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86 Lubbe
on the funds while a negative project will reduce the return on the funds and this
would affect alignment.
Business leverage has to do with the ratio between fixed costs and variable
costs. This would have an affect on the economics of the organization. Fixed costs
should always be recovered and assets with a fixed base cost should be used in the
hope that more profit could be generated. It would be wise for the organization to
use financial leverage if profit is stable, otherwise if fixed cost represents the majority
of the expenses, managers would find that profit is not stable. Obviously, if customer
numbers cannot be guaranteed in e-commerce projects, managers would find that
profit would not be stable. Organizations are warned not to use financial leverage
if business leverage plays a role in organizational strategies. Managers should also
remember that certain assets could affect fixed costs negatively. Also that both these
leverages could be combined, for example, an economic risk could be combined
with low financial risks and the other way around. The total risk of the organization
could entail a swap between total risk and the expected return on any investment.
There are some economic ratios that could help with leverage:
• Total debt to total assets. This displays the percentage total funds supplied
by other people such as creditors. They prefer a low ratio, while the owners
prefer a big ratio to increase turnover and to keep control of the organization.
• Total interest earned. This ratio tells the organization how much turnover
could be lowered without affecting the payment of these interest amounts. This
ratio is calculated by dividing gross profit by interest.
• Fixed cost coverage. This ratio shows how the organization can pay fixed
costs (interest added to long-term debt). The ratio is planned by calculating
a total for profit before tax and tax and rent and this total is then divided
by the total for interest and rent.
• Breakeven point is that mark where the total for fixed costs and variable
costs is equal to that of the total turnover.
• The degree of financial leverage is calculated by dividing earnings before
interest and taxes by earnings before tax minus interest.
There are other ratios that could affect financial or business leverage but are
too many to mention and would not be dealt with during the course of this chapter.
It would be difficult with e-commerce to calculate the break-even amount of sales
that the organization needs because nobody can state for sure what the fixed and
variable costs would be. This will affect leverage and one can safely note that ecommerce
would affect the alignment of the organization.
Breakeven analysis could be used in three ways, to modernize a program or
if the organization wants to use a new market such as e-commerce, to study the
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