Operating lever

At enterprises, the issues of regulating the dynamics of profit in the management of financial resources are at one of the first places. As a result of the volume of output and changes in the cost structure, the operating leverage gives an opportunity to assess the entire economic benefit.

The concept of leverage, or operational lever, is associated with the structure of the cost price, in particular, with a certain ratio of conditional variables and conditionally fixed costs. If we consider the cost structure in this aspect, much can be achieved. First, due to a certain reduction in costs with the growth of sales, namely physical, it is much easier to solve such a problem as profit maximization. Secondly, the distribution of all costs for conditionally variable and constant gives an opportunity to talk about the payback and allows you to calculate how large the financial safety margin of a given enterprise in the event of any complications in the market or difficulties of varying complexity. And, finally, thirdly, it allows you to count the decisive sales volume, completely covering all costs, and also ensuring the work of the enterprise without losses.

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

The production lever or operating leverage is a specific mechanism that is based on optimizing the ratio of variables and fixed costs, as well as managing the entire profit of the enterprise. Knowing all the work of the operating leverage, you can easily predict what will be the change in the profit of the enterprise, if the revenue changes, and besides, it is absolutely certain to determine the point at which the enterprise will manage to break even.

The operating leverage is another means of management accounting used as a profit monitoring tool, an instrument of the impact of a cost grouping policy to reflect the impact of changes in the increase in sales volumes on profit. It is thanks to him that a significant increase in sales volumes.

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

The necessary condition for using the operating leverage is the application of margin analysis and a clear management of costs.

The following aspects should be clearly and clearly represented in the analysis:

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

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

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

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

The production lever is, at the same time, an indicator that helps managers choose the most optimal strategy, which is subsequently used in managing the company's profit and its costs.

Varying the effect of the production lever depends on the change in the relative importance of the costs of the constant. After all, the lower the proportion of the specific weight of constant costs in their total amount, the higher the degree of change in the amount of profit relative to the rhythms of the change in the specific revenue of the enterprise.

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

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

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

- there is a reverse orientation of the mechanism of production leverage;

- there is an inverse relationship between the profit of the enterprise and the productive leverage;

- the manifestation of the effect of productive leverage is possible only in a short period.

Understanding the structure and operation of the operating mechanism mechanism enables you to purposefully manage constant and variable costs in order to increase the level of efficiency of a particular enterprise. This management means a change in the value of the leverage force under different trends in the market conjuncture, stages and stages of the life cycle of the firm.

In the event of unfavorable commodity market conjuncture, or in the early stages of the enterprise's operation, its policy should be maximally aimed at reducing the strength of the operating leverage by saving at constant costs.

If the conjuncture of the current market is favorable and suitable for all parameters, and the availability of safety margin is significant, then the implementation of the regime of saving constant costs can be significantly weakened. In such periods, the firm is able to expand its real investment by upgrading its main production assets.

It should be noted that the constant costs are amenable to a rapid change to a lesser extent, so many enterprises that have significant strength of the operating leverage lose flexibility in managing their company's costs. As for variable costs only, the basic rule or principle of managing these costs is to implement their constant, uninterrupted savings, which guarantees an increase in sales volumes.