What is efficiency: definition, indicators and types
Any socio-economic structure, at whatever level of development it may be, cannot exclude from its activity the definition of what efficiency is.
Concept of effectiveness
The company, being at different stages of development, has always been looking for the answer to the question: how much will it cost and resources to achieve one or another production goal. Thus, it turns out that the method of quantitative assessment of economic efficiency is the ratio between economic results and costs, resources.
This goal is for both the whole society and a separate subject (employee). This task, the ways to achieve it, and the possibilities of increasing economic efficiency are the substantive basis for all economic disciplines (both functional and sectoral) and the economy as a science in general.
Efficiency can be absolute and relative.Absolute efficiency can be used to assess the company's financial results and other general indicators at the macro and micro levels of the economy as a dynamic process.
Thus, the question of what efficiency is is one of the fundamental economic studies, since it expresses the patterns inherent in any kind of human activity.
Efficiency as the basis of the enterprise
The main principle of the organization of the enterprise is the enomic efficiency of its activities. The performance of the organization is reflected in a comprehensive analysis of the results of the use of personnel and production resources for a set period of time. In fact, the effectiveness of the company’s activity is determined by the ratio of the results obtained to the costs and reflects the level of achievement of the goals set. There are interrelated concepts such as economic and managerial effectiveness. The question of what is the effectiveness of the organization, is to assess the results of operations, determine the cost, the rational allocation of funds.Management efficiency is envisaged by the search for methods, ways, tools for more effective management of the enterprise and obtaining economic efficiency.
Purpose of performance analysis
The main goal of enterprise management is to organize a stable activity in the market for a long period. This raises the question of what is performance measurement. The main aspect of the growth of the company's efficiency is the growth of the productivity of the labor process, that is, for each unit spent, the amount of profit and services provided by the organization increases.
The modern company carries out its work in conditions of constant changes in the external environment. This affects the performance of the organization. The increase in performance suggests that there are the right ways to solve problems and rationally use additional attracted material resources.
The goal of any organization is to obtain the greatest profit based on the results of its own activities. Important prerequisites for achieving the goal are to increase the efficiency of organizations, to improve management systems and services, and technical re-equipment.Receiving income from the sale of services forms the financial result of the company.
In order to study the efficiency parameter, we consider several groups of indicators:
- Generalizing. They show the degree of market satisfaction, product profitability and the provision of services, and the increase in services through increased activity.
- The use of labor. Characterized by the rate of increase in productivity.
- The use of working capital and fixed assets. Show the profitability and capital productivity of fixed assets.
- The use of material means. Characterized by profitability and turnover of working capital, profitability and payback period of investments.
Evaluation of the effectiveness of social and economic activities of the company depends on the direction of development and improvement of activities, on the types of resources and costs.
Among the main indicators of efficiency consider the factors presented below.
Profit from operations is the difference between the proceeds from the sale of the company and the costs incurred. It is calculated by the formula:
Pone= B - C,
where B is revenue, C is cost.
Profit from sales is the difference between the revenue received and the cost of producing services. The formula for calculating:
Pr = B - W,
where B is revenue, W is the cost of production. Using these indicators, the company's profitability is calculated.
The coefficient of profitability of production is the ratio of profit to the number of costs. The formula for calculating:
Rproducing= P / Z,
Where P is the profit, W is the cost.
Product profitability is the ratio of profit to revenue. The formula for calculating:
Rprod= P / V,
where P is profit, B is revenue.
In the financial statements of the organization, together with the profit from the sale of services, the value of the profit from the financial and economic activities, the profit of the reporting period, the distributed profit is given. Net profit and depreciation can be considered the basis of the organization’s personal funds, which are important to use for the further development of the enterprise.
Private profitability ratios
There are several profitability indicators that can be used to analyze the economic efficiency of a company.
The profitability ratio of fixed capital indicates the efficiency of the use of fixed assets of the company. It represents the quotient of dividing net profit by half the amount of funds used at the beginning and end of the reporting period. This ratio shows how much profit falls on one unit of economic resources used.
The return on equity ratio complements and specifies the previous figure. It is defined as the quotient of the division of net profit to the average annual amount of equity capital.
The profitability of fixed assets is calculated by dividing the net profit to the volume of (average annual) fixed assets used by the enterprise. This indicator gives a characteristic of the efficiency of economic assets, which are implemented in the fixed assets of the organization.
The profitability of long-term financial investments is calculated by the ratio of interest received by the organization from participation in the capital of other organizations to the average annual value of financial investments. Shows whether it is reasonable to use own funds for investments or it is more expedient to direct them to expand their activities.
The payback period of equity capital is calculated by dividing the value (average annual) of equity capital by net profit. It shows how efficiently the capital management of an enterprise takes place. Profitability indicators link the results of current activities with material resources, which reflect the effectiveness of all the activities of the organization. These indicators are important for investors to decide on the possible investment of funds in this organization.
Break-even point in the process of research efficiency
The minimum amount of sales required for the reimbursement of all costs determines the breakeven level of the enterprise. The break-even level is calculated using three indicators:
- volume of sales;
- margin profit margin;
- fixed costs.
Fixed costs - those costs that do not depend on the volume of sales. These include: advertising costs, labor costs, costs for utilities, etc. Marginal profit is the difference between the proceeds from the sale of a product and the variable costs of producing the product itself.The profitability of the marginal profit is calculated by the ratio of the volume of marginal profit to the sales volume multiplied by 100%. The magnitude of the variable costs depends on the volume of sales. If sales increase, then the value of variable costs increases, and vice versa.
The break-even point shows the amount of revenue that provides a break-even, but also profit-free operation of the enterprise. The break-even level changes over time. One of the main problems in calculating the break-even level is the sorting of costs into variables and constants. Variable costs are provided by the sales activity of the finished product. Fixed costs are associated with depreciation of fixed assets and enterprise management.
Calculating the break-even point plays a big role in confirming investment projects. With a well-planned project, the volume of activity ensured by consumer solvency far exceeds the degree of self-sufficiency. In general, the break-even point analysis, along with the marginal analysis, play an important role in the planning of material flows and production and are very widely used in the company's activities.
The most significant areas of enterprise efficiency growth are: improving the production structure, increasing the speed of organizational and technical development, improving the quality and, therefore, the competitiveness of products and services, modernizing the company's foreign economic activity. Internal factors affecting efficiency are technologies, management styles and methods, personnel, etc. External factors are infrastructure, state social and economic policies, and various changes in the structure.
Money management plays an important role in understanding what a company's efficiency is. For the successful operation of the enterprise working capital must be liquid to the maximum. An organization must at any time have sufficient cash to pay bills. At the right time, the lack of material resources can lead to the bankruptcy of the enterprise, even if it is sufficiently profitable. With the development of the organization, it is important to calculate the correct limit on investments in receivables and stocks. An important task in the management of working capital is to find regulatory ratios. These coefficients sometimes need to be set in relative terms, sincetotal sales are constantly fluctuating. The efficiency of an enterprise is characterized by its own specifics of activity, the state of the regional and federal economy, and that is why it is important to constantly give a realistic assessment of the standard indicators and regularly review them.