Q. Show the nature of business operations?
The nature of business operations that influences the proportion of fixed costs to total costs. Capital intensive business operations for instance will have a high proportion of fixed costs to total costs. From this point of view operational gearing is a measure of business risk. As operational gearing raise a business becomes more sensitive to changes in turnover and the general level of economic activity and profit before interest becomes more volatile. A increase in operational gearing may therefore lead to a business experiencing difficulty in meeting interest payments. Managers of businesses with elevated operational risk will therefore be keen to keep fixed costs under control.