www.sharexxx.net - free books & magazines
www.sharexxx.net - free books & magazines
www.sharexxx.net - free books & magazines
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
86 Lubbe<br />
on the funds while a negative project will reduce the return on the funds and this<br />
would affect alignment.<br />
Business leverage has to do with the ratio between fixed costs and variable<br />
costs. This would have an affect on the economics of the organization. Fixed costs<br />
should always be recovered and assets with a fixed base cost should be used in the<br />
hope that more profit could be generated. It would be wise for the organization to<br />
use financial leverage if profit is stable, otherwise if fixed cost represents the majority<br />
of the expenses, managers would find that profit is not stable. Obviously, if customer<br />
numbers cannot be guaranteed in e-commerce projects, managers would find that<br />
profit would not be stable. Organizations are warned not to use financial leverage<br />
if business leverage plays a role in organizational strategies. Managers should also<br />
remember that certain assets could affect fixed costs negatively. Also that both these<br />
leverages could be combined, for example, an economic risk could be combined<br />
with low financial risks and the other way around. The total risk of the organization<br />
could entail a swap between total risk and the expected return on any investment.<br />
There are some economic ratios that could help with leverage:<br />
• Total debt to total assets. This displays the percentage total funds supplied<br />
by other people such as creditors. They prefer a low ratio, while the owners<br />
prefer a big ratio to increase turnover and to keep control of the organization.<br />
• Total interest earned. This ratio tells the organization how much turnover<br />
could be lowered without affecting the payment of these interest amounts. This<br />
ratio is calculated by dividing gross profit by interest.<br />
• Fixed cost coverage. This ratio shows how the organization can pay fixed<br />
costs (interest added to long-term debt). The ratio is planned by calculating<br />
a total for profit before tax and tax and rent and this total is then divided<br />
by the total for interest and rent.<br />
• Breakeven point is that mark where the total for fixed costs and variable<br />
costs is equal to that of the total turnover.<br />
• The degree of financial leverage is calculated by dividing earnings before<br />
interest and taxes by earnings before tax minus interest.<br />
There are other ratios that could affect financial or business leverage but are<br />
too many to mention and would not be dealt with during the course of this chapter.<br />
It would be difficult with e-commerce to calculate the break-even amount of sales<br />
that the organization needs because nobody can state for sure what the fixed and<br />
variable costs would be. This will affect leverage and one can safely note that ecommerce<br />
would affect the alignment of the organization.<br />
Breakeven analysis could be used in three ways, to modernize a program or<br />
if the organization wants to use a new market such as e-commerce, to study the<br />
Copyright © 2003, Idea Group Inc. Copying or distributing in print or electronic forms without written<br />
permission of Idea Group Inc. is prohibited.