How to improve operating leverage without impeding growth

Tech can help keep operating costs down as a percentage of profits, but first, differentiate which expenses should (and shouldn’t) grow with revenue.

By: Robert Freedman

Back-office tech investment is a way to increase operating leverage when you’re growing and scaling as a young company, Cartegraph CFO Ben Murray told CFO Dive. 

Cartegraph is a recurring-revenue company whose software helps local governments keep tabs on their work orders and physical assets such as street lights and fire hydrants. 

Murray touts the importance of operating leverage as a proxy for how efficiently a company is growing. If you’re posting strong revenue growth but also seeing your operating expenses grow in tandem, it could be a red flag. You might be devoting too much to costs that ideally should be shrinking on a percentage basis over time.

“You get caught in this trap that you’re growing but your cash flow’s not improving,” he said. “Your margins are flat or decreasing.”

By contrast, your cost-of-goods-sold (COGS) is expected to grow in tandem with your revenue growth because the two are linked together. 

Source: CFO DIVE (2020)

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