Understanding Leverage Strategy in Business

TallyDekho
4 min readOct 2, 2020

Hey folks! TallyDekho is back with another amazing business story about how to frame and lead a leverage strategy in business so as to balance all the components of the cycle and put every single resource to its best use. In today’s blog we’ll see, what is business leverage, its classification, and how it helps in balancing the overall working criteria of the business.

What is Business Leverage?

Just imagine, you’ve got all the resources you need to make the production process go smoother. But, now think, if you couldn’t balance the resources well because of the lack of managerial efficiency, then all the organizational efforts will go in vain. Thus, mere procurements of resources are never enough, a leveraging factor is equally important to carve out the required execution of the operations. For a good business idea, risks are not completely eliminated, thus business leverage helps to neutralize that risk factor and create more profitable and better opportunities for the organization.

So, basically, business leverage is the process of bringing the debt capital (funds) of the company to use for amplifying the fruitful returns from a particular investment or a particular project.

In, other words, the mechanism of creating a balance in business operations by leveraging the finance to its best use is referred to as business leverage.

Objectives of Business Leverage

  • To enhance the overall business profitability
  • To boost sales and optimize the fixed and variable costs of the concern
  • To bring all the business ratios in proper
  • To create a balanced capital structure
  • To create financial stability in the business operations

Classification of Leverage

There are several areas that a business needs to work on. Thus, business leverage is broadly classified into three categories. They are as follows:

✓ Operating Leverage

As the name suggests, operating leverage is that accounting formula that helps the business understand the sales target and mark a high-profit margin so as to increase or augment the operating income by accelerating the overall revenue of the concern.

✓ Financial Leverage

The very next step after the operating level is the financial level. Thus, it includes the use of debt funds to finance the assets of the business. Here, the assets can be both, long-term as well as short-term depending on the need and prospects of the company in the current and future scenarios.

✓ Combined Leverage

So, as the heading says, the combined leverage is the combination of both types of leverages, i.e, operating leverage, and financial leverage. The combined leverage shows the combined effect on the earnings of the business per share given that a particular change is made in sales.

Significance of Business Leverage in creating a balanced business frame

Leveraging a business is as important as watering a plant, thus, business leverage is the tool that every business has to take into account. Below are some points of importance about business leverage:

Helps to bring more revenue in a given point of sales volume

Operating and financial leverage creates a more promising business handle that not only gives an idea of where the things can get risky and but also, helps to generate more revenue at the provided point of sales volume. Profit-making is the whole-sole motive for any business, and business leverage is the tool that shapes the plan accordingly.

Reduce the expenses and create more revenue opportunities

The other important objective of business leverage is to cut short the expenses and costs of the business and thereby, create more revenue-making opportunities for the business. The operating, financial, and combined leverage are all that decide how high the expenses are and how they can be neutralized.

Create a more balanced investment portfolio for the business

Creating a balanced investment portfolio is another main objective of the business. Thus, business leverage helps the business managers to plan and frame such an investment portfolio that brings maximum ROI and make the investment venture profitable.

Minimize the risk factor and take over the opportunities

Eliminating the risk factor is the main reason for commuting and evaluating the business leverage ratios. Thus, a business manager with the evaluation of the business leverage minimizes the risk and thus, enjoys more profitable opportunities at the minimum risk.

Better future outlook and good for long term business success

Evaluating and analyzing business leverage is always good for business. Thus, it along with good profit, brings good future prospects as well thereby, proving to be beneficial for long-term business success.

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