However, it is not enough to simply assess the dynamics of the income received by the company, since current activities are associated with serious operational risks, in particular, the risk of insufficient revenue to cover liabilities. Accordingly, the task of assessing the degree of operational risk arises. It should be remembered that any change in sales revenue 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 revenue, for example, by 15% will not automatically lead to an increase in profit by the same 15%. This fact is due to the fact that the costs "behave" in different ways, i.e. the ratio between the individual components of the total cost changes, which affects the financial results of the company.
In this case, we are talking about dividing costs into fixed (Fixed Cost, FC) and variable (Variable Cost, VC) depending on their behavior in relation to the volume of production and sales.
- Fixed costs - costs, total amount 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 (expenses for raw materials and materials, transportation and packaging, etc.).
It is this classification of costs, widely used in management accounting, that allows solving the problem of profit maximization 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 conditional: some costs are of a mixed nature, fixed costs may change depending on the conditions, otherwise the costs per unit of output (unit costs) behave differently. Detailed information about this is presented in the specialized literature on management accounting. In any case, subdividing the costs into FC and VC, the concept of "relevance area" should be used. This is such 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 between such indicators 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 many percent will change EBIT when it changes RS by 1%.
With the help of the operating lever, you can 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 percent reduction in sales revenue.
Really, DOL acts as a kind of "lever" that allows you to increase the financial result in accordance with the costs incurred (the reverse is also true - with an unfavorable cost structure, losses may increase). The greater the difference between additional fixed costs and the revenues they generate, the greater the leverage effect.
Example 7.1
Suppose there is information about the company "Z" for two conditional reporting periods - 2XX8 and 2XX9.
Operating profit (P r) by the end of 2XX8 will be:
If the company plans to increase revenue next year by 10%, leaving fixed costs unchanged, the profit in 2XX9 will be:
Profit Growth Rate:
With a 10% increase in revenue, profit increased much more significantly - by 20%. This is the manifestation of the operating leverage effect.
Assume that Company Z has increased its share of depreciable non-current assets, resulting in an increase in FC(due to the increase in 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 the increase FC leads to lower profit growth. Consequently, the financial management of the company should be focused on constant monitoring of the dynamics of fixed costs and reasonable savings, as a result, the entrepreneur gets the opportunity to influence the financial result. The 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 foregoing, the following conclusions can be drawn.
- The indicator of operating leverage 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 margin (RS - VC), the lower DOL.
- The higher the achieved level of sales Q, the lower DOL.
To answer the question of what will be the increase in profit depending on the change in sales and revenue, they calculate an indicator called “the strength of the impact of operating leverage”.
Methods for calculating the impact force of the operating lever 1
Operating leverage is related to the level of entrepreneurial risk: the higher it is, the higher the risk. The operating lever is one of the indicators of the sensitivity of profit to changes in sales volumes (Q) or sales proceeds ( RS).
Operating lever force (Sj):
Similarly, the calculation is carried out on the volume of sales of products (works, services) in physical terms.
Dependence of the strength of the impact of the operating lever on the cost structure (S 2):
7.3. Operating leverage effect
- S depends on cost structure (FC/VC) and level Q.
- The higher FC, the higher S.
- The higher the Q achieved, the lower the S.
Assume that the operating leverage in the analyzed company is 7.0. This means that for every 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 necessary to compensate investors and creditors for the risks they take on.
Example 7.2
Let's determine what will be the growth rate of profit, provided that the volume of sales increases by 50%.
Company A: T p (.EB1T) = 50 7 = 350%;
Company "B": T p(EB1T) = 50 3 = 150%.
Using this technique, it is possible to carry out variant calculations for one company with different forecast data for changes in earnings before interest and taxes (operating profit).
Obviously, the influence of operating leverage can be both positive and negative. The condition for the positive impact of operating leverage is the achievement by the company of such a level of revenue that covers all fixed costs (break even). Along with this, with a decrease in sales volumes, a negative effect of operating leverage is possible, which manifests itself in the fact that profit will decrease the faster, the higher the share of fixed costs.
There is a relationship between the strength of operating leverage (S) and the company's return on sales ( ROS):
The higher the proportion FC in revenue, the greater the decrease in the profitability of sales ( ROS) has a company.
Factors affecting S:
- fixed costs FC;
- unit variable costs VCPU;
- unit price p.
Companies using a mixed scheme of business financing (having own and borrowed funds in the capital structure) are forced to control not only operational, but also financial risks. In the language of financial analysts, this is called the conjugate effect of leverage(Degree of Combined Leverage, DCL) - an indicator of the company's overall business risk (Fig. 7.2).
The conjugated effect shows how much the net profit will change when the income from sales changes by 1%. It is calculated as the product of the impact force of the financial and the impact force of the operating leverage (Fig. 7.3). Depends on the structure of expenses and the structure of business financing sources.
The larger S, the more sensitive the profit before taxation is to the change in proceeds from the sale of products (works, services). The higher F, the more sensitive net profit is to changes in profit before tax, i.e.
Rice.
with simultaneous action F and S all smaller changes in revenue lead to more significant changes in net income. This is a manifestation of the coupled effect.
When making decisions on increasing the share of fixed costs in the company's cost structure and the advisability of attracting borrowed funds, it is necessary to focus on the sales forecast. In doing so, you can use
Rice. 7.3. Calculation of the force of leverage in calculations, the value of marginal income, which is the difference between revenue and variable costs (it is also called contribution to cover fixed costs).
Derivation of the formula of the coupled effect in terms of contribution margin 1:
where Q - sales volume; CM - marginal income.
With a favorable forecast for sales growth, it is advisable to increase the share of fixed costs and borrowed capital in order to increase the level DCL and get an increase in net profit in DCL times greater than the relative increase in sales volume.
With an unfavorable forecast for 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 as Q decreases, it becomes smaller.
Example 7.3
The trading company increased its sales volume (Q) from 80 units. up to 100 units At the same time, the structure of financing, costs and prices did not change.
The selling price of a unit of production Р = 20 rubles.
fixed costs FC= 600 rub.
Variable costs for 1 unit. VC= 5 rub.
Interest payments I= 100 rub.
Income tax rate D = 20%.
Determine how the change in sales under the above conditions affected the value of the company's net profit.
|
1600 - 400 = 1200 |
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1500 - 600 = 900 |
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20 500 = (100) |
20 800 = (160) |
|
Sales revenue increased by 25% (2000 -1600/1600) and the company's net income increased by 75% (25% 3).
Thus, the use of management analysis elements in the process of assessing the dynamics of the company's performance indicators allows managers to minimize operational and financial risks by determining the optimal for this stage life cycle cost and capital structure.
the impact forces of operational analysis
Operational analysis works with such parameters of the company's activities as costs, sales volume and profit. Of great importance for operational analysis is the division of costs into fixed and variable. The main quantities used in operational analysis are: gross margin (coverage amount), strength operating leverage, profitability threshold (break-even point), financial safety margin.
Gross margin (coverage amount). This value is calculated as the difference between sales revenue and variable costs. It shows whether the company has enough funds to cover fixed costs and make a profit.
The force of the operating lever. It is calculated as the ratio of gross margin to profit after interest, but before income tax.
The dependence of the financial results of the enterprise's operating activities, ceteris paribus, on assumptions related to changes in the volume of production and sales of marketable products, fixed costs and variable costs of production, is the content of the analysis of operating leverage.
The impact of an increase in the volume of production and sales of marketable products on the profit of an enterprise is determined by the concept of operating leverage, the impact of which is manifested in the fact that a change in revenue is accompanied by a stronger dynamics of change in profit.
Along with this indicator, when analyzing the financial economic activity enterprises use the value of the effect of the operating leverage (leverage), the reciprocal of the safety threshold:
where ESM is the effect of operating leverage.
Operating leverage shows how much profit will change if revenue changes by 1%. The effect of operating leverage is that a change in sales revenue (expressed as a percentage) always results in a larger change in profit (expressed as a percentage). The strength of operating leverage is a measure of the entrepreneurial risk associated with an enterprise. The higher it is, the greater the risk to shareholders.
The value of the operating leverage effect found using the formula is further used to predict the change in profit depending on the change in the company's revenue. To do this, use the following formula:
where ВР is the change in revenue in %; P - change in profit in%.
The management of the Technologiya enterprise intends to increase sales revenue by 10% (from UAH 50,000 to UAH 55,000) due to the growth in sales of electrical goods, while not going beyond the relevant period. The total variable costs for the initial version are UAH 36,000. Fixed costs are equal to 4,000 UAH. You can calculate the amount of profit in accordance with the new revenue from the sale of products in the traditional way or using operating leverage.
Traditional method:
1. The initial profit is 10,000 UAH. (50,000 - 36,000 - 4,000).
2. Variable costs for the planned volume of production will increase by 10%, that is, they will be equal to UAH 39,600. (36,000 x 1.1).
3. New profit: 55,000 - 39,600 - 4,000 = 11,400 UAH.
Operating Lever Method:
1. The strength of the influence of the operating lever: (50,000 - 36,000 / / 10,000) = 1.4. This means that a 10% increase in revenue should bring a profit increase of 14% (10 x 1.4), that is, 10,000 x 0.14 = 1,400 UAH.
The effect of operating leverage is that any change in sales revenue results in an even larger change in profit. The action of this effect is associated with the disproportionate impact of semi-fixed and semi-variable costs on the financial result when the volume of production and sales changes. The higher the share of semi-fixed costs and production costs, the stronger the impact of operating leverage. Conversely, with an increase in sales, the share of semi-fixed costs falls and the impact of operating leverage falls.
Profitability threshold (break-even point) is an indicator that characterizes the volume of product sales, at which the company's revenue from the sale of products (works, services) is equal to all its total costs. That is, this is the volume of sales at which the business entity has neither profit nor loss.
In practice, three methods are used to calculate the break-even point: graphical, equations, and marginal income.
With the graphical method, finding the break-even point is reduced to building a comprehensive schedule "costs - output - profit". The sequence of plotting is as follows: a line of fixed costs is drawn on the chart, for which a straight line is drawn parallel to the x-axis; on the x-axis, a point is selected, that is, a volume value. To find the break-even point, the value of total costs (fixed and variable) is calculated. A straight line is drawn on the graph corresponding to this value; again, any point on the abscissa axis is selected and for it the amount of proceeds from the sale is found. A straight line is constructed corresponding to the given value.
Direct lines show the dependence of variable and fixed costs, as well as revenue on the volume of production. The point of critical production volume shows the volume of production at which the sales revenue is equal to its full cost. After determining the break-even point, profit planning is based on the effect of the operating (production) leverage, that is, the margin of financial strength at which the company can afford to reduce the volume of sales without leading to a loss. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The revenue corresponding to the break-even point is called the threshold revenue. The volume of production (sales) at the break-even point is called the threshold volume of production (sales). If the company sells products less than the threshold sales volume, then it suffers losses; if more, it makes a profit. Knowing the threshold of profitability, you can calculate the critical volume of production:
Margin of financial strength. This is the difference between the company's revenue and the threshold of profitability. The margin of safety shows how much revenue can decrease so that the company still does not incur losses. The margin of financial strength is calculated by the formula:
ZFP = VP - RTHRESHOLD
The higher the power of influence of the operating lever, the lower the margin of financial strength.
Example 2 . Calculation of the impact force of the operating lever
Initial data:
Proceeds from the sale of products - 10,000 thousand rubles.
Variable costs - 8300 thousand rubles,
Fixed costs - 1500 thousand rubles.
Profit - 200 thousand rubles.
1. Calculate the force of the operating leverage.
Coverage amount = 1500 thousand rubles. + 200 thousand rubles. = 1700 thousand rubles.
Operating lever force = 1700 / 200 = 8.5 times
2. Suppose that on next year 12% growth in sales volume is forecasted. We can calculate by what percentage the profit will increase:
12% * 8,5 =102%.
10000 * 112% / 100= 11200 thousand rubles
8300 * 112% / 100 = 9296 thousand rubles.
11200 - 9296 = 1904 thousand rubles
1904 - 1500 = 404 thousand rubles
Lever force = (1500 + 404) / 404 = 4.7 times.
From here, profit increases by 102%:
404 - 200 = 204; 204 * 100 / 200 = 102%.
Let's define the profitability threshold for this example. For these purposes, the gross margin ratio should be calculated. It is calculated as the ratio of gross margin to sales revenue:
1904 / 11200 = 0,17.
Knowing the gross margin ratio - 0.17, we consider the profitability threshold.
Profitability threshold \u003d 1500 / 0.17 \u003d 8823.5 rubles.
Analysis of the cost structure allows you to choose a strategy of behavior in the market. There is a rule for choosing profitable options assortment policy -- the rule "50: 50".
Cost management in connection with the use of the effect of operating leverage allows you to quickly and comprehensively approach the use of enterprise finances. You can use the 50/50 rule for this.
All types of products are divided into two groups depending on the share of variable costs. If it is more than 50%, then it is more profitable for the given types of products to work on reducing costs. If the share of variable costs is less than 50%, then it is better for the company to increase sales volumes - this will give more gross margin.
The calculation of the above values allows us to assess the sustainability of the company's business activities and entrepreneurial risk associated with it.
And if in the first case the chain is considered:
Cost (Cost) - Volume (Sales proceeds) - Profit (Gross profit), which makes it possible to calculate the profitability of turnover, the self-sufficiency ratio and the profitability of production by costs, then when calculating by cash flows, we have an almost similar scheme:
Cash outflow - Cash inflow - Net cash flow, (Payments) (Receipts) (Difference) which makes it possible to calculate various indicators of liquidity and solvency.
However, in practice, a situation arises when an enterprise has no money, but there is a profit, or there are funds, but there is no profit. The problem lies in the mismatch in time of movement of material and cash flows. In most sources of modern financial and economic literature, the problem of liquidity - profitability is considered in the framework of working capital management and is overlooked in the analysis of enterprise cost management processes.
Although in this perspective, the most significant bottlenecks in the functioning of domestic industrial enterprises: payment, or rather "non-payment" discipline, problems of dividing costs into fixed and variable, access to the problem of intra-company pricing, the problem of assessing cash receipts and payments over time.
Theoretically interesting is the fact that when considering the CVP model in the context of cash flows, the behavior of the so-called fixed and variable costs changes completely. It becomes possible to plan the level of "real" rather than prospective profitability within shorter periods, based on agreements for the repayment of accounts payable and receivables.
The use of the operational analysis of the standard model is complicated not only by the above limitations, but also by the specifics of the preparation of financial statements (once a quarter, half a year, a year). For the purposes of operational management of costs and results, this frequency is clearly not enough.
Differences in the structure of the assortment of the enterprise are also the "bottleneck" of this type of cost analysis. Given the difficulty of dividing mixed costs into fixed and variable parts, the problems with the further distribution of allocated and "pure" fixed costs for a specific type of product, the break-even point for a specific type of enterprise product will be calculated with significant assumptions.
In order to obtain more timely information and limit the assortment assumptions, it is proposed to use a methodology that takes into account the direct movement financial flows(payments for cost items and receipts for specific products sold, which ultimately form the cost of production and sales revenue).
The production activity of the majority of industrial enterprises is regulated by certain technologies, state standards and established terms of settlements with creditors and debtors. For this reason, it is necessary to consider the methodology in the context of cash flow cycles, production cycles.
There is a direct relationship between operating leverage and entrepreneurial risk. That is, the greater the operating leverage (the angle between revenue and total costs), the greater the entrepreneurial risk. But at the same time, the higher the risk, the greater the reward.
1 -- proceeds from sales; 2 - operating profit; 3 - operating losses; 4 - total costs; 5 -- breakeven point; 6 - fixed costs.
Rice. 1.1 Low and high level operating lever
The effect of operating leverage is that any change in sales revenue (due to a change in volume) leads to an even greater change in profit. The action of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activity of the enterprise when the volume of production changes.
The strength of the impact of the operating lever shows the degree of entrepreneurial risk, that is, the risk of loss of profit associated with fluctuations in the volume of sales. The greater the effect of operating leverage (the greater the proportion of fixed costs), the greater the entrepreneurial risk.
As a rule, the higher the fixed costs of the enterprise, the higher the entrepreneurial risk associated with it. In turn, high fixed costs are usually the result of a company having expensive fixed assets that need maintenance and periodic repairs.
Fomina Irina Alexandrovna
professor at 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 addresses the issues 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 of the enterprise based on the marginal approach, which is demonstrated by the example of UTair airline.
The marginal approach is an integral part of managerial decision-making at enterprises in various fields of activity.
A comprehensive assessment of the effectiveness of economic activity characterizes the level and dynamics of the final indicators of the enterprise.
In accordance with the purpose of any commercial activity, such totals are sales revenue and profit.
Marginal 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 the basis of this, manage the process of forming its value.
The main features of marginal analysis are to determine:
break-even sales volume (profitability threshold, cost recovery) at given price ratios, fixed and variable costs;
security zones (break-even) of the enterprise;
the required volume of sales 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 the level of variable and fixed costs.
With the help of marginal analysis, other management decisions: select change options production capacity, equipment options, production technology, purchase of components, evaluation of the effectiveness of accepting an additional order, product range, prices for a new product, etc.
AT modern conditions at Russian enterprises, the issues of mass regulation and profit dynamics come to one of the first places in the management of financial resources. The solution of these issues is included in the scope of operational (production) financial management.
The basis of financial management is financial economic analysis, during which the analysis of the cost structure is of paramount importance.
It is known that entrepreneurial activity associated with many factors influencing its result, which are usually divided into two groups. The first group of factors is associated with profit maximization through pricing policy, profitability of products, its competitiveness. The second group of factors is associated with the identification of critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, with the division of costs into variable and fixed.
Analysis production costs allows you to determine their impact on the amount of profit from sales, but if you go deeper into these problems, then the following is revealed.
This division:
helps to solve the problem of increasing the mass of profits due to the relative reduction of certain costs;
allows you to search for the optimal combination of variable and fixed costs, providing an increase in profits;
allows you to judge the cost recovery and financial stability in the event of a deterioration in the economic situation.
The following indicators can serve as a criterion for choosing the most profitable products:
gross margin per unit of production;
the share of gross margin in the price of a unit of production;
gross margin per unit of limited factor.
Considering the behavior of variable and fixed costs, one should analyze the composition and structure of costs per unit of output in a certain period of time and with a certain number of sales. The behavior of variable and fixed costs when the volume of production changes is characterized as follows (Table 1).
Table 1. The behavior of fixed and variable costs with a change in the volume of production
The cost structure is not so much a quantitative relationship as a qualitative one. Nevertheless, the impact of the dynamics of variable and fixed costs on the formation of financial results with a change in production volume is very significant. The concept of operating leverage is closely related to the cost structure.
An analysis of the dynamics of sales proceeds and profits of enterprises shows that a change in sales proceeds causes a stronger change in profit. This effect is called production (operational) leverage.
A number of indicators are used to calculate the effect, or force, of leverage. This requires the separation of costs into variables and constants with the help of an intermediate result. This value is usually called the gross margin (coverage amount, contribution).
These metrics include:
gross margin = profit from sales + fixed costs;
contribution (coverage amount) = sales proceeds - variable costs;
the strength of the impact of the operating lever = (sales proceeds - variable costs) / profit from sales;
operating leverage effect = profit growth rate/revenue growth rate.
If we interpret the effect of the operating leverage as a change in the gross margin, then its calculation will allow us to answer the question of how much the profit changes from an increase in the volume (production, sales) of products.
There is a direct relationship between the value of the production (operating lever) and the ratio of fixed and variable costs:
1) the value of the leverage is greater, the higher the level of the ratio of fixed costs to variables;
2) the value of the leverage is the smaller, the lower the level of the ratio of fixed costs to variables. The calculation of the effect of operating leverage in the system of marginal analysis of UTair's activities is presented in Table. 2.
Table 2. Calculation of the threshold of profitability, margin of financial strength, the strength of the impact of the operating leverage of UTair airline
| Indicators | unit of measurement | Year | ||
| 2008 | 2007 | 2006 | ||
| Total revenue | Thousand rub. | 16 974 418 | 12 110 492 | 8 320 060 |
| Costs are variable | Thousand rub. | 10 211334 | 7 432 199 | 4 508 407 |
| Gross Margin (B - VC) | Thousand rub. | 6 763 084 | 4 678 293 | 3 811653 |
| Gross margin ratio (VM/V) | 0,4 | 0,37 | 0,5 | |
| Profitability Threshold (FC/KBM) | Thousand rub. | 9 293 071 | 8 697 659 | 6 257 244 |
| ZFP (V - PR) | Thousand rub. | 7 681 347 | 3 412 833 | 2 062 816 |
| Profit (ZFP KVM) | Thousand rub. | 3 060 464 | 1 318 380 | 945 034 |
| Impact force 0R | 2,2 | 3,5 | 4,0 | |
| Profitability of sales (P/V 100%) | % | 18,0 | 10,9 | 5,6 |
| Profitability of production (P/R 100%) | % | 29,9 | 17,7 | 20,9 |
Source: the table was compiled based on the author's calculations based on data from the UTair Aviation website: www.utair.ru. Note: B - proceeds from the sale of aviation services; VC - variable costs; FC- fixed costs; VM - gross margin; KVM - gross margin ratio; 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 threshold of profitability. 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 can also be seen that the gross margin provides coverage of 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 had a drop in revenue by 7,681,347 thousand. rub. [Ibid.], then the UTair group could have endured this before suffering losses. Similarly for 2007 and 2006. It can be seen that in 2006 the margin of financial safety, although it existed, was insignificant, which indicated a warning about the danger. However, by 2008, the so-called "safety cushion" was formed - due to an increase in the margin of financial strength. It is reasonable to say that the degree of risk is getting lower every year.
According to the results of the operating leverage indicator, it can be judged that the sales revenue is increasing, therefore, the impact of the operating leverage is decreasing. Each percentage increase in revenue results in less and less operating leverage. Based on the foregoing, it can be concluded that the degree of entrepreneurial risk is decreasing, since the strength of the impact of the operating lever decreases every year.
Thus, based on the performed marginal analysis, we can speak about the successful operation of UTair Aviation 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 operating profit management mechanism by influencing the ratio of fixed and variable costs of an enterprise remains unchanged.
In specific situations of the operating activity of an enterprise, the manifestation of the operating leverage mechanism has a number of features that must be taken into account in the process of its use for profit management. Let's formulate the main ones.
1. The positive impact of operating leverage begins to manifest itself only after the company has overcome the break-even point of its operating activities.
2. After breaking the break-even point - the higher the operating leverage ratio, the greater the impact on profit growth will be the company, increasing the volume of sales.
3. The greatest positive impact of operational leverage is achieved in the field as close as possible to the break-even point (after it has been overcome).
4. The mechanism of operating leverage also has the opposite direction - with any decrease in the volume of sales of products, the size of gross operating profit will decrease even more.
5. The effect of operating leverage is stable only in the short run.
This is determined by the fact that operating costs, which are classified as fixed, remain unchanged only for a short period of time. As soon as in the process of increasing the volume of sales of products there is another jump in the amount of fixed operating costs, the company needs to overcome a 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 the new business conditions.
Understanding the mechanism of manifestation of operating leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of operating activities. This control comes down to changing the value of the operating leverage ratio under various market trends commodity market and stages of the life cycle of an enterprise.
In case of unfavorable commodity market conditions, which determine a possible decrease in the volume of sales of products, as well as in the early stages of the life cycle of an enterprise, when it has not yet overcome the break-even point, it is necessary to take measures to reduce the value of the operating leverage ratio. And vice versa, if the commodity market is favorable and there is a certain margin of safety (margin of safety), the requirements for the implementation of the fixed cost savings regime can be significantly weakened - during such periods, the 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 specifics of the implementation of operating activities, which determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor.
It should be noted that fixed costs are less amenable to rapid change, therefore, enterprises with a high operating leverage ratio lose flexibility in managing their costs. Despite these objective limitations, if necessary, each enterprise has enough opportunities to reduce the amount and proportion of fixed operating costs.
Such reserves include a significant reduction in overhead costs (management costs) in case of unfavorable commodity market conditions; sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation charges; widespread use of short-term forms of leasing machinery and equipment instead of acquiring them as property; reduction in the number of consumed utilities and some others.
When managing variable costs, the main guideline should be to ensure their constant savings, since there is a direct relationship between the amount of these costs and the volume of production and sales of products. Providing these savings before the company overcomes the break-even point leads to an increase in the amount of marginal profit, which allows you to overcome this point faster.
After breaking the break-even point, the amount of savings in variable costs will provide a direct increase in gross operating profit. The main reserves for saving variable costs include:
reduction in the number of employees of the main and auxiliary industries by ensuring the growth of their labor productivity;
reduction of stocks of raw materials, materials, finished products during periods of unfavorable commodity market conditions;
provision of favorable conditions for the supply of raw materials and materials for the enterprise, and others. Purposeful management of fixed and variable costs, prompt change in their ratio under changing business conditions can increase the potential for the formation of the operating profit of the enterprise.
Operating leverage is an indicator that answers the question of 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. Conversely, if in the planning period the company needs a certain amount of profit from sales, using the operating lever, you can determine what sales revenue will provide the desired profit.
The mechanism for applying operating leverage depends on what factors affect 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 impact on the revenue of each factor are of paramount importance.
The dynamics of sales proceeds as a result of a decrease or increase in prices for sold products (works, services) affects the amount of profit differently than the dynamics of proceeds as a result of an increase or decrease in physical sales.
If the change in demand for products is expressed only through price changes, and the natural volume of sales remains at the basic level, then the entire amount of the increase or decrease in sales proceeds simultaneously becomes the amount of increase or decrease in profit.
If the basic prices are maintained, but the natural volume of sales changes, then the increase or decrease in profit is the sum of the increase or decrease in revenue, reduced by the corresponding change in the value of variable costs.
Consequently, the change in prices is more reflected in the dynamics of profit from sales than the change in the natural volume of sales. It has already been said that the operating lever 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 indicator of operating leverage with a change in revenue only due to prices will always be higher than with a change in revenue only due to physical sales volume.
Based on the foregoing, it can be concluded that it is expedient 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. Moscow: Eksmo, 2009.
2. Campbell M. R., Brew S. L. Economics: Principles, problems and politics. In 2 vols. T. 2. / Per. from English. M.: Respublika, 1992.
3. Karpova G. A. Analysis of financial stability commercial organizations// http://www.gasu.ru/vmu/archive.
4. Kovalev A. I., Privalov V. P. Analysis of the financial condition of the enterprise. Moscow: Center for Economics and Marketing, 2001.
5. http://www.utair.ru.
6. Savitskaya GV Analysis of economic activity of the enterprise. M.: LLC "New knowledge", 2009.
7. Sheremet AD Management accounting: Proc. allowance. M.: ID FBK-PRESS, 2000.
The effect of operating leverage is based on the division of costs into fixed and variable, as well as on the comparison of revenue with these costs. The action of production leverage is manifested in the fact that any change in revenue leads to a change in profit, and profit always changes more than revenue.
The higher the share of fixed costs, the higher the production leverage and entrepreneurial risk. To reduce the level of operating leverage, it is necessary to seek to convert fixed costs into variables. For example, workers employed in production can be transferred to piecework wages. Also, to reduce depreciation costs, production equipment can be leased.
Methodology for calculating the operating leverage
The effect of operating leverage can be determined by the formula:
Let's consider the effect of production leverage on a practical example. Let's assume that in the current period the revenue amounted to 15 million rubles. , variable costs amounted to 12.3 million rubles, and fixed costs - 1.58 million rubles. Next year, the company wants to increase revenue by 9.1%. Determine how much profit will increase using the force of operating leverage.
Using the formula, calculate the gross margin and profit:
Gross margin \u003d Revenue - Variable costs \u003d 15 - 12.3 \u003d 2.7 million rubles.
Profit \u003d Gross Margin - Fixed Costs \u003d 2.7 - 1.58 \u003d 1.12 million rubles.
Then the effect of operating leverage will be:
Operating leverage = Gross margin / Profit = 2.7 / 1.12 = 2.41
The operating leverage effect measures the percentage increase or decrease in earnings for a one percent change in revenue. Therefore, if revenue increases by 9.1%, then profit will increase by 9.1% * 2.41 = 21.9%.
Let's check the result and calculate how much the profit will change in the traditional way (without using operating leverage).
When revenue increases, only variable costs change, while fixed costs remain unchanged. Let's present the data in an analytical table.
Thus, profit will increase by:
1365,7 * 100%/1120 – 1 = 21,9%
Operating leverage is present when a firm has fixed operating costs—regardless of production volumes.
The presence in the composition of the costs of any amount of their constant types leads to the fact that when the volume of sales changes, the amount of profit always changes at an even faster pace.
In other words, fixed operating costs, by the very fact of their existence, cause a disproportionately higher change in the amount of profit of the enterprise with any change in the volume of sales of products, regardless of the size of the enterprise, industry specifics and other factors.
The lever works in reverse side– enhances not only the profits of the company, but also its losses. In the latter case, losses may arise as a result of an unexpected drop in sales due to the refusal of consumers to buy products of this enterprise (manufacturer).
The action of the operational (production, economic) lever is manifested in the fact that any change in sales proceeds always generates a stronger change in profit.
However, the degree of sensitivity of profit to changes in sales proceeds varies greatly in enterprises with a different ratio of fixed and variable costs. The ratio of fixed and variable costs of the enterprise, allowing the use of the mechanism of the operating lever is characterized by the force of the impact of the operating lever (CWOR).
In practical calculations, to determine the strength of the impact of the operating lever, the ratio of the so-called marginal income (MA) to profit (P) is used.
(7.6)
Marginal income (MD) is the difference between sales proceeds and variable costs, this indicator in the economic literature is also referred to as the amount of coverage. It is desirable that marginal income is enough not only to cover fixed costs, but also to generate profits.
SVOR shows how much the profit will change with a change in revenue by 1 percent.
The force of operating leverage is always calculated for a certain volume of sales, for a given sales proceeds. When the proceeds from sales change, the strength of the operating leverage also changes. The strength of the impact of operating leverage largely depends on the industry average level of capital intensity: the greater the cost of fixed assets, the greater the fixed costs.
At the same time, the effect of the operating lever can be controlled precisely on the basis of taking into account the dependence of the force of the lever on the value of fixed costs: the larger the fixed costs (Fix) and the lower the profit, the stronger the operating lever.
When the income of the enterprise decreases, fixed costs are difficult to reduce. This means that high specific gravity fixed costs in their total amount indicates a weakening of the flexibility of the enterprise. If it is necessary to leave your business and move to another area of activity, it will be very difficult for an enterprise to diversify abruptly, both organizationally and especially financially.
An increased share of fixed costs enhances operating leverage, and lower business activity enterprise translates into multiplied profit losses. It remains to be consoled by the fact that if revenue is still growing at a sufficient pace, then with a strong operating leverage, the enterprise, although it pays maximum amounts income tax, but has the ability to pay solid dividends and provide development finance.
Therefore, we can say that the strength of the impact of the operating lever indicates the degree of entrepreneurial risk associated with this firm: the higher the value of the impact of the production lever, the greater the entrepreneurial risk associated with the activities of this enterprise.
The action of the effect is associated with the unequal influence of fixed and variable costs on the financial result when the volume of production (sales) changes.
The ratio between fixed and variable costs for an enterprise that uses the mechanism of production leverage with different intensity of impact on profits is expressed by the coefficient of this leverage. It is determined by the formula:
, (7.7)
where is the coefficient of production (operational) leverage;
Z - total costs
The higher the value of this coefficient, the more the enterprise is able to accelerate the rate of profit growth in relation to the rate of increase in production (sales). In other words, at identical rates of growth in output, an enterprise that has a higher coefficient of production leverage (ceteris paribus) will always increase the amount of profit to a greater extent compared to enterprises with a lower value of this coefficient.
The specific ratio of the increase in the amount of profit and the value of the volume of production (sales), achieved at a set value of the coefficient of production leverage, is characterized by the parameter "effect of production leverage".
The standard formula for calculating this indicator is:
, (7.8)
where EPR is the effect of the production lever;
?П - profit growth rate;
?OP - the rate of increase in production (sales).
By setting one or another rate of increase in the volume of production, it is always possible to calculate the extent to which the mass of profit increases with the value of the coefficient of production leverage prevailing at the enterprise.
The positive impact of the operating lever begins to manifest itself only after the company has overcome the break-even point of its activities.
The threshold of profitability is such a proceeds from the sale at which the company no longer has losses, but still does not have profits. Marginal income is enough to cover fixed costs, and the profit is zero.
Profitability Threshold (PR) can be calculated as follows:
, (7.9) where KMD is the coefficient of marginal income, the share of marginal income in sales proceeds;
B is sales revenue.
Having determined what quantity of manufactured goods corresponds, at given selling prices, to the profitability threshold, it is possible to calculate the threshold (critical) value of the volume of production (in pieces, etc.) (PKT). Below this quantity, it is unprofitable for the enterprise to produce. The threshold value is found by the formula:
(7.10) After overcoming the break-even point, the higher the force of influence of the OR, the greater the force of influence on profit growth the enterprise will have, increasing the volume of sales.
The greatest positive impact of OP is achieved in a field as close as possible to the breakeven point.
Using the operating lever, you can choose the most effective financial policy enterprises.
The key elements of operational analysis are: operating leverage, margin of profitability and financial strength of the enterprise.
Margin of financial strength of the enterprise (ZFP) is the difference between the actual sales proceeds achieved and the profitability threshold. If the sales proceeds fall below the profitability threshold, then financial condition enterprises are deteriorating, there is a shortage of liquid funds:
(7.11)
The relative size of the financial safety margin as a percentage is determined by the formula:
. (7.12) The margin of financial strength is the higher, the lower the force of the impact of the operating leverage.
. (7.13)
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