Financial Mngmt
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
15 January 2011
hi experts,
what is operating and financial leverage?why a comapny should have high operating leverage and low financial leverage?pls expalain with a xample
what is operating and financial leverage?why a comapny should have high operating leverage and low financial leverage?pls expalain with a xample
15 January 2011
Operating leverage is a
measure of how sensitive
net operating income
is to percentage changes
in sales.
Operating leverage acts as a multiplier.
If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income.
.............................
In simple terms;
where a 10% increase in sales gives
profits more than 20% before;
it is said it is High Operating Leverage.
measure of how sensitive
net operating income
is to percentage changes
in sales.
Operating leverage acts as a multiplier.
If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income.
.............................
In simple terms;
where a 10% increase in sales gives
profits more than 20% before;
it is said it is High Operating Leverage.
15 January 2011
It means increase in sales is desirable.
.
Hence action plan would be to focus on Marketing of the product to increase sale.
And
if Production is not to that extnet; then also try to increase the production.
( Management Percespective )
.
Hence action plan would be to focus on Marketing of the product to increase sale.
And
if Production is not to that extnet; then also try to increase the production.
( Management Percespective )
15 January 2011
In finance,
leverage
is a technique
to multiply gains and losses.
Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.
.....................................
In simple term; we see so many persons take loan for the business.
Why ?
(Example) :
Because they see a margin of 10% of sales of Rs. 5,00,000 ( suppose they invest Rs. 10,00,000 to achieve this sale).
In real term they earn 5% every month of their investment.
OK ?
It means if they have more sales in their hands ( demand )but losing it due to lack of capital, they will borrow to have advantage of the opportunity.
If the said loan is available @ 12% p.a. then the cost which they bear is 1% per month towards this.
Hence by introducing more money they earn 4% additional surplus on bringing loans in the business.
In finance,
leverage
is a technique
to multiply gains and losses.
Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.
.....................................
In simple term; we see so many persons take loan for the business.
Why ?
(Example) :
Because they see a margin of 10% of sales of Rs. 5,00,000 ( suppose they invest Rs. 10,00,000 to achieve this sale).
In real term they earn 5% every month of their investment.
OK ?
It means if they have more sales in their hands ( demand )but losing it due to lack of capital, they will borrow to have advantage of the opportunity.
If the said loan is available @ 12% p.a. then the cost which they bear is 1% per month towards this.
Hence by introducing more money they earn 4% additional surplus on bringing loans in the business.
15 January 2011
( Humour )
I have used the maximum space of caclub to expand my answer.
It is also one type of leverage.
I have used the maximum space of caclub to expand my answer.
It is also one type of leverage.
Message likes :
1 times
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Gst registered proprietorship firm
- TDS Challan - change of FY 2025-26 to TY 2026-27
- Price inclusive or exclusive of GST while made entry in P& L Account
- AUDITOR APPOINTMENT FOR THE YEAR ENDING MARCH 27
- Minimum tax payable to file Updated return
- SALARY CAN BE CAPITALIZE
- GST ISSUE OF INPUT AND OUTPUT GST
- Change Of Karta In Case of Death
- Tax rate change regarding
- Salary from Qatar in Dollars in India
- Non filing of I T Returns
- How to Handle Active E-Invoices in GST Portal Deleted from Tally?
- IMPORT PURCHASE ENTRY PASSED IN BOOKS OF ACCOUNT
- FAST DS 26 Undisclosed Foreign Asset Disclosure Scheme 2026
- Starting trading business
- Regime change
- Goods sold but invoice not issued
- Tally: Imported bank entries do not show up in manual reconciliation
- Sales of goods of amount Rs97 lakhs to a party
- Confused About My Career After 12th — Cyber Security, AI or Finance? Need Guidance
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
