OPERATIONAL LEVERAGE AS A SOURCE OF PROFITABILITY OF BUSINESS IN CROATIA

Abstract

Operational leverage measures the level of fixed costs in the company’s total expense and has a significant impact on the profitability 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 profitability threshold. Fixed costs do not grow linearly with revenue growth and thus negatively affect profit with an insufficient level of total revenue. The paper explores the possibilities of using an operational leverage in combination with commercial policy in order to create a profit multiplier. Research has been conducted in companies in the Republic of Croatia that operate in continuity with low levels of profitability, up to 5% of net profit. In the research, the main hypothesis of work is set, by which the operational leverage is defined as a profit multiplier under the conditions of even the smallest organic growth of the enterprise in case it also operates with a high level of fixed costs. The paper begins with the fact that the effect 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 fixed costs and that their increase in profitability 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 profitability, which in combination with the adequate application of commercial policy measures determines the dynamic character or processes that generate a multiplication effect even in the case of very small revenue growth. In this and such context, we are talking about the significant effect of operational leverage on company’s profitability even when neglected revenue growth affects the level of fixed cost reduction in relation to total revenue, thereby increasing profitability.