The task of a competent manager is to know how to calculate the overall economic efficiency of an organization. After reading this article, you will not have any difficulties in this matter.
You will learn:
- What is the economic efficiency of an organization.
- How to calculate economic efficiency.
- How is such effectiveness assessed?
- What types of assessment are there?
- What does the system of indicators of economic efficiency of an enterprise consist of?
- What influences economic efficiency indicators.
The position a company occupies in the market speaks volumes about its competitiveness. These indicators are influenced by the overall economic efficiency of the organization. Therefore, the task of every manager is to know how to calculate it.
What is the economic efficiency of an organization
The economic efficiency of an enterprise is a relative value that compares the performance indicators with resources and the costs required to achieve it. An enterprise is effective when results increase and the costs of achieving them decrease.
For the head of any organization, increasing the economic efficiency of the enterprise is the main management function. To properly consider this issue, you need to understand the differences in the concepts of “effect” and “efficiency”.
An effect is the end result of some action. The value is not complete enough because it does not demonstrate at what cost the result was achieved. For example, enterprises A and B earned 5.5 million rubles in the second quarter of 2018. The costs of enterprise A amounted to 1.5 million rubles, and enterprise B - 2 million, that is, the effect is the same, but the efficiency of achieving results is different.
Efficiency is characterized by the ratio of effect to costs.
EE = Effect / Cost
Thus, the value of the economic efficiency of an organization indicates how many resources were spent to achieve a specific goal. The theory of enterprise economics distinguishes 2 types of economic efficiency:
- Rdistribution of available resources. Shows how effectively the resources at the organization's disposal were used.
- ANDuse of resources by industry. Shows how effectively resources were used in a particular activity.
There is no single approach to efficiency criteria, because in practice there are a large number of subjective factors that are often left unattended. Analysis of the economic efficiency of an enterprise takes into account only factors within a particular organization, since there are various price redistributions, benefits from the state, and reductions in labor costs. In such cases, the resulting indicator will deviate from the objective indicator.
The very efficiency of an organization's economy is determined by a large number of interconnected factors. They are formed together.
Assessing the economic efficiency of an organization
The goal of every company is to get the most profit. To achieve this, products are produced at the lowest possible costs, and competition promotes their distribution in accordance with market demands. This sets the price for the product or service. In order to assess the economic efficiency of an enterprise, several types of assessment are used.
- Resource. The realized volume of products or services is compared with the maximum indicators of the spent factors of production. It is expressed in the category of productivity. However, this approach will be least useful if the enterprise does not have a unified system for measuring homogeneous resources.
- Pure cash flow. This assessment method takes into account a large number of factors. This is the sum of the enterprise's net profit and depreciation minus capital investments. Net cash flow is also affected by changes in working capital and long-term debt obligations.
- Free flow of money. This valuation method focuses on cash flow without fixed costs to ensure it. In most cases, the indicator is represented by the amount of marginal income of the organization.
- Modern. This is the amount of revenue that is generated by all business processes in a company minus the expenses required to achieve them.
Assessing the economic efficiency of an enterprise studies the fundamental criteria for the activities of organizations. The more objective the assessment, the more ways in which investments will be received, and their feasibility will be justified. It also characterizes the entire management of the company, forming its authority and image.
The main task is to correctly assess economic prospects and determine ways for the organization to achieve maximum indicators. Economic prospects and potential are the sum of opportunities and resources for the development of an enterprise. With any changes in the external environment, characteristics are determined that imply an increase in the level of economic efficiency of the organization.
Indicators of economic efficiency of the organization
System Definition
Economic efficiency, like other indicators, is measurable. For this purpose it is used system of criteria and indicators. A criterion is the properties and characteristics that are defined for calculations. Indicators are quantitative criteria for economic efficiency. The more accurately and correctly the criteria are established, the more useful the analysis of economic activity will be for the organization.
Since an economic indicator is a characteristic of an enterprise or its individual actions and processes, it can also be high quality. In this case, it does not display numerical units, but the overall efficiency of the process and the level of its development.
The most universal of all indicators of the economic activity of an enterprise is profitability.
How to double your profitability
The editors of the Commercial Directors magazine have prepared recommendations on how to create a sales funnel for the sales department and conclude more profitable contracts.
However, depending on the industry and the characteristics of the enterprise, the main indicators may be supplemented. In order for the analysis to objectively reflect efficiency, it must be in-depth and affect all aspects of the economy. In this case, additional – private – indicators are added to the main indicators.
The selection of these indicators is determined by the purpose of the business.
Example from agriculture. If you need to establish indicators for the economic assessment of a crop farm, then it would be reasonable to use a system of indicators: gross and marketable output per 1 kg of vegetables produced, labor productivity of farmers, payment for water and fertilizers, cost recovery.
Methodology
When the system of indicators is formed, you need to determine how exactly you will calculate them. For this purpose systems are used absolute And relative indicators.
Absolute indicators help track changes in various profit values over several years: economic (from sales), net or accounting. It is important not to overestimate them as they do not take inflation into account.
Relative indicators do not depend on banking conditions, so they are preferable in this regard.
The methodology, like the indicators, is selected depending on the goals of the subject of activity under study, industry characteristics, and other things. In order to clearly understand what tactics and methods to choose to determine the economic efficiency of an enterprise, you need to become familiar with the effect indicators in detail.
Effect indicators
Gross income
Consists of salary fund and net income. Used for accumulation and consumption. In some industries, clean products can only be identified through mathematical calculations, since some of them can be realized in the process of achieving results or recycling. That's why gross income does not in all cases reflect the real level and movement of economic efficiency.
VD = T x RN(T – turnover, RN – calculated allowance)
Cost recovery
One of the general indicators. It represents how the volume of net output relates to the total costs of material and human labor.
OZ = VD / TK(VD – gross income, TZ – labor costs)
Profit
Represents the portion of gross income that has been realized. For each concept of enterprise costs, different concepts of profit are assumed. There are differences between economic profit and accounting profit.
Economic profit– the difference between the total revenue of the enterprise and the opportunity costs of resources. If the profit from goods and services sold is less than the opportunity costs, then the enterprise incurs losses. If the result of the activity is completely covered opportunity costs, then the enterprise uses the available resources in the most profitable way. If total revenue equals opportunity cost, then economic profit is zero. In this case, the resources are not used in the worst way and bring benefits more than if they were used in an alternative way. This is called "normal business profit."
Accounting profit differs from economic in that it takes into account implicit costs and indicators that are interpreted as lost opportunities. Accounting profit consists of the total profit of the organization before deducting those costs for which its own resources are used. Compared to normal profit, accounting profit is excess profit. Therefore, it is economic profit, and not accounting profit, that is the criterion for business success, since it cannot correctly assess the efficiency of using available resources.
Most often, to identify the level of economic efficiency, enterprise economics specialists use economic profit. By applying accounting profits, in some cases the timeliness and accuracy of estimates will be greatly reduced.
Profitability
It represents the ratio of profits to costs of an enterprise. In economic theory, it is calculated based on marketable products, but for certain types of business the gross can also be used.
R = Profit / X(X is the amount from which the return must be calculated)
Profit rate
It is calculated as the ratio of profit to fixed and current assets. When calculating this indicator, it is necessary to take into account the specifics of the enterprise's activities. Since, being part of the whole, it may not always correctly reflect the direction and dynamics of change. Difficulties in calculating and analyzing economic efficiency indicators may arise due to the fact that the total costs have not been determined. It is important to reduce heterogeneous types of costs (material, energy, administrative, labor of workers) to a single measurement system.
NP = Net profit / Revenue
Cost price
Individual price for the manufacture of any product. It is a form of expressing and accounting for business costs.
How to reduce costs
The issue of competitive advantage is extremely important for many companies, and in a number of cases the cost of the goods, works and services offered plays a decisive role. Often they try to reduce it by reducing costs - for personnel, materials, spare parts. At the same time, there is another way – tax optimization, described in detail in an article in the “Commercial Director” magazine.
Living labor productivity
It represents the result of net and gross output per unit of labor costs, for example, per hour of working time. This indicator allows you to understand how well your employees are working and analyze the dynamics of changes in efficiency by department or over a period of time.
How to manage the economic efficiency of an enterprise
The reasons why the economic efficiency of an organization increases can be:
- scientific research, advanced technologies;
- labor mechanization;
- process automation;
- organization and stimulation of labor;
- participation in industry work.
Increasing the economic efficiency of an enterprise is a multi-component problem. This is the most important business indicator, which is influenced by a huge number of internal and external economic, socio-cultural, administrative and natural factors.
Increasing production intensity, combined with the use of scientific and technological progress, makes it possible to reduce the adverse impact of external and other unforeseen factors. Increased specialization and concentration of production will lead to high performance if changes are made within reasonable limits and gradually.
The economic efficiency of an organization is also influenced by the rational use of production resources. If you can eliminate or minimize costs that do not affect revenue, you will avoid losses. The criterion for the benefit of solving a business problem is the degree of economic benefit obtained. This also includes measures to reduce the cost of products and services while improving their quality.
In many sectors of the economy, one problem is quality. If you solve it successfully, you will increase your competitiveness and position in the market. This will have a positive effect on the economic efficiency of your enterprise.
To successfully manage economic activities, it is necessary to correctly define goals. The desire to obtain the greatest profit should be fixed in the goals and plans of the enterprise for at least a quarter. When dealing with foreign counterparties, it is important to take into account the currency aspects of payback and self-financing.
In the practical work of enterprise economics specialists, there are 2 behavioral strategies:
- ANDinnovative The strategy involves an emphasis on the strengths of the company's activities. Characterized by an aggressive position in the market and widely adapts to market changes, environmental factors and consumer needs.
- Ttraditional The strategy for managing the economic efficiency of an enterprise involves minimizing the shortcomings and weaknesses of the enterprise. In the market, the company takes a defensive position and in business decisions takes the resources and potential capabilities of the enterprise as a guide.
Choosing the optimal strategy, taking into account the current conditions and the specifics of the business, will entail an increase in the economic performance of the enterprise.
Conclusion
In business, it is important not only to know the theoretical basis for calculating economic efficiency, but also ways to increase the economic efficiency of an enterprise. For this process to be successful, the manager of even a small business must understand what it is and how economic efficiency differs from financial or accounting efficiency.
It is important to correctly define the system and choose methods of calculation and analysis, because on this basis quantitative and qualitative indicators are selected. If they are chosen incorrectly, then the conclusions and results that you get from the research will be useless. It will be impossible to apply them in practice.
Managing economic efficiency is one of the main tasks of a manager. It can be achieved in various ways, but you should always adhere to certain management rules: intensive use of resources, innovation, reducing opportunity costs, and so on.
- How to calculate the investment efficiency ratio.
- How to calculate the net present value indicator.
- How to find out the value of the discounted profitability index.
- How to calculate the investment return index.
- How to calculate the internal rate of return of a supported project.
- How to calculate the modified internal rate of return.
- How to calculate the payback period of the first investment.
In order for money invested in a business to generate income, it is necessary to calculate the feasibility investment by using efficiency factor. Read in this article how to do this and what calculation methods an investor should use.
Rules for calculating the investment efficiency ratio
Investment efficiency ratio is one of the common methods for accounting assessment of the feasibility of monetary investments in an enterprise. Please note that this method does not take into account income discounting, but only income in the form of average annual profit.
One of the main advantages of this indicator investment efficiency assessments– ease of use. To calculate the coefficient, you should divide the average annual profit by the average investment in the project. To find the average investment, you will need to multiply the amount of capital investment by 0.5.
This technique is suitable as a tool for primary project evaluation. The average investment in this formula is estimated only if, after the investment is stopped, capital expenditures are planned to be written off in full. If the presence of residual assets is assumed, then the average investment value is not estimated in this formula.
The only significant advantage of the considered method is the simplicity and speed of calculations. There are noticeably more disadvantages. For example, using this method it is almost impossible to accurately calculate upcoming financial receipts and income from the project. Another disadvantage is that the method introduces large errors if it is applied to calculating the profitability of a venture investment project.
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Net present value
This indicator is indispensable when it comes to the effectiveness of monetary investments. The main goal of most investments is to obtain as much net income as possible from their accounts. profits. This is what most investors are aiming for. Net present value objectively shows how much money can be received for supporting a project.
To calculate the net present value, the investor needs to understand the characteristics and directions of cash flows, which will be triggered by the investment of funds. It is important to predict how the calculated cash flows will change over time in size and direction. To better understand how cash flow works, you should look at this diagram:
On the graph you can see the principle of changes in business cash flow. The pre-production period refers to the first phase of investing funds in the operation of the enterprise. An investment can be considered either an investment that was made once in a year or a process lasting 12 months or more.
If investment is understood not as a one-time investment, but as a process, then when calculating the net value, it is necessary to take into account the size of the change in the price of the investment. In the calculations, in addition to other initial data, there must be a discount rate. The size of the bet depends on what criteria were chosen by the investor. This could be the cost of capital, rate of return, lending rate and others.
How to manage investments so as not to incur losses?
Formulas for calculating the indicator
To calculate the cash flows that go towards the investor-supported enterprise, NV's cash receipts are calculated using the following formula:
- Clt– the amount of investment in the project throughout its entire life cycle;
- CFt– cash flows going to the project during its life cycle;
- n– investment life cycle.
This formula does not take into account cash flows from the financial and operating activities of the enterprise.
Once the cash flows have been calculated, you should begin to calculate the net present value. To do this, the flows must be discounted using the following formula:
- ICt– influx of investment;
- CFt– cash flow in t-year;
- n– life cycle time of cash investments;
- r– discount rate.
- IC0– the amount of investment made in the enterprise at the very beginning.
The net present value calculated using the above formulas helps investor decide whether it is worth investing in the activities of a particular enterprise. Moreover, one project for two enterprises may show different profitability. This depends on the size of the discount rate. For a more objective and accurate assessment, other indicators need to be considered.
Discounted yield index
Such an index shows the ratio of investments received from investments discounted at the capital investment rate to the sum of all discounted investments. The profitability index taking into account the discount rate is referred to as DPI and is calculated using the formula:
It is advisable for an investor to invest in supporting an enterprise only if the DPI indicator is not less than 0. The same rule applies to formulas for calculating present net profit.
Calculation of investment return index
If you are investing small amounts of money, or we are talking about investing short-term projects with a life cycle of up to 12 months, you can use a simplified method for calculating the investment return index. In this case, it is enough to use the formula:
This formula is convenient to use to compare two investment projects. The higher the index value, the more profitable it will be to invest in a specific project. It must be taken into account that the formula does not reflect the real state of affairs in terms of the financial stability and cost of capital of the invested project.
It is important not only to calculate the value of the PI indicator, but also to correctly draw a conclusion based on it. So, if the parameter is less than one, then the investment in the investment project will not pay off. When the indicator is equal to 1, the project is characterized by profitability, the size of which is similar to the discount rate. If PI exceeds one, then the business project is considered promising and attractive for investing in it.
Calculation of internal rate of return
This indicator of investment efficiency plays an important role in the analysis of projects selected for financial support with the aim of making a profit. It is denoted as IRR.
- IRR = r, at NPV = 0
The calculated rate is an indicator of the lower limit of the rate of return at which it would be an unprofitable decision for an investor to invest in supporting an investment project. If the calculated IRR is less than the average return on capital of the project, then it is better to refuse to support such a business. The IRR indicator is also used to compare several projects.
This method is suitable for comparing two or more investment projects, even if they have different scales and durations life cycle and other parameters. The method is also suitable for comparing alternative investments, including bank deposits. For example, if the IRR is higher than the interest rate on the deposit, then this deposit is profitable.
The dynamic method of calculating the internal rate of return has not only positive qualities, but also disadvantages that must be remembered when using the technique. This method does not reflect the absolute increase rate cost of the supported project. Another disadvantage is the difficulty of performing calculations, which is due to the unsystematic structure of cash flows.
Internal rate of return
This indicator is of great importance for analyzing the performance of investment projects, in respect of which there is an annual reinvestment of profits at the rate of the price of total capital. To calculate the internal rate of return for a project, you should use the formula:
- d– average cost of capital;
- r– cash flow discount rate;
- CFt– cash flow indicator for year t;
- ICt– investment cash flows within the t-year;
- N– duration of the project life cycle.
The formula shows an objective picture only if the cash flows are relevant, that is, they have a positive sign throughout the entire period of time.
Time until payback
An important parameter is the payback period of the investments that were initially made in the project. To calculate the parameter, the formula is used:
- RR– the required payback period for the initial investment;
- I0– the size of the initial investment;
- CFt– cash flow from investments in year t;
- t– the period for which the calculation is performed.
The formula does not take into account the rise or fall in the value of money over time.
But this formula takes into account this indicator:
- R– rate of discounting cash flows.
The DPP indicator is always larger than the PP indicator. It is not recommended to rely only on these calculations; to present the full picture, it is necessary to perform an absolute assessment of the cash flows accumulated over the entire life cycle of a business project.
The considered method of calculating the payback period has a drawback due to the use of only constant cash flows. In real life, such flows are not static, but changeable. Due to this circumstance, the payback period in reality may differ greatly from the calculated one, both up and down.
Now you know how to calculate key investment performance indicators.
Take time to do the math before investing in any venture. Otherwise, there is a risk that the investment will not pay off.
After analyzing the general indicators of the efficiency of using fixed assets, the degree of use of the enterprise's production capacity, individual types of machinery and equipment is studied in more detail. Analysis of equipment operation is based on a system of indicators characterizing use of its quantity, operating time and power.
1) Indicators of the degree of attraction of equipment into production
There are equipment available and installed (put into operation), equipment that is actually used in production, is under repair and modernization, and reserve. The greatest effect is achieved if the first three groups of equipment are approximately equal in size.
For analysis quantitative equipment use is grouped by degree of use (Fig. 2).
Rice. 2. Composition of available equipment
To characterize the degree of equipment involvement, calculate:
Available equipment fleet utilization rate (Kn):
Кн = Number of operating equipment / Number of available equipment;
Installed equipment fleet utilization rate (Ku):
Ku = Number of operating equipment / Number of installed equipment;
Utilization factor of commissioned equipment (Ke):
Ke = Number of installed equipment / Number of available equipment.
If the indicator values are close to one, then the equipment is used at a high degree of utilization, and the production program corresponds to production capacity.
2) Indicators of the degree of utilization of the enterprise's production capacity.
Under the production capacity of the enterprise implies the maximum possible output of products at the achieved or intended level of technology, technology and production organization. In other words, this is the maximum potential opportunity for production of products by a given enterprise during the reporting period.
Production capacity is not a constant value and changes along with the improvement of equipment, technology and production organization. It is calculated based on the capacity of leading workshops, sections, units, taking into account the implementation of a set of organizational and technical measures aimed at eliminating bottlenecks, and possible production cooperation.
The degree of utilization of the enterprise’s production capacity is characterized by the following coefficients:
1.General coefficient:
Ko = Actual or planned volume of production / Average annual production capacity of the enterprise;
2.Intensive load factor:
Ki = Average daily production output / Average daily production capacity of the enterprise;
3. Extensive load factor:
Ke = Actual or planned working time fund / Estimated working time fund adopted when determining production capacity;
In the process of analysis, the dynamics of these indicators, the implementation of the plan for their level and the reasons for their changes, such as the commissioning of new and reconstruction of existing enterprise assets, the technical re-equipment of production, and the reduction of production capacity, are studied.
In addition, the level of use of the enterprise's production space is analyzed: output in rubles. per 1 m 3 of production area.
One of the most important factors influencing the efficiency of OS use is improving the use of production capacities of the enterprise and its divisions. To establish the relationship between capital productivity and production capacity, use the following factorial model:
FO = VP/VPos. VPos/ W . W/Wasp. OSa/OS,
where VP is the volume of production accepted for calculation;
VP OC - the main (core) product of the enterprise;
W - average annual production capacity.
This formula allows you to determine the impact on the dynamics of capital productivity of changes in the level of specialization of the enterprise (VP/VP OC); production capacity utilization factor (VP OC /W); capital productivity of the active part of the operating system, calculated by production capacity (W/OCa); the share of the active part of the funds in their total value (OSa/OS).
3) Characteristics of extensive and intensive loading of equipment. To characterize the extensive loading of equipment, analyze equipment usage by time: work time balance and shift ratio.
Table 1. Indicators characterizing the equipment use time fund
The level of intra-shift equipment use is characterized by the equipment load factor K3, which allows you to estimate the loss of equipment operating time due to scheduled maintenance, etc.:
Kz = Tf / Tk or Tf / Tn or Tf / Tef
The level of conditional use of equipment is characterized by the shift coefficient (Kcm):
Kcm = Actual number of machine-shifts worked for the period / The maximum possible number of machine-shifts worked by the installed equipment for 1 shift of the period.
Under intensive equipment loading understand the assessment of its performance.
Equipment intensive load factor (Ci) is determined:
Ki = Actual average hourly output of equipment / Planned average hourly output of a unit of equipment.
A general indicator characterizing the complex use of equipment is the integral load indicator (Kint).
An investment project is a multi-page document containing descriptive and calculation parts.
The descriptive part provides a general description of the project, characteristics of the invested object, a description of the project idea and the method of implementing this idea, a description of the environment with characteristics of the market for competitive products, the advantages of its own products, a marketing plan for conquering a market segment, and much more.
The calculation part contains technical calculations for the implementation of the project, the construction calculation part of the project with construction estimates and the economic part with calculations of the economic efficiency of the proposed solution. We consider the calculation of an investment project from an economic point of view, the main thing in which is the calculation of the efficiency indicators of the investment project.
All investment performance indicators can be divided into absolute indicators, measured in monetary units and time periods, and relative indicators, measured in percentages or ratios.
The first group of indicators includes:
- net present value of the investment project NPV (Net present value);
- payback period of investments PP (Pay-Back Period);
- discounted payback period DPP (Discounted payback period).
The second group consists of the following indicators:
- PI (Profitability Index);
- internal rate of return IRR (internal rate of return);
- modified internal rate of return MIRR (Modified Internal Rate of Return);
- investment efficiency ratio ARR (Accounting Rate of Return).
Calculation of the net present value of an investment project
This indicator is calculated using the formula:
- NPV - net present value of investment;
- ICo - initial invested capital (Invested Capital);
- CFt - cash flow (Cash Flow) from investments in the t-th year;
- r - discount rate;
- n is the duration of the project life cycle.
Calculation example: The company plans to replace outdated equipment in the auxiliary equipment production workshop. This will require 85 million rubles for the purchase, delivery and installation of new equipment. The dismantling of old equipment is fully covered by its sale on the market. The lifespan of investments in new equipment is the obsolescence time of 6 years. We accept the discount rate corresponding to the enterprise's rate of return of 14%. The calculation of income from the operation of new equipment by year is as follows:
The discount rate r is unchanged in this example. But this is unlikely, since it is influenced by many factors, such as inflation, changes in the refinancing rate, price fluctuations in the market for manufactured products, etc. In the above calculation formula, in this case, the discount rate can be replaced by the predicted rate for each year. And when calculating the actual NPV for analyzing the effectiveness of investments, this is done without fail.
Calculation of the payback period of investments
The payback period of an investment is an indicator of the return on investment to an investor measured in time periods - months or years. The general form of the formula for determining it looks like this:
PP=N, if 
- CFt—receipt of income from the project in the t-th year;
- N - payback period, years.
For the above example, PP = 3 years, since more precisely - 2 years and 8 months.
If cash flows are discounted at an accepted rate, then the discounted payback period of investments can be calculated using the formula:
DPP=N, if
More precisely, DPP = 3 years 6 months.
Calculation of relative performance indicators
Calculation of the profitability index
The investment return index shows the profitability of each invested unit of investment at the current time, that is:
For our example, PI = (10.526 + 27.7 + 32.39 + 27.54 +25.26 + 17.51) / 85 = 140.926/85 = 1.66. This can be interpreted as follows: every ruble of investment brings 0.66 rubles of income.
Calculation of internal rate of return
The internal rate of return on investments is determined when the discounted cash inflows from the investments that caused them are equal to the investments. That is:
IRR is the internal rate of return on investments.
Based on this formula, it becomes clear that IRR, on the one hand, is the average rate of return of the project over its entire life cycle, and on the other hand, the maximum rate of return of the project, below which one cannot fall.
Therefore, it is compared with barrier rates for a given investment object to make a decision on the feasibility of investment design. If it is equal to or less than the cash flow discount rate determined on the basis of the cost of the weighted average capital of the invested object, then any investor will abandon such a project without hesitation.
In our example, the discount rate is 14%. Let's see what the internal rate of return on investment is in our example.
Let us determine the value of the internal rate of return using the method of successive approximation:
Thus, the IRR is equal to 32%, which significantly exceeds the discount rate and the weighted average return of the invested object. It is advisable to implement the project.
Quite often, in the process of investing in large projects, problems of investment shortage arise; in this case, a decision is made to reinvest the profits received during the implementation of the project. In this case, the modified internal rate of return on investments MIRR is calculated, which is calculated using the formula:
- d - weighted average cost of capital;
- r - discount rate;
- CFt - cash inflows in the t-th year of the project life;
- ICt - investment cash flows in the t-th year of the project’s life;
- n is the life cycle of the project.
Here it is necessary to pay attention to the fact that all investments and reinvestments are reduced to the beginning of the project at the same discount rate, and all income is reduced to the end date of the project according to the discount rate of the corresponding weighted average cost of capital of the invested object.
From the above equation, the modified internal rate of return in our example is determined:
As we can see, MIRR< IRR. The advantage of this indicator is that in the case of alternating inflows, it gives an objective assessment of the investment project, which the IRR indicator cannot provide.
The calculation of the efficiency of an investment project, an example of which we have examined, should be supplemented by the calculation of another indicator - the efficiency coefficient of the investment project ARR. This indicator is the reciprocal of the payback period PP, that is, ARR = 1/PP, if we define the latter as the ratio of the average annual return on investment to the initial investment.
The formula for calculating the investment efficiency ratio looks like this in this case:
CFcr - average annual return on investment.
If the coefficient is calculated for the entire life cycle, then the formula takes the form:
If is the liquidation value of the investment project.
For our example, the calculation looks like this:
ARR = 228/ 6/ 85 = 0.447 or in percentage terms 44.7%.
Possible deviations from the calculation of this indicator for the payback period are associated with the methodology for determining the average annual income from investments.
In conclusion, it should be noted that the calculation of all the above indicators is easy to carry out on a computer using standard Excel programs.
How to determine the main indicators of economic efficiency? What methods of calculating indicators can be used? Let's talk about this in the article.
You will learn:
- What is the essence of the economic efficiency of an enterprise, why does it need to be calculated.
- What indicators for assessing economic efficiency are known.
- What formulas can be used to calculate indicators of economic efficiency of commercial activities.
- What methods exist for calculating economic efficiency indicators.
What is the essence of calculating economic efficiency
The economic efficiency of an enterprise is its overall effectiveness commercial activities, which is expressed in the ratio of the product received and the resources expended. To obtain an economic efficiency ratio, it is necessary to correlate the profitability indicators of the enterprise and the total costs of the resources used. Business project will be effective if the first indicator exceeds the second component.
Indicators for calculating the economic efficiency of an enterprise
The system of indicators of overall economic efficiency includes estimated indicators and indicators by type of resources used. The key performance indicator of an organization is always profit. The following indicators also include the following indicators: profitability of products, profitability of production assets, relative savings of fixed and working capital.
These indicators are needed for the development and implementation of new equipment, solving production issues, including the use of interchangeable materials and products, as well as when designing construction and reconstruction, drawing up business plans, and choosing production organization schemes in technological and scientific activities.
How are benchmarks determined? To do this, the savings obtained from reducing production costs, and as costs - additional capital investments that led to these savings.
Comparative economic efficiency is determined by choosing one of two or more options for solving a certain commercial or economic problem. Thus, you get a characteristic of the advantages of one option compared to others.
When comparing two options, it is possible that the ratio of required capital investments and the level of production costs. The option that requires less capital investment, while ensuring the lowest cost of production, is considered economically profitable.
When comparing options, you must use the reduced costs calculated for each of them. The given costs for each option represent the sum of capital investments and current costs (cost), reduced to a single dimension in accordance with the efficiency standard.
It is also important to understand that the selection of economic indicators is determined by the objectives of the functioning of the system under study. For example, when establishing indicators of the comparative economic efficiency of an enterprise in the field of livestock farming, one must focus on the growth in production volume, growth in labor productivity, payback on the feed used and other costs. Based on this, the following system of indicators can be established: gross and marketable output per animal, labor productivity, payment for feed and cost recovery.
Economic efficiency: calculation formula
The general formula for calculating efficiency is as follows:
E = R / Z, Where:
R– production results;
Z– the costs of obtaining this result.
It is quite difficult to apply such an efficiency formula in practice, since the numerator and denominator of the fraction in most cases are not quantifiable and cannot be calculated in common units. In most cases, the results of an enterprise’s commercial activities are diverse and it is impossible to combine them into a common result. In some cases, the result cannot be expressed in numerical form at all, and can only be qualitative.
Efficiency can be determined in 2 ways:
- As the ratio of the result of production to the costs of its implementation.
- As the ratio of the result of what was produced to what had to be abandoned when choosing an alternative option.
How to calculate economic efficiency indicators
You can consider the features of calculating the main indicators of economic efficiency of an enterprise. For example, these include profitability, cost intensity, financial health, and financial and resource management.
Profitability indicators show the ratio of profit to costs, investments, investment costs, that is, they characterize the share of profit per unit of invested costs:
- profitability of products (services) R pr i, i.e. ratio of product profit (P i) to cost (C i) of a manufactured unit of product, %:
This indicator is used to identify the most profitable products;
- economic profitability of the company's assets (R f), i.e. the ratio of the amount of annual profit (P year) to the assets of the enterprise (K act) or the amount of fixed capital (K main) and working capital (K turnover), %:
Level R f demonstrates the efficiency of the enterprise (use of assets), i.e. shows the share of profit per $1 of assets. P year includes balance sheet profit(P point) plus interest on the loan charged to cost.
- the company's return on equity (R ck), i.e. the ratio of the company's net annual profit (after tax) to the amount of equity capital at the end of the reporting period (Keb), %:
- return on capital employed (R ik, %) shows the efficiency of both equity and attracted capital (credits, borrowings, advances) of the company and is calculated using the formula:
The company’s balance sheet at the beginning and end of each reporting period reflects the cost data on fixed assets - the initial cost, the amount of depreciation ( depreciation), residual value.
Fixed assets move throughout the year, so their availability in accounting is shown monthly. The cost of fixed assets at the end of the period (K of.k) is determined according to the balance sheet scheme:
To official beginning - the cost of fixed assets at the beginning of the period;
K of.p - the cost of acquired fixed assets;
To of.v - the cost of retired fixed assets.
The cost of purchased equipment includes: purchase price, transportation costs, insurance, installation, installation, adjustment.
To assess the level of use of fixed assets, it is necessary to have information on the average annual cost of fixed assets (K average).
To the office beginning – the cost of fixed assets at the beginning of the year;
To the office k – value of fixed assets at the end of the year.
How to learn to manage expenses: a case
A manager needs to be able to manage the budget of his company. The editors of the “Commercial Director” magazine have compiled a detailed algorithm in order to learn how to competently manage expenses and extract maximum benefits at the lowest costs.
Methods for calculating economic efficiency indicators
After we have decided on the systems of main indicators of economic efficiency, we need to work out calculation methods.
Absolute criteria will help to analyze the main dynamics of various profit indicators for a certain number of years:
- economic;
- accounting;
- received from sales;
- calculated in its pure form.
Such indicators are more related to arithmetic calculations than to economic ones. The figures will be obtained in pure form without taking into account inflationary processes. At the same time, relative indicators will have certain advantages in terms of the fact that they are not subject to inflation.
The calculation of economic efficiency indicators is the volume of products produced, work performed or services provided. They are the basis for satisfying all needs and improving material condition.
Economic efficiency indicators include:
- Payback of basic costs is the ratio of the volume of gross output to the total costs of living and material labor, which is a general indicator.
- Profit is the realized part of income in its pure form. The concepts of costs incurred also imply various concepts of profit. In the field of economics, the term profit has a meaning that is different from the definition in accounting reports.
- Receiving net profit. Includes all net income and payroll. This is the main source of consumption and certain accumulation. In most enterprises, such indicators can only be determined by calculation. Therefore, the resulting “clean” products do not always reflect with maximum accuracy the actual level of efficiency and dynamics of production development.
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