Loan lever, Investment income lever, Turnover of assets in the...

Loan lever

The term financial lever for a long time could not be stabilized in the economic literature in United States. Depending on whether the translated book was British or American, it was translated as gyring and Lever, Leverage respectively. This term derives from English words meaning "lever", which in the financial context of the United States language is accurate, but it would be clumsy to translate as "looseness". It seems that Archimedes belongs to the words: "Give me a fulcrum, and I will turn the world around". They are told about the possibilities of the lever in physics. In fact, in physics and finance, the leverage is not as significant as it thought, but they are very large. This is a lever, which the firm can create on the basis of borrowed funds. A successful business is of value not only to its immediate owners who profit. People are ready to join the success and invest their money in such a business. This will make it possible to say that the firm is simply obliged to attract certain means of society on the basis of borrowing. If it does not, it does not gain its potential for productivity and profitability. But how much should this firm occupy, increasing productivity and not losing stability? This is determined by the ratio of the two shoulders financial lever - own and borrowed funds. This is discussed in this chapter.

Income return on investment

As it was already shown, the income for investment (DID - ROI) is the most important indicator of the efficiency, estimated by operating profit. DENI is a product of two factors: asset turnover and profit margins. But if you increase any of these factors, then DEN will increase by an amount that exceeds the directly proportional relationship. This is the effect of a lever of the DEN type. Pay attention to this effect, shown in Table. 9.1.

Table 9.1

The effect of a DAY-type lever

Metric

Source

Option

If the margin increases by 1%

If the turnover of assets increases by one turn

Profit Margin

0.06

0.07

0.06

Turnover of assets

x 3

x 3

x 4

Return on investment (DID)

0.18

0.21

0.24

Turnover of assets in the lever of income for investment

The factor of the effect of the turnover of assets on investment income (DID) in American literature is called asset leverage. Within the same industry, the profit margin of all its participants is very level, it is almost the same for all manufacturers of this product. When the market is almost equal to the same prices for raw materials and labor, it is very difficult to achieve a serious gain in comparison with a competitor. Under such conditions, the degree of exploitation of assets begins to play a decisive role; their turnover. The ability to squeeze a large volume of sales on the basis of smaller assets becomes an indicator of effective management. Aggressively focused on high DID firms win at the expense of a relatively larger lever of assets.

Example

Firm A will have a larger DID with a smaller margin of profit due to a greater lever of assets:

Profit Margin

x Turnover of assets

= DAYS

Firm A

5%

4

20%

Firm In

6%

3

18%

If both firms manage to raise profitability by 2%, then the gap in DID will increase:

Profit Margin

x Turnover of assets

= DAYS

Firm A

7%

4

28%

Firm In

8%

3

24%

Although it is more difficult to surpass competitors in the margin level than in asset turnover, it is possible to do this through saving measures:

- on production costs;

- Sales and marketing costs;

- the cost of storage, storage and delivery;

- general and managerial overhead.

DEN checking through good control

The simultaneous (at least a small) increase in the turnover of assets and the increase in margin through the reduction of costs works best. In Fig. 9.1 this strategy is presented. The numbers above the labels in the rectangles are the amounts that the firm put into the budget, and under them are the actual data reduced as a result of the management's efforts in implementing the budget. The resulting increase in DDI from 9.9 to 21% is a very significant result of the combination of small economies at each stage separately. Attentive - sound - financial management justifies itself!

thematic pictures

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