Learning About Operating Leverage – And How It Helps Your Business
Operating leverage is your company’s buffer against judgement and calculation mistakes, including errors in sales forecasts. Your operating leverage figures directly relate to your fixed and variable expenses, sales numbers and profit margins. Keeping an eye on your leverage calculations help you maximize revenues and minimize risk factors as you focus on improving your small business operations. Learn all you can about this important figure to protect your small business through all growth stages.
When effectively calculated, your operating leverage will reflect your sales figures, profit margins and expense ratios. If your company has more fixed expenses than variable costs, you may have a high operating leverage. This is especially true if your company has a high profit margin, but relatively low sales figures. On the other hand, if you sell a lot of products at a low profit margin and have more variable expenses than fixed costs, your operating leverage is likely low.
Although you can use the above factors as a guide, you actually need to place your precise financial figures into a formula to calculate your exact operating leverage. You can find your operating leverage by inserting your financial figures into this formula:
Product run quantity x (Sales price – Per unit variable cost) / Product run quantity x (Price – Per unit variable cost) – Fixed expenses
When you run your financial figures through this formula, you will obtain a decimal figure you can use to determine how revenue increases will translate to operating income.
When you identify your operating leverage figures, you can use the information to decide where to focus your efforts while promoting company growth. Your leverage figures can also help you gauge risk while making changes to your operations, especially when faced with volatile market conditions.
If your company in Missouri has a high operating leverage, you may want to focus on increasing sales volume numbers to boost your yearly profits. If you end up in the lower leverage category, you may want to make an effort to decrease your variable expenses or increase profit margins.
Assessing Your Operating Leverage
As your operations evolve through the years, it pays to keep a close eye on your operating leverage. To always have these figures on hand, work with the team at accountRely in St. Louis, MO. Your accounting professional will perform the calculations and help you assess your operating leverage figures through every phase of your small business growth.