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What does it mean to leverage your variable cost structure?
I think I understand cost structure, but "leverage" means nothing. They also want to talk about contribution margins. From what I know of those, I assume that has something to do with leveraging.
afr, if I had to guess (and it would totally be a guess), I'd say, translate "leveraging" as "using [the thing that is being "leveraged"] as leverage."
Posts: 4077 | Registered: Jun 2003
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Leverage means maneuver to your advantage from what I know. I don't know if there is a specific technique or just the general concept.
My guess is that they want to manuever to lower their variable cost structure. (Which makes it sound like it is a graduated ladder of variable costs.) Like medical bills, for some things I'd pay a co-pay of $25 and other things, like a chiropractor I pay a co-pay of $35.
Once gain using the health care example because it seems to work, they probably want to increase the "contribution margins". To me, this means they'd want all their employees to pay $35 regardless of their service or, they want to increase the monthly amount the employee pays in "contributes" for their health care that is automaticaly deducted from their paycheck.
posted
"Leverage" in a business context used to have a fairly tight meaning: to invest using a method such that the actual cash layed out by the investor is less than the principal of the investment. Thus, buying stock on margin is a form of leverage. Buying a house with a mortgage is also leverage. Here's how the math works:
Purchase price of house: $100,000 Down payment: $20,000 Monthly mortgage payment (30 yr, 6% interest): ~$600 Payments after 5 years: $36,000 Principal paid after 5 years: ~$6,400 Selling price w/ 5% appreciation: ~$127,000 Total gain in price: ~27%
Total cash invested: $56,000 ROI: ~71%
This is why buying a house is such a good way to accumulate wealth.
Leveraged buy outs are when the buyer borrows all or most of the capital needed to purchase a company. The same kind of math can come into play. However, the obvious downside is if the investment becomes worthless: the buyer still owes the purchase price to the lender.
Unfortunately, "leverage" has been used less precisely over the last 10 years or so, and has come to generically mean "take advantage of." "Leverage your variable cost structure" could mean anything.
The contribution margin is actually what is left after the gross margin is subtracted from the revenue, AFAIK. According to the investment relations guy, it won't change.
I'm wondering why the variable cost structure is something we can leverage. And I'm trying to think of a way to say that whole thing in English so I don't have to use the word "leverage." Of course, this is going out to investors, so they probably understand the business speak. But I can't expound on it and I want to.
Posts: 5957 | Registered: Oct 2001
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posted
I would guess "leverage your variable cost structure" to mean that there are advantages to the variable cost structure that can be of benefit to the intended audience and it is a recommendation to take advantage of the opportunity.
Not knowing the real details, if it were in my industry (enterprise software), it would probably mean that there was a software feature that allowed multiple cost structures to be applied to the purchasing module. Those structures save time by being applied automatically in the purchasing process -- which results in more accurate inventory accruals and less guesswork on the part of accounting. Those benefits could be pointed out by our sales staff to new prospects, thus "leveraging the variable cost structure". Posts: 5948 | Registered: Jun 2001
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posted
I got a brainful from the investor relations guy a while after I posted this. The variable cost structure is not what I thought it was, and leveraging it involves several different business strategies. I'm not sure I can explain it in a few sentences. Hopefully I can keep it in my head long enough to put it into English.
Just remember that the contribution margin stays constant, and the savings we get from the new manufacturing facility get plowed back into driving revenue growth through discounts and promotions rather than adding to the gross margin.
Posts: 5957 | Registered: Oct 2001
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