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48 • The 100 Greatest Ideas for Building the Business of Your Dreams

There is a huge benefit to be gained if a division or a company can increase its
sales volumes without increasing its fixed costs. It illustrates what managers are
often talking about. 'We have to sweat the assets.' When you have spent money on
infrastructure of any sort, slight increases in sales have an unexpectedly high impact
on the bottom line.

The concept of operating leverage shows the benefit of this.
Look at the impact on the bottom line of different splits between variable and
fixed costs. Each of the four profit and loss accounts is built to answer the same
question. 'If we can increase sales volume by 10% without increasing fixed costs
what percentage impact will it have on net profit?' Operating leverage is calculated
by dividing this percentage by 10%.

First case

£ £
current additional 1 0%

sales 100 110
variable costs 90 99
contribution 10 11
fixed costs 0 0
net profit 10 1 1 (an increase of 10%)

The operating leverage is 1, i.e. there is no leverage at all.