PRINCIPLES OF FINANCIAL MANAGEMENT: OPERATIONAL LEVERAGE AND FINANCIAL LEVERAGE
Keywords:
Financial management, operational leverage, financial leverageAbstract
Understanding and mastering the principles of financial management is not only the key to success in running a business, but also very vital in our personal lives. In this world full of uncertainty, the ability to manage finances wisely can determine financial stability in the future. With good financial management, companies can allocate expenditure and income funds appropriately. Understanding the principles of operational leverage and financial leverage is very important in financial management. Both can be used to maximize profits, but also carry risks that need to be managed properly. With the right strategy, companies can use leverage to achieve their financial goals. In financial management, leverage is an important concept used to increase the company's profit potential. The utilization of fixed costs in the business's cost structure is associated with operational leverage. Leverage in finance is the process of using debt to fund a company's operations and assets. The performance of the business as a whole may be impacted by these two interrelated forms of leverage. Nevertheless, the amalgamation of these two categories of leverage can also increase risk, so financial managers need to be careful in planning the company's cost and financing structure.
References
Armour, J., Awrey, D., Davies, P. L., Enriques, L., Gordon, J. N., Mayer, C. P., & Payne, J. (2016). Principles of financial regulation. Oxford University Press.
Asraf, A., & Desda, M. M. (2020). Analysis of the effect of operating leverage and financial leverage on companies profitability listed on Indonesia Stock Exchange. Ilomata International Journal of Management, 1(2), 45-50.
Brailsford, T. J., Oliver, B. R., & Pua, S. L. (2002). On the relation between ownership structure and capital structure. Accounting & Finance, 42(1), 1-26.
Brown, G., Harris, R., & Munday, S. (2021). Capital structure and leverage in private equity buyouts. Journal of Applied Corporate Finance, 33(3), 42-58.
Chadha, S., & Sharma, A. K. (2015). Determinants of capital structure: an empirical evaluation from India. Journal of Advances in Management Research, 12(1), 3-14.
Chen, H. (2020, December). The impact of financial leverage on firm performance–Based on the moderating role of operating leverage. In Fifth International Conference on Economic and Business Management (FEBM 2020) (pp. 464-473). Atlantis Press.
Chu, Y., & Wang, L. (2017). Capital structure along the supply chain: how does customer leverage affect supplier leverage decisions?. Quarterly Journal of Finance, 7(04), 1750014.
Dudycz, T. (2020). Operating leverage: A critical analysis of the concept and the methods of measurement. Tadeusz Dudycz, Revista de Contabilidad-Spanish Accounting Review, Forthcoming.
Eichhorn, P., & Towers, I. (2018). Principles of management. Efficiency and Effectiveness in the Private and Public Sector. Switzerland: Springer.
Fatmawatie, N., & Endri, E. (2022). Implementation of the principles of financial governance in service companies. Journal of Governance and Regulation, 11(4), 33-45.
Ferrarini, B., Hinojales, M., & Scaramozzino, P. (2017). Leverage and capital structure determinants of Chinese listed companies. Asian Development Bank Economics Working Paper Series, (509).
Getzmann, A., Lang, S., & Spremann, K. (2014). Target capital structure and adjustment speed in Asia. Asia‐Pacific Journal of Financial Studies, 43(1), 1-30.
Goel, U., Chadha, S., & Sharma, A. K. (2015). Operating liquidity and financial leverage: Evidences from Indian machinery industry. Procedia-Social and Behavioral Sciences, 189, 344-350.
Graham, J. R., Leary, M. T., & Roberts, M. R. (2015). A century of capital structure: The leveraging of corporate America. Journal of financial economics, 118(3), 658-683.
Hang, M., Geyer-Klingeberg, J., Rathgeber, A. W., & Stöckl, S. (2018). Measurement matters—A meta-study of the determinants of corporate capital structure. The Quarterly Review of Economics and Finance, 68, 211-225.
He, W., Tang, X., & Zeng, H. (2024). Testing Static and Dynamic Leverage Models: A Standardized Leverage Measure Approach. Finance Research Letters, 105678.
Madura, J., Hoque, A., & Krishnamrti, C. (2018). International financial management. Cengage AU.
Magli, F., Nobolo, A., & Ogliari, M. (2018). The effects on financial leverage and performance: The IFRS 16. International Business Research, 11(8), 76-89.
Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021). Principles of management accounting. Sultan Chand & Sons.
Megawati, L. R. (2020, May). The analysis of effects of operating leverage, financial leverage, and liquidity on profitability in the telecommunications industry listed in indonesia stock exchange. In First ASEAN Business, Environment, and Technology Symposium (ABEATS 2019) (pp. 110-115). Atlantis Press.
Mohamed, I. (2016). Effect of financial leverage on financial performance of non financial firms listed at the Nairobi securities exchange (Doctoral dissertation, University of Nairobi).
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.
Procasky, W., Ujah, N. U., & Raja, Z. A. (2014). Funds from Operations to Total Debt: A More Efficient Measure of Leverage for Capital Structure Decision Making. Journal of Accounting and Finance, 14(6), 71.
Sarkar, S. (2020). The relationship between operating leverage and financial leverage. Accounting & Finance, 60, 805-826.
Titman, S., Keown, A. J., & Martin, J. D. (2018). Financial management: Principles and applications. Pearson.
Towo, N. N. (2023). Financial Leverage and Financial Performance of Savings and Credit Co-operative Societiesin Tanzania. International Journal of Rural Management, 19(2), 214-233.
Veronica, A. (2015). The influence of leverage and its size on the earnings management. Research Journal of Finance and Accounting, 6(8), 159-167.
Zutter, C. J., & Smart, S. B. (2019). Principles of managerial finance. London, UK: Pearson.
Downloads
Published
Versions
- 2024-08-29 (2)
- 2024-08-06 (1)
Issue
Section
License
Copyright (c) 2024 INTERNATIONAL JOURNAL OF ECONOMIC LITERATURE
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
INTERNATIONAL JOURNAL OF ECONOMIC LITERATURE © 2023 by Adisam Publisher is licensed under CC BY-SA 4.0
