OPERATIONAL LEVERAGE AS A SOURCE OF PROFITABILITY OF BUSINESS IN CROATIA

Abstract: Operational leverage measures the level of fi xed costs in the company’s total expense and has a signifi cant impact on the profi tability of a company, especially in activities where large initial investment is necessary, and long acclimatization timeframes and high levels of revenue are needed to reach the profi tability  threshold. Fixed costs do not grow linearly with revenue growth and thus negatively aff ect profi t with an insuffi cient level of total revenue. Th e paper explores the possibilities of using an operational leverage in combination with commercial policy in order to create a profi t multiplier. Research has been conducted in companies in the Republic of Croatia that operate in continuity with low levels of profi tability, up to 5% of net profi t. In the research, the main hypothesis of work is set, by which the operational leverage is defi ned as a profi t multiplier under the conditions of even the smallest organic growth of the enterprise in case it also operates with a high  level of fi xed costs. Th e paper begins with the fact that the eff ect of the operational leverage is of particular importance in certain segments of the economy that are constrained by the impossibility of entering into part of fi xed costs and that their increase in profi tability depends solely on the level of healthy organic growth.  Accordingly, a model is considered in which an operational leverage has the ability to progressively leverage profi tability, which in combination with the adequate application of commercial policy measures determines the dynamic character or processes that generate a multiplication eff ect even in the case of very small revenue  growth. In this and such context, we are talking about the signifi cant eff ect of operational leverage on company’s profi tability even when neglected revenue growth aff ects the level of fi xed cost reduction in relation to total revenue, thereby increasing profi tability.

 

Keywords: operational leverage, profi t, organic growth, propulsiveness, profi t multiplier