Methodology for evaluating the economic efficiency of an agricultural enterprise

Production efficiency is a complex socio-economic category, for the comprehensive assessment of which it is necessary to use a system of indicators. Previously, the efficiency of the use of land, material and technical resources, labor, fixed and current assets, and current production costs forming the cost of production (works, services) were considered separately.

A generalizing effect (result) for assessing the efficiency of production and sales of an agricultural enterprise's products is the profit mass — the realized part of net income, representing the difference between monetary revenue from the sale of marketable products and the costs of their production and sale. However, the absolute amount of profit (profit mass) does not fully reflect the level of economic efficiency, as it does not show what costs the enterprise required to obtain it. The same amount of profit can be obtained at different levels of profitability.

An enterprise strives to obtain a certain amount of profit with a higher level or percentage of profitability. If the revenue received in the process of selling products (works, services) is equal to the cost of their production and marketing, then the profit is zero. The economic content of such a result is that for every 1 ruble of costs, there is 1 ruble of sales revenue, i.e., there is 100% cost recovery, but no profit.

Example 15.2. Realized products with a cost of 200 thousand rubles provided revenue of 200 thousand rubles. Cost recovery is equal to one, or 100% (200 thousand rubles / 200 thousand rubles x 100%). This is a hypothetical example.

In practice, such equality is a rarity. As a rule, there is a difference between revenue from products and their full cost. An excess of monetary revenue over the cost indicates a cost recovery of more than 100% and the fact of making a profit. If monetary revenue does not cover the cost, then cost recovery is less than 100% and a loss occurs.

In agricultural enterprises, it is customary to calculate two performance indicators — net income and profit. The initial data for calculating net income are the gross output produced during the year (including agricultural) and the annual costs for its production (including only for agricultural). Thus, net income is determined regardless of the state, volume, and results of sales and represents the difference between the value of gross output and the costs of its production.

In this case, the following methodological approaches are used to calculate the value volume of gross output:

• the non-marketable part is estimated at cost, and the marketable part at the prevailing selling price;
• the entire gross output is estimated at the prevailing selling prices.

The ratio of net income to the cost of gross output, i.e., to the production costs for obtaining it, expressed as a percentage, represents the level of profitability of the enterprise's gross output production. More fully, economic efficiency is characterized by the level of profitability as a percentage of profit to the full (commercial) cost of sold products. This indicator expresses the efficiency of using current production costs in addition to the costs of product sales, but it does not reflect the efficiency of using total production assets applied at the enterprise. Therefore, the level of profitability as a percentage of profit to the average annual value of fixed and current assets is taken into account. This indicator, called the rate of return, was considered above as a generalizing one to characterize the efficiency of the use of the applied total assets. As a rule, it is determined for the farm as a whole, since it is difficult to separate assets by industry and product.

Thus, the level of profitability depends on the cost of produced and sold products, profit, and, consequently, selling prices. The rate of return is influenced by the enterprise's rational equipment with production assets, their scale, and effective use.

Agricultural production and its industries can be either profitable or unprofitable. As a rule, a profitable farm is effective, but under the currently formed difficult conditions for the industry, the production of an agricultural product is sometimes considered profitable, although it is not effective in terms of the use of its resources and capabilities. Profitability is ensured through state subsidies. They can increase the level of profitability (or reduce the level of unprofitability) by several percentage points. Statistics provide achieved indicators of the level of profitability taking into account subsidies and compensations and without taking them into account.

The main indicators of the results of the economic activity of agricultural enterprises are given in Table 15.1.

More than 20% of the country's enterprises are unprofitable, although the level of profitability for all enterprise activities was 27% in 2008–2010.

T a b l e 15.1. Economic performance of agricultural enterprises in the Russian Federation, 2004–2010.

Indicator 2004 2005 2006 2007 2008 2009 2010 Profit before tax, in

41 829.4 34 778.0 50 146.0 105 781.0 117 437.0 83 564 82219 cluding government subsidies, million rubles Profitability level, %: 0 excluding subsidies 5.3 2.0 2.6 8.1 2.3 -3.2 -5.4 0 including government subsidies 10.4 7.6 9.7 17.2 15.3 9.4 8.3 Share of loss-making agricultural organizations, % 36.9 42.0 35.0 25.0 22.0 28 29

Every agricultural enterprise needs not only to cover current expenses but to develop continuously — that is, to implement expanded reproduction. In modern realities, this has to be carried out mainly on an intensive basis. This means that the growth in gross output volumes and income must be achieved through more efficient use of land, labor, and material-technical resources, rather than simply by increasing costs.

The economic efficiency of production at an enterprise is evaluated using several basic indicators:

• increase in gross output, gross income, net income, and profit;
• growth in labor productivity;
• reduction in the share of the replacement fund in the structure of gross output;
• growth in allocations to the accumulation fund and the consumption fund;
• increase in the overall level of profitability.

For an economic analysis of farm operations, it is customary to divide all gross output produced during the year and the income received into constituent elements. This allows for a clear view of how the enterprise's resources are distributed after harvesting and the sale of the harvest.

• c + v + m — gross output
• v + m — gross income (net product)
• m — net income
• m1 — profit (the realized part of net income)
• c + v — production cost

The replacement fund and distribution of gross income

Initially, all gross output of an enterprise is divided into the replacement fund c and the newly created net product v + m (gross income). The replacement fund is the cost of consumed seed, fertilizer, fuel and lubricants, spare parts, and depreciation, which is transferred to the harvested crop. Without full replacement of these costs, it is impossible to continue work even at previous levels. In agriculture, the replacement fund is formed in kind (own seed and feed at cost price) and in value terms (purchased assets at acquisition price). The replacement fund is included in the cost structure in full, but excluding labor costs.

The newly created gross income v + m expresses the absolute efficiency of production and is distributed into two key funds — consumption and accumulation. Labor costs of all types v form the basis of the consumption fund. Net income m serves as the material basis for the formation of the accumulation fund, and its realized part m1 forms the farm's profit.

The higher the efficiency of production at an enterprise, the larger the share of the received income that can be directed toward the expansion and modernization of the material-technical base. If, however, the consumption fund systematically prevails over accumulation in the structure of gross income, the farm's economy loses its potential for development. The ratio between the accumulation fund and net income m shows the accumulation rate, which determines the enterprise's real capacity for expanded reproduction.

Specifics of reproduction: from biological cycles to diversification

Unlike the industrial sector, agricultural production depends directly on the biological characteristics of living organisms. Their reproduction processes cannot be accelerated by administrative measures — they require a strictly defined time and stable financing. For this reason, any forced reduction in livestock numbers hits the farm's economy for years to come, and a great deal of resources are spent on its restoration.

Since land resources are strictly limited in area, their expanded reproduction comes down to the reproduction of soil fertility. The cost of mineral and organic fertilizers required to maintain soil quality is directly included in the enterprise's replacement fund. Significant difficulties are also created by the pronounced seasonality of work: it forces the diversion of significant volumes of working capital and sharply slows down their turnover.

The economic model of a modern farm also requires the continuous improvement of land relations — the development of the institution of ownership, paid land use, and a normal market turnover of plots. To protect the business from falling income during unfavorable market or weather situations, enterprises are moving away from narrow specialization toward diversification.

Mastering new types of products and combining various sectors provide agribusiness with direct practical benefits:

• the opportunity to implement full-scale crop rotation and preserve soil;
• reduction of financial risks characteristic of highly specialized farms;
• improvement of overall sustainability of reproduction and maximization of final profit.