Why Some Businesses Hurt More in a Slowdown: The Hidden Force of Operating Leverage

Have you noticed how some businesses struggle the moment sales dip, while others seem to ride it out?

Raffles Corporate Services works with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice. This article is general information only and is not legal advice.

The difference often isn’t the product or the owner’s hustle. It’s something less visible: operating leverage.

In plain English, operating leverage is about how much of your costs are fixed.

• Rent, full-time staff, long-term leases → fixed.

• Freelancers, pay-per-use services, hourly rentals → variable.

Fixed costs don’t move when sales change. That’s why some businesses feel the pain faster.

Why It Matters for SMEs

• High operating leverage = higher risk, but also bigger upside when sales rise.

• Low operating leverage = safer in downturns, but growth is slower.

In Singapore, many SMEs lock themselves into long leases or commit to full-time staff early. That raises operating leverage. If revenue slips, those costs don’t go away — and the squeeze begins.

Case Example: When Operating Leverage Bites

In July 2024, Ritual Gym abruptly shut down all its outlets in Singapore — Orchard Road, Holland Village, Tiong Bahru, and Joo Chiat. Members arrived to find locked doors, and soon after, the founders confirmed the closures. One co-founder admitted: “We were burning money.”

Why? Ritual carried high fixed costs:

• Prime location leases locked in for years.

• Salaried staff.

• Expensive equipment and fit-outs.

When member sign-ups slowed, those fixed commitments didn’t shrink. Every dip in revenue translated into much bigger losses. That’s operating leverage at work — amplifying the downside.

A simple illustration

👉 Why 60% fixed costs?
This isn’t arbitrary. In Singapore, gyms often face:

• Rent: 20–30% of revenue.

• Salaried staff: 20–25%.

• Equipment, fit-out depreciation, insurance, utilities: 10–15%.
  That easily adds up to around 60% fixed costs before variable items.

High operating leverage gym

• Revenue (normal month): $100,000

• Fixed costs: $60,000

• Variable costs: $10,000

• Profit: $30,000

If revenue falls by 20% (to $80,000):

• Fixed costs stay at $60,000

• Variable costs fall slightly to $8,000

• Profit: $12,000 → a 60% drop in profit.

Low operating leverage trainer

• Revenue (normal month): $20,000

• Fixed costs: $2,000

• Variable costs: $12,000

• Profit: $6,000

If revenue falls by 20% (to $16,000):

• Fixed costs stay $2,000

• Variable costs fall to $9,600

• Profit: $4,400 → only a 27% drop in profit.

When Operating Leverage Works for You

Operating leverage isn’t always bad news. It’s what allows scalable businesses to grow profits faster than revenue once they’ve covered their base costs.

Take the same gym — but in a good month:

High operating leverage gym (revenue up 20%)

• Revenue: $120,000

• Fixed costs: $60,000

• Variable costs: $12,000

• Profit: $48,000 → a 60% increase in profit from just a 20% increase in sales.

Because rent and salaries don’t rise with every new member, each additional dollar of revenue drops almost straight to the bottom line.

That’s the upside of investing in capex and infrastructure:

• A bakery that buys new ovens can triple output without tripling staff.

• A digital agency that automates reporting can handle more clients without hiring immediately.

In short: High leverage multiplies risk — but also rewards.
The key is to build leverage where you have confidence in demand and control over costs.

What Founders Should Do

Operating leverage isn’t about good or bad. It’s about fit — matching your cost structure to your business model and growth stage.

Here are three steps you can take right now:

1. List your fixed vs variable costs.

   • Rent, full-time staff, equipment → fixed.

   • Freelancers, pay-per-use tools, hourly rentals → variable.

2. Run a “what if” scenario.

   • Ask: If sales drop 20%, can I still cover my fixed costs?

   • If the answer scares you, you may be carrying too much risk.

3. Match leverage to your goals.

   • Want flexibility in uncertain times? Keep leverage low (more variable costs).

   • Ready to scale? Higher leverage can work — if you’re confident sales will hold up.

Takeaway

Operating leverage is invisible day-to-day, but it decides how resilient (or fragile) your business is when the winds change.

Take an hour this week to map your cost structure. It could save you months of headaches later.