Definition: is a degree to which an enterprise relies on significant levels of fixed operating costs (which include insurance costs, salaries, and rental payments) in comparison to the levels of its variable expenditures (that include energy bills, material costs, and labor). Organizations that possess high operating leverage need to generate more revenue to reach their breakeven point when compared to low operating leverage companies. However, once the breakeven point has been reached, each raise in sales revenue substantially increases the profitability of a high operating leverage enterprise. This concept is a vital component of a firm’s operating risk.
In a Sentence:
As our startup has a lot of initial funds, we’ve decided to establish an operating leverage. While it may take some time for our company to become profitable, in the long-term it should prove to be the right decision.
The shareholders are concerned because of the high level of operating leverage. In the last two quarters, their company didn’t manage to reach the breakeven point, and it seems that their business is going downhill.
Synonyms and related words: financial leverage, operation gearing, investment leverage, operating risk