Financial leverage: what is it and how does it help in business expansion?

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As a manager, you know that it is not always easy to obtain the resources needed to invest in business expansion. At these times, several obstacles arise, preventing access to credit . It is no wonder that many companies often resort to financial leverage to invest in their growth.

However, this mechanism, even though it helps in the expansion of macedonia phone number list enterprise, presents a series of risks that need to be observed by those who want to make good use of it without jeopardizing the continuity of the enterprise. With this in mind, in this content we will explore all the intricacies of this type of operation. Enjoy reading!

What is financial leverage?
It is an operation through which the investor or manager of a company increases its profitability or profit potential from a value greater than what it actually has available. Typically, this procedure is done on the basis of a credit transaction.

Don't understand? Don't worry, we'll explain it in other words. Imagine what a lever does and in what situations you would use one. This tool is almost always used when you want to use more force to complete a certain action.

In other words, when we think about financial leverage, we are referring to the practice of someone using external resources (such as borrowed money) to achieve better results that would be impossible without this help.

Imagine that you have a factory that, due to the good work done, receives more orders every day, exceeding the current production demand. What should you do to avoid missing out on opportunities? In this scenario, the business manager seeks credit in the market and, with the money raised, expands the production facilities.

This improves the company's positioning to meet new demands and take advantage of opportunities that arise. Even with the debt incurred, the company will increase its production, earn more, pay back the money borrowed and even increase its profits. Without this leverage, perhaps none of this would happen.

It is important for managers to understand the differences between financial and operational leverage. While the former involves the investment of external resources, generally obtained through credit operations, the latter is closely linked to the fixed costs of a business and how they are used to increase the growth of a business.

Operating leverage is almost always adopted by businesses in which these values ​​are quite heavy, especially when compared to variable costs. In these scenarios, fixed costs take on the role of leverage, causing companies with high demand for them to increase their operating profit even further.

In a simplified example, a company that has a 25% increase in business can have a 30% increase in operating profit. This is because fixed costs represent expenses that do not vary according to the level of production or sales volume. In the opposite direction, variable costs fluctuate with revenues, going up or down as sales increase or decrease.