 OPM is a very important idea that often separates successful companies from those that aren't. OPM stands for Other People's Money, and it's how Apple and Ford and Walmart and other big companies you've heard of have grown from small businesses started in a garage to multi-billion dollar organizations that they are today. There are two major types of leverage used in business. The first is financial leverage. This is the concept of Other People's Money. It means that a business will use debt and equity financing to grow their business. The other is operating leverage. And operating leverage is how they grow their business using fixed costs. This video will show you how to calculate the operating leverage factor and what it means. So let's define operating leverage as how responsive a company's operating income is to the changes in sales volume. Companies with high amounts of fixed costs are going to have high operating leverage factors. Companies with operating factor of one will have no fixed costs. The formula for operating leverage factor is contribution margin divided by operating income. Here I've highlighted the contribution margin and operating income in our sample company. Since you can see that this company doesn't have large amounts of fixed costs, you should already conclude that the operating leverage factor will be quite small. When we divide contribution margin by operating income, we get a factor of 1.15. So the degree of operating leverage is 1.15. This means that a 20% increase in sales will result in a 23% increase in operating income. So operating leverage can be used to predict the impact on operating income based on changes in market conditions, both good or bad changes. Okay, so firms with large fixed costs have high operating leverage. And so a small increase in sales can have a big increase in operating income. But the opposite is also true. A small decrease in sales could have a big decrease in operating income. Firms with little fixed costs have low operating leverage. So small increases or decreases in sales have small impacts on operating income.