operating leverage

Definition

The degree to which a company's costs are fixed versus variable, determining how profits change with sales volume. High operating leverage means each additional sale drops straight to the bottom line—until sales drop and you discover fixed costs are indeed fixed.

Example Usage

The airline's high operating leverage meant profits soared in good times, but bankruptcy loomed when planes flew empty because jet leases don't negotiate.

Origin

Concept developed in management accounting during the mid-20th century.

Fun Fact

Software companies have extreme operating leverage—once they've built the product, each new customer costs almost nothing, which explains both their valuations and their layoffs when growth slows.

Source: Managerial finance terminology

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