Definition
Operating leverage refers to the proportion of fixed costs in a company�s cost structure, which means that as sales increase, operating income increases at a faster rate due to fixed costs not rising with increased revenue.
Related Services
Financial analysis, cost management, and business consulting services help companies optimize operating leverage by managing fixed and variable costs.
Problem and Application
High operating leverage can lead to greater profitability in periods of revenue growth but can also expose companies to greater risk during downturns if fixed costs remain high.
Conclusion
Operating leverage is a key factor in scalability; however, businesses need to balance it to avoid excessive risk during market fluctuations.
