig. 7.3). Depends on the structure of expenses and the structure of sources of business financing.

The larger S, the more sensitive the pre-tax profit to changes in proceeds from the sale of products (works, services). The higher F, the more sensitive is the net profit to changes in profit before tax, i.e.

Rice.

with simultaneous action F and S less significant changes in revenue lead to more significant changes net profit. This is a manifestation of the conjugate effect.

When making decisions on increasing the share of fixed costs in the company's cost structure and the feasibility of attracting borrowed money it is necessary to focus on the forecast for the volume of sales. In this case, you can use

Rice. 7.3. Calculation of the strength of the influence of leverage in the calculations of the amount of marginal income, which is the difference between revenue and variable costs (it is also called contribution to cover fixed costs).

Derivation of the conjugate effect formula through margin income 1:

where Q is the volume of sales; CM - margin income.

With a favorable forecast of sales growth, it is advisable to increase the share of fixed costs and borrowed capital in order to increase the level of DCL and get an increase in net profit in DCL times more than the relative increase in sales.

With an unfavorable forecast of changes in sales volume Q, it is advisable to increase the share of variable costs, reduce fixed costs and borrowed capital and thereby lower the level DCL.

As a result, a relative decrease N1 falling Q will decrease.

Example 7.3

The trading company increased its sales (Q) from 80 units. up to 100 units At the same time, the financing structure, costs and prices did not change.

The selling price of a unit of production is P = 20 rubles.

Fixed costs FC = RUB 600

Variable costs for 1 unit. VC = RUB 5

Interest payments I = RUB 100

Income tax rate Г = 20%.

Determine how the change in sales volume under the above conditions affected the company's net profit.

Sales revenue increased by 25% (2000-1600/1600), while the company's net profit increased by 75% (25% 3).

Thus, the use of elements of management analysis in the process of assessing the dynamics of the company's performance indicators allows managers to minimize operational and financial risks, determining the optimal this stage life cycle cost and capital structure.

DEFINITION

Operating lever(operating or production leverage) is an indicator reflecting the excess of the profit growth rate over the company's revenue growth rate.

The purpose of the functioning of any company is to increase 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 allows you to manage your future sales profit by planning revenue for the future.

The main factors affecting the volume of revenue are:

• Product prices,
• Variable costs that vary with changes in production;
• Fixed costs that do not depend on production volumes.

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

Operating Leverage Formula

The calculation method using the operating leverage formula is as follows:

OR = (V - Per.Z) / (V - Per.Z - Const.Z)

OR = (V - Per.Z) / P

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

Here OR is an indicator of operating leverage,

B - revenue,

Per.Z - variable costs,

Const.Z - fixed costs,

P is the amount of profit,

VM - gross margin

Operating leverage and financial strength

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

RR = 1 / ZFP

Here OP is the operating lever,

ZFP is a margin of financial strength.

With an increase in the indicator of operating leverage, the company's financial strength falls, which contributes to its approach to the threshold of profitability. In this situation, the company is unable to ensure sustainable financial development. To prevent this provision continuous tracking is recommended production risks and their impact on financial performance.

What the operating lever shows

The operating lever can be of two types:

• Price operating lever, with the help of which price risk is reflected (the effect of price changes on profit margins);
• In-kind operating leverage represents production risk or the dependence of profit on the volume of output.

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

The growth in costs is due to the following reasons:

• Modernization of utilized facilities, increasing production space, increasing the number of production workers, introducing innovations and improving technologies.
• Minimization of prices for products, low-efficiency growth of costs for salaries low-skilled personnel, an increase in the number of defective products, a decrease in the efficiency of production lines, etc.

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

Examples of problem solving

EXAMPLE 1

Definition

Operating Leverage Effect ( English Degree of Operating Leverage, DOL) is a coefficient that shows the degree of efficiency of management of fixed costs and the degree of their influence on operating income ( English Earnings before Interest and Taxes, EBIT). In other words, the ratio shows the percentage of the change in operating income when the volume of sales proceeds changes by 1%. Companies with a high ratio are more sensitive to changes in sales.

High or low operating lever

The low value of the operating leverage ratio indicates the prevailing share of variable costs in the total costs of the company. Thus, an increase in sales will have a weaker impact on an increase in operating income, but such companies need to generate lower sales revenue to cover fixed costs. All other things being equal, such companies are more stable and less sensitive to changes in sales.

The high value of the operating leverage ratio indicates the predominance of fixed costs in the structure of the company's total expenses. Such companies receive a higher increase in operating income for each unit of increase in sales volume, but are also more sensitive to its decrease.

It is important to remember that direct comparisons of operating leverage for companies from different industries is inappropriate, since industry specifics largely determine the ratio of fixed and variable costs.

Formula

There are several approaches to calculating the effect of operating leverage, which nevertheless lead to the same result.

V general view it is calculated as the ratio of the percentage change in operating income to the percentage change in sales.

Another approach to calculating the operating leverage ratio is based on the value of the profit margin ( English Contribution Margin).

This formula can be transformed as follows.

where S is sales revenue, TVC is total variable costs, FC is fixed costs.

Also, the operating leverage can be calculated as the ratio of the margin profit ratio ( English Contribution Margin Ratio) to the operating profitability ratio ( English Operating margin ratio).

In turn, the ratio of the marginal profit is calculated as the ratio of the marginal profit to the sales proceeds.

The operating profitability ratio is calculated as the ratio of operating income to sales revenue.

Calculation example

V reporting period the companies demonstrated the following indicators.

Company A

• Percentage change in operating income + 20%
• Percentage change in revenue from sales + 16%

Company B

• Sales proceeds 5 mln.
• Total variable costs $ 2.5 million
• Fixed costs 1 million c.u.

Company B

• Proceeds from the sale of 7.5 million c.u.
• Aggregate Margin Profit 4 mln.
• Operating profitability ratio 0.2

The operating leverage ratio for each of the companies will be as follows:

Let's assume that each of the companies has a 5% increase in sales. In this case, the operating income for Company A will grow by 6.25% (1.25 × 5%), for Company B by 8.35% (1.67 × 5%), and for Company C by 13.35% ( 2.67 × 5%).

If all companies face a 3% decrease in sales volume, Company A's operating income will decrease by 3.75% (1.25 × 3%), Company B's by 5% (1.67 × 3%), and Company B by 8% (2.67 × 3%).

A graphical interpretation of the impact of operating leverage on operating income is shown in the figure.

As you can see in the graph, Company B is most vulnerable to a decline in sales, while Company A will show the most resilience. On the contrary, with an increase in sales volume, Company B will demonstrate the highest rates of growth in operating income, and Company A - the lowest.

conclusions

As mentioned above, companies with high leverage ratios are vulnerable to even modest declines in sales. In other words, a few percent drop in sales can result in a significant loss of operating income or even an operating loss. On the one hand, such companies must carefully manage their fixed costs and accurately predict changes in the volume of sales. On the other hand, in favorable market conditions, they have a higher potential for growth in operating income.