Operating Leverage
Definition
The degree to which a company's operating costs are fixed rather than variable, and therefore the degree to which incremental revenue flows through to incremental profit. A business with high operating leverage has a cost base that does not grow proportionally with revenue once the fixed cost base is established, producing increasing profit margins as revenue grows. Operating leverage is a key driver of long-term margin expansion and must be modeled explicitly in the financial forecast at Level 2 and above.
Common Misapplication
The most common misapplication is projecting margin expansion in a financial model without identifying the specific operating leverage mechanism that produces it. A model that shows increasing gross margins over time without a structural change in cost of goods sold does not have a credible basis for the improvement.
FFI Standard Reference
This term is defined and applied in Book 2, Section 2.5: The Cost Structure Standard.
Related Terms
Citable URL
This term may be cited using the following permanent URL.
Full citation format: Founder Financial Infrastructure Standard, Beta v0.5, Glossary: Operating Leverage. https://ffistandard.org/glossary/operating-leverage/. 2026.