The relevance of fixed costs in the diagnosis of operating risk to SME’S
Journal Title: Proceedings in Manufacturing Systems - Year 2017, Vol 12, Issue 3
Abstract
Due to their weak capitalization and low negotiation power on the market, small and medium-size enterprises (SME) have a high vulnerability to changes in the environment they operate. These vulnerabilities can significantly increase the operational risk of the business, going as far as compromising it. Particularly in areas of activity where technical capital is a business force, the level of fixed costs can be the main factor of operational risk. In view of this, the present paper aims to develop a simple and effective instrument for assessing operating risk to SME’s based on variation of some main indicators such as total sales, prices, fixed costs, variable costs. The proposed risk evaluation model, use two aggregate indicators: degree operating leverage (DOL) and business security interval (IS), calculated as an expression of enterprise’s economic performance, market position and level of capitalization (investment). Following the trend of these indicators is evaluated the trend of the operational risk of the business. The method proposed for evaluation of operating risk includes the main steps that are required to be followed under scientific control. These are presented in a decisional logic structure, in order to optimize the management decision in terms of minimizing the risk of the business which is objectively assessed through calculation. This way increases significant the applicative character of the method. The paper includes a case study to illustrate how to apply the method to a SME’s type company.
Authors and Affiliations
Nicolae Boian
Keywords
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