what is operating leverage?

Operating leverage refers to the ratio of fixed business costs to revenue. While fixed costs -- administration, equipment, facilities, advertising, taxes and so forth -- don't change with economic swings, revenue does change. Interest on short-term debt to finance inventory and payroll (financial leverage) and labor costs are not fixed because they change with economic conditions and company needs.

Operating leverage refers to the ratio of fixed business costs to revenue. While fixed costs -- administration, equipment, facilities, advertising, taxes and so forth -- don't change with economic swings, revenue does change. Interest on short-term debt to finance inventory and payroll (financial leverage) and labor costs are not fixed because they change with economic conditions and company needs.