Question 2.A.22: What steps might managers of a business take to reduce: (a) ...
What steps might managers of a business take to reduce:
(a) the level of financial gearing, and
(b) the level of operating gearing
where it is considered to be too high?
Managers may lower levels of financial gearing by issuing ordinary shares. The shares may be used to replace existing borrowing within the capital structure. Managers may also try to replace existing borrowing with new borrowing available at a lower rate of interest.
Managers may lower levels of operating gearing by cutting fixed costs. This may be done in various ways, including:
■ sharing services with other businesses, such as payroll accounting or office space
■ hiring temporary workers
■ rewarding staff by increasing bonuses based on sales rather than increasing base salaries
■ outsourcing services or processes.
You may have thought of other ways of cutting fixed costs.