Take Advantage Of Operating Leverage To Measure Operating Income

What is the term: operating leverage? By definition operating leverage is an analysis that finds out how much your company’s operating income and affects sales results.

For the business world, the purpose of this operating leverage analysis is to find out how much minimum sales must be obtained so that later the company does not experience losses.

Therefore, operating leverage is a picture where you can also find out how far the level of variable operating costs is with fixed costs, either in a relatively small or high level.

Measuring operating leverage of course has an operating leverage formula calculation such as DOL (degree of operating leverage). Where this calculation can be used to measure changes in operating profit that are affected by sales volume.

The benefit of operating leverage is one of the indicator tools in measuring how much the company’s operating income is against changes in sales.

What is Operating Leverage?

In general, operating leverage is derived from the analysis of fixed cost accounts with variable costs, where companies use a lot of fixed assets in operating a business.

However, when you have the highest leverage it will result in the risk of fixed costs also increasing, even this leverage can affect cash flow in financial statement analysis .

Meanwhile, if the level of leverage is small, the company will experience changes in the accounts of fixed costs and low variable operating costs.

On the other hand, the benefits of high operating leverage will make the company generate more revenue from sales. So companies no longer need to increase additional costs to make sales.

This operating leverage analysis is also related to fixed assets such as factory buildings, property, equipment, and labor which can add additional costs.

Reasons Why Operating Leverage Is Important?

The following are some of the reasons why operating leverage is very important for your company, namely:

1. Estimating the Company’s Revenues And Cash Flows

The existence of increased operating leverage will also increase high income, but if there is a change in sales it will result in instability in income.

The reason it’s important to estimate earnings on higher leverage is that you should be more careful. Why is that? Because the slightest change will be a big mistake that affects the company’s cash flow.

2. Considering the Break-Even Point

Taking into account the break-even point aims to assist the company in setting the selling price and sales volume.

Trending in Accounting

Leave a Comment