Importance Of Leverage And Break-even In Saudi Vision 2030
Leverage in business means borrowing capitals to invest in the acquisition of business assets, paraphernalia, and inventory. On the other hand, break-even analysis refers to the level at which the total cost and the total revenue are equal and is used to determine the number of monies in revenue, is needed to cover the entire costs, either fixed or variable costs. Saudi is an Arab country with an extensive area, vastly populated, but has limited economic resources, yet being the home for Islam, and the world’s largest oil producer, it has influenced the world broadly. As a result of the reduction in foreign exchange reserves and depreciation of its riyal, Saudi’s government started to establish regulations to manage its unstable revenue to improve economic development (Al-Tally, 2014).
For Saudi to accomplish its vision 2030, managers have to implement the leverage and break- in analysis. The Break-Even analysis says that in an organization, there are two types of costs, namely fixed expenses, which are the costs that do not change whether there is business or not an example being rent or salaries (Carlson, 2019). Variable costs, on the other hand, are the adjusted costs sustained to create a unit, therefore considering the limited economic resources in Saudi, managers in companies will rely solely on expensive apparatus and machinery to produce oil. Expenses such as procurement of machinery usually get offset by the increase of sales, but the costs remain constant, meaning profits made get linked to the volume of sales produced. With this knowledge, the higher the level of operating leverage, the higher the Break-Even level anticipated. Also, operation risks get expected as a result of fluctuating profits in higher levels of operating leverage as sales change (Carlson, 2019).
