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Unit17 Farm Efficiency Measures

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127 views

Unit17 Farm Efficiency Measures

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matteoandanastasia
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Unit 17: FARM EFFICIENCY

MEASURES
17.1: Concept of Farm efficiency
Definition

 It is ratio of farm output to the farm inputs


 It shows the profitability of farms

Type of farm efficiency

a. Physical efficiency
 It is ratio of physical output to the quantity of inputs used
 It measured effective utilization of resources without wastage

b. Economic efficiency
 The physical efficiency measured in monetary term through prices
 Or it is value of output to the value of inputs

17.2: Measuring Farm Efficiency


A. Physical efficiency measure

This efficiency measure the efficiency of land, labor & capital.

It is of two types:

Physical

Absolute Ratio
Measure Measure

Total area of
Labor Livestock Machinary
firm
Land
Crop acreage
Total Production/liv
per man et
production quivalen estock

Total yield Livestock Livestock


maintained efficiency
per man index
Production
efficiency PMWU/man
equivalent

Cropping
intensity

Crop yield
index
Absolute measure

 Total area of firm


 Total production

Ratio Measure

1. Land

Efficiency of land is measured in terms of productivity, cropping intensity and crop yield index.

a. Total yield = Total product /Total Area

b. Production efficiency
It is ration of actual yield of a crop on the farm and average yield of the same crops in the
locality.
Crop Actual Yield (in Average Local Yield (in Production
kg) kg) Efficiency
Wheat 500 400 1.25
Corn 700 600 1.17
Rice 900 800 1.12

c. Cropping intensity
It is ratio of gross cropped area during the agricultural year to net cropped area in the same
year.

d. Crop yield index


It compares yield of all crops grown in the farm with that of locality.
Crop Yield (Per Ha) Area PE PE*Area
Farm Locality
Paddy 35 25 2 140 280
Wheat 9 10 1 90 90
Total 3 370

Crop Yield Index= 370/3 = 123%

2. Livestock
a. Production/livestock
b. Livestock efficiency index
3. Labor
By comparing the labor efficiency we can know whether a labor or a farm is more or less than
what is required.

Following are efficiency measure of labor


a) Crop acreage per man equivalent
b) Livestock maintained per man
c) PMWU(Productive man work unit)/man equivalent

Man-days

 Work performed by a productive man in 8 hrs called as Man-days


 Woman productivity: 90% of Man day
 Children: 75% of adult man

Man Equivalent year: Mandays/365

B. Financial efficiency measure

It helps to decide the success or failure of business. These are further classified as aggregate and
ratio measure.

Financial efficiency measure

Aggregate measure Ratio measure

Total capital invested Fertilizer cost per crop acre

Total value of production Power and equipment cost per acre

Total expenses
Cost ratios

Net cash income


Liquidity ratio

Net farm income e


Leverage ratio Coverage ratio
Activity and turnover ratio

Profitability ratio
a. Aggregate measure
It measures total income earned by the business it is measure in terms of
1. Total capital invested
2. Total value of production
3. Total expenses
4. Net cash income
5. Net farm income etc.

b. Ratio measure
It represents per unit returns or costs to the inputs involved in the business

i) Fertilizer cost per crop acre


ii) Power and equipment cost per acre
iii) Cost ratios
𝑇o𝑡𝑎𝑙 o𝑝e𝑟𝑎𝑡i𝑛g 𝑐o𝑠𝑡
𝐺𝑟o𝑠𝑠 i𝑛𝑐o𝑚e
a. Operating cost ratio =

𝑇o𝑡𝑎𝑙 fi𝑥e𝑑 𝑐o𝑠𝑡


𝐺𝑟o𝑠𝑠 i𝑛𝑐o𝑚e
b. Fixed cost ratio=

c. Gross ratio = t o𝑡𝑎𝑙 𝑐o𝑠𝑡


𝐺𝑟o𝑠𝑠 i𝑛𝑐o𝑚e

IV) Liquidity ratio


 Liquidity is the ability of the firm to convert assets into cash to meet its current obligations.
 It is usually of particular interest to short term creditor.

1. Current ratio
 The current ratio measures a company’s ability to pay off its current liabilities (payable
within one year) with its current assets such as cash, accounts receivable and inventories.
 If the current ratio was less than 1.00, then the firm would have a problem meeting its bills.

2. Quick ratio/Acid test ratio


 The quick ratio measures a company’s ability to meet its current liabilities with its most
liquid assets therefore it excludes the inventories from the current assets.
 If the quick ratio was less than 1.00, then the firm would have to sell inventory to meet its
obligations.
3. Networking capital ratio
 Working Capital is more a measure of cash flow
 Bankers look at Net Working Capital over time to determine a company's ability to withstand
financial crises
 Networking capital = Current assets – current liabilities
4. Cash ratio
 Liquidity ratio that measures a firm's ability to pay off its current liabilities with only
cash and cash equivalents.
 A ratio of 1 means that the company has the same amount of cash and equivalents as it
has current debt.

V) Leverage ratio
 It determines the proportion of debt in total financing.
1. Debt-equity ratio
Debt-to-equity ratio = Debt capital / Stockholders’ Equity
2. Debt to assets ratio
o Debt to assets ratio = Debt capital / total assets
3. Net capital Ratio (Solvency ratio)
 It is the ability of a company to meet its long-term debt.
 The firm's ability to pay off the debt in future, uncertain economic times.
Solvency ratio = Total Assets/Total Liabilities

C. Coverage ratio
Interest coverage ratio = Earnings before tax and interest/ Interest
D. Activity and turnover ration
Inventory turnover = (cost of goods sold)/Average inventory
E. Profitability ratio
1. Gross profit margin = ( Sale – cost of goods sold )/ Sales
2. Net profit margin = profit after tax/Sale
3. Operating expense ratio = Operating expense/ Sale
4. Return on investment = Net return/Cost of investment
5. Return on equity = Profit after tax/ Networth

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