When evaluating the health of a company, it is vital that the business in question be subjected to the right kind of metrical measurements. There are different ways to evaluate a company’s health, and you want to be sure that you are using the right one for your needs so as to ensure that you are getting the most accurate picture of the business’s health. The two most common ways of measuring that corporate health are operational and financial leverage.
For those not in the know, operating leverage is a measurement of a company’s health that focuses on the break-even point. This type of measurement takes your different expenditures into consideration, determines the amount of cash flow you would need in order to break even, and calculates the overall health of the company from there. In order to do this, the operational leverage method takes into account the different operational costs associated with a given building.
For example, operating leverage takes into account a company’s fixed assets, including the rent and salaries they pay, the utilities they use, and any interest on loans they owe. Balancing these is key to determining the operational costs of a company.
These will vary depending on the type of company in question. For example, the costs of maintaining a manufacturing center or apartment complex will likely be higher than those of an attorney’s or accountant’s office.
By contrast, financial leverage concerns the amount of debt a company uses to finance their cost of operation.
Obviously, this has to be carefully managed, lest a company slip too far into debt. On the one hand, there is nothing inherently wrong with debt, and taking it on in the short-term can often pay off in the long-term. This thinking informed Alexander Hamilton’s approach to America’s finances in its early days, allowing the young nation to build up credit and buy and build fast. On the other hand, debt run amok can sink a country or company.
Making sure you have the right leverage evaluations can help ensure the healthy future of your company.