The activities of almost any company are subject to risks. To achieve its goals, the company develops predictive financial indicators, 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) is the equity capital of the company.

However, due to competition in the market, ups and downs of the economy, a situation arises when the actual values ​​of revenue and other key indicators differ significantly 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. The rapid obsolescence of products has a great influence 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 the return on equity (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 the production risk of a company is share of fixed costs in its general operating expenses, which must be paid regardless of how much revenue its business generates. To measure the degree of influence of fixed costs on the company's profits, you can use the indicator of operating leverage, or leverage.

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

A high level of operating leverage is characteristic of 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, wage management personnel, property and land tax, etc. The peculiarity of fixed costs is that they remain unchanged and with the growth of production volumes, their value per unit of output decreases (the effect of scale of production). At the same time, variable costs increase in direct proportion to the growth of production, however, per unit of output, they are a constant value. To study the relationship between a company's sales volume, expenses and profit, 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 quantity of goods and services sold is called breakeven point (break-even point), and the 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 is not yet making a profit, but is no longer incurring losses. If sales rise above this point, then a profit is formed. 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 operating expenses, i.e. operating profit is zero, EBIT= 0:

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

where is the breakeven point.

Example 9.2. Let us assume that Charm, a cosmetics company, has a fixed cost of RUB 3,000, a unit price of RUB 100, and a variable cost of RUB 60. per unit. What is the breakeven point?

Solution

We will carry out the calculations according to the formula (9.1):

In Example 9.2, we showed that the company needs to sell 75 units. products to cover their operating expenses. If you manage to sell more than 75 units. product, then its operating profit (and therefore, ROE in the absence of debt financing) will begin to grow, and if it is 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 greater the size of the company's fixed costs. More high level fixed costs require you to sell more products 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, data for one of them - "Sharm" - we considered in example 9.2. The second company - "Style" - has higher fixed costs at the level of 6000 rubles, but its variable costs are lower and amount to 40 rubles. per unit, the price of products is 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 own capital, namely 15,000 rubles. It is required to calculate the break-even point for the company "Style", as well as to determine the value ROE for both companies with sales volumes of 0, 20, 50, 75, 100, 125, 150 units. products.

Solution

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

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

Table 9.1

Sharm company

Table 9.2

Company "Style"

Due to Style's higher fixed costs, the break-even point is reached at a higher sales volume, so the owners need to sell more products to make a profit. 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 company "Sharm" (chart 1) is lower than for the company "Style". For the first company, it is 75 units, and for the second - 100 units. After the company sells products in excess of the break-even point, revenue covers operating expenses and additional profit is formed.

So, in the considered example, we have shown 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, the 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 activity, the same effect occurs, only a decrease in sales leads to the fact that losses grow faster for a company with higher fixed costs. Thus, fixed costs create a 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 risk. Using the calculation of 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- operating profit of the company; Q- sales volume in units of production.

At the same time, the higher the share of fixed costs in the company's total operating expenses, the higher the strength of the operating leverage. For a specific volume of production, the operating leverage is calculated by the formula

(9.2)

If the value of the operating leverage (leverage) is equal to 2, then with an increase in sales by 10%, operating profit will increase by 20%. But at the same time, if the sales revenue decreases by 10%, then the company's operating profit will also decrease more significantly - by 20%.

Rice. 9.5.

If the brackets are opened 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 a company has a high level of fixed costs in general expenses, then the value of operating income will change significantly with revenue fluctuations, and there will also be a high dispersion of 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 activities largely depend on the market situation (changes in GDP, fluctuations in interest rates, inflation, changes in the exchange rate of the national currency, etc.). If the company is characterized by high operating leverage, then a significant proportion of fixed costs enhances the consequences of negative changes in the markets, increases the company's risks. Indeed, variable costs will decrease following the decline in production caused by market factors, but if fixed costs cannot be reduced, then profits will decline.

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, a company can calculate the break-even point and operating leverage for different investment plans. For example, a trading company can analyze two sales options household appliances- V shopping malls or over the Internet. Obviously, the first option involves high fixed costs for renting trading floors, while the second trading option does not involve such costs. Therefore, in order to avoid high fixed costs and the risk associated with them, the company can provide a way to reduce them during the project development stage.

To reduce fixed costs, the company may also switch to subcontracts 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 withdrawal of individual capital-intensive industries to subcontractors. The Importance of Management fixed costs connected with 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.

The concept of operating leverage is closely related to the cost structure of a company. Operating lever 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 organization's profit 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 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 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: variables and constants. 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 point is reached, there is profit, 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. The essence of its action lies in the fact that with the growth of revenue there is a higher growth rate of profit, but this higher growth rate is limited by the ratio of fixed and variable costs. The lower the proportion of fixed costs, the lower this constraint will be.

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, it is possible to predict the change in profit with a change in revenue. Distinguish price and natural price leverage.

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

Rts = V / P

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

Given that V \u003d 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 lever(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.

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

the value 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 overall structure costs is a reflection not only of the characteristics of a given enterprise and its accounting policy, but also of sectoral characteristics 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.

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

Thus, small operating lever can be strengthened by attracting borrowed capital. High operating leverage, on the other hand, can be offset by low financial leverage. With the help of these powerful tools - operational and financial leverage - an enterprise can achieve the desired return on invested capital at a controlled level of risk.

32 Analysis of operating leverage.

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

Operating leverage shows its effect in the fact that any change in sales generates a stronger change in profits. At the same time, the strength of the operating leverage (SOP) reflects the degree of entrepreneurial risk: the greater the value of the strength of the operating leverage, the higher the entrepreneurial risk.

Since the growth in sales revenue causes a corresponding increase in variable costs when a larger volume of raw materials, materials, labor production costs, etc. is consumed, then part of the additional revenue received will become a source of their coverage. Another part of the current costs, the so-called fixed costs (not related to the functional dependence on the volume of production), in the context of expanding the scale of the business, may also increase. This growth will be recognized as justified only if the sales proceeds grow faster. Restraining the growth of fixed costs while increasing sales of products will contribute to the generation of additional profits, as the effect of operating leverage will manifest itself.

The following formulas are used to calculate the operating leverage strength index:

SOS = Profit Margin / Sales Profit = (Sales Revenue - Variable Expenditure)/ Profit = (Profit + Post Expenditure)/Profit = Psot. expenses/profit +1

Operating leverage (production leverage) is a potential opportunity to influence the 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 varying degrees of influence of the dynamics of variable costs and fixed costs on financial results 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 the profit will increase.

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 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 impact of operating leverage decreases, and the organization's financial strength, on the contrary, grows. This feedback is 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 constant value and depends on a certain, underlying implementation value. For example, with a breakeven volume of sales, the level of operating leverage will tend to infinity. Operating lever level has highest value 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 profit 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 have a large operating leverage. 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.

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

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

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

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

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

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

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

The price at which the product is sold;

Volume of sales;

Costs are mostly fixed.

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

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

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