Risk is a natural part of business life; using operational gearing measures one of those risks. Sorry to throw in a bit of jargon there at the start, my jargon buster ray gun is there at the ready.
Have you ever wondered what operational gearing is? And how it can benefit your business? Maybe you have never heard of it. Wonder no more, I look at operational gearing in this week’s podcast. Firstly, I explain what operational gearing; secondly, how you measure it. Finally, how you can use this knowledge to make your business stronger, with knowledge comes power.
Operational gearing is the level of fixed costs in a company as a proportion of total costs. It is a measure of how much a company has to spend to keep the business running, regardless of how much revenue it generates. The higher the level of fixed costs, the higher the operational gearing.
A high level of operational gearing can be risky for a company, because it means that a small decrease in revenue can result in a loss. However, it can also make a company more profitable because it can increase margins.
Understanding operational gearing is important for business owners and managers because it can help them to make informed decisions about where to allocate resources and how much debt to take on. It can also help them to understand the risks and rewards associated with different levels of operational gearing.
Good to know
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