The concepts of "effect" and "efficiency" in the economy belong to its most important categories in the era of the market. There is a close relationship between them. The presence of an economic effect implies a certain useful result, expressed in concrete cost. Economic efficiency is understood as the ratio of the results of economic activity or the cost of resources or labor (living and materialized).
The concept of effect and effectiveness
The useful result of the enterprise in value form can be expressed in terms of revenue, income, profit, volume of products sold. These concepts relate to the criteria of the economic effect, which is an absolute value and is measured in rubles per unit of time.
In contrast, economic efficiency is a relative quantity. It can be characterized only by comparing the economic effect as a result of the activity with the costs to which it is caused.
It is most often determined by the economic efficiency coefficient E. It depends on what exactly the economic effect is expressed in and what kind of costs were taken into account when calculating it. That is, there are various types of effect and effectiveness. The size of the coefficient of economic efficiency can be calculated in different ways, regardless of its essence.
One of its most common types is the so-called profitability indicator in its various types.
Why do you need to evaluate cost-effectiveness?
This assessment is very important for the successful management of the enterprise in the field of investment. It is the expected effect and effectiveness of the project that serves as the criterion for choosing one or another investment object. When calculating indicators of economic efficiency, it is necessary to take into account the difference between short-term economic efficiency (when it comes to a one-time transaction) and the economic efficiency of a long-term project that has been implemented for several years.
Any type of activity involves the achievement of a certain result, and people have always sought to evaluate its effect and effectiveness. Since the production began to develop on an industrial scale, this assessment has grown into a real concept - the desire to get more results with the same or less cost.
Nowadays, these criteria (efficiency, effect, costs) are among the most serious components of the economy of any enterprise. Without them, business planning is impossible.
Effect and Efficiency: Difference
These two concepts should not be confused. What is the difference between effect and effectiveness? The first refers to the absolute indicators (results) of any activity or specific action. Its value can be both positive and negative. Speaking of efficiency, we mean only a relative characteristic of the effectiveness of the activity. It is always extremely positive.
To evaluate the effect obtained, the calculation of efficiency is carried out by comparing the costs incurred with the result, expressed in cash. The formula for this is as follows:
Efficiency = (Result / Cost) x 100%.
Moreover, the comparison of costs and results can be carried out by different methods, and the data obtained have different meanings depending on the shift in emphasis on certain nuances of the efficiency category.
In general, indicators of effect and efficiency are always a characteristic of the result obtained per unit of cost.
Characterizing the ratio of the result obtained as a result with the intended target settings, they use various terms - effectiveness, feasibility, cost-effectiveness, productivity, efficiency.
What is this characteristic
Efficiency refers to the characteristics of impacts and processes that are purely managerial in nature. It primarily reflects the degree of achievement of the intended goals. That is why we can talk about the effectiveness of only targeted interaction.
Under this concept also understand:
- the effectiveness of a particular action, expressed in a specific result;
- coincidence of the process or result with the planned or the maximum possible;
- variety of systems in functional terms;
- degree of satisfactory functioning, expressed in numerical characteristics;
- the likelihood of the implementation of target functions and settings;
- correlation of real and required (normative) effects.
What was meant by the effectiveness of the organization in the pre-reform period
In the field of economics and management, the concepts of effect and efficiency have historically evolved since we started talking about the effectiveness of a particular production. In our country, this topic was discussed in detail in regulatory materials and instructions of governing bodies, and was also covered in scientific literature. But in a state-owned economy with no market for capital, products and labor, decisions on the use of resources were almost always taken in a centralized manner.
That is why the bulk of the effort was concentrated on the procedure for the analysis of control and planning of the current efficiency (effectiveness) of production. The issue of production efficiency in this period was relatively two aspects - in the form of a macroeconomic category (it was engaged in political economy) with a politicized connotation and as a unit of account, which includes a long series of indicators and is used in the accounting and planning reports of enterprises. The difference between the concepts of "effect" and "efficiency" in those days was not so pronounced.
The essence and meaning of efficiency
This concept in the broad sense is intended to characterize the qualitative side of economic development. Its specificity is in revealing those combinations of resources, due to which the final result is obtained. Increasing efficiency as such is equivalent to accelerating the growth of the effect (final result) in comparison with the invested costs. That is, the investment of less social labor per unit of such a result.
Thus, the criterion of the effectiveness of social production can be called the achievement of the maximum effect on each unit of labor social costs or the minimum of such costs in relation to each unit of result.
As a generalized indicator of efficiency, we can take the ratio of the cost of the resulting products with the total costs (current and capital) spent on its production. Thus, efficiency is determined for the national economy as a whole and in the context of individual industries. In the same way, the efficiency of new equipment, machinery and capital investments is calculated.
Macroeconomic characteristics
If we talk about the national economy as a whole, then the ratio of its production funds to national income serves as an indicator of its effectiveness. The effectiveness of capital investments is measured by the ratio of profit to the volume of capital expenditures. A positive economic effect is considered a saving, a negative value is a loss.
A variation of the economic effect is the so-called prevented loss. This means the non-arisen economic effect of a negative nature, erroneously called economy. Losses include a decrease in real property or damage (for example, losses due to marriage). From the same category - the concept of lost profits, that is, non-receipt of possible property benefits.
The prevention of these negative phenomena in any form is an economic effect. Under the economy (positive economic effect) refers to the saved resources in the form of social labor, time, etc.
How are these criteria evaluated?
Today, the most consistent and complete assessment of the effect and effectiveness is presented by the theory of integrated economic analysis, where several sections are devoted to this topic at once. This direction is busy identifying factors of changes in economic efficiency.
Having briefly analyzed the system of performance indicators adopted in domestic practice, we can trace their division into the following groups:
- Those related to generalized performance indicators.
- Indicators characterizing the measure of effect and labor efficiency (i.e., labor resources).
- Related to the use of fixed assets, capital investments and current assets.
- Characterizing the use of material resources.
- Those that can evaluate the economic efficiency of new technology.
Who does this
To analyze the economic activity of the manufacturing enterprise as a whole is the prerogative of senior management. This occupation is associated with determining the final price of a product, the size of the batch of deliveries of the original products or purchases of raw materials, and the replacement of technology or equipment with a more advanced one. All other solutions must also correspond to the most successful line of the company.
The main tasks of the effectiveness analysis include the need to assess the economic situation, identify the reasons for the achieved state, prepare and justify the decisions made by the managerial nature, identify and mobilize the reserves for improving efficiency.
About extensive and intensive factors
One of the main directions of analysis is to identify the intensive and extensive factors of changes in economic activity. Extensive factors include an increase in production volumes by increasing quantitative growth indicators - introducing additional labor resources, increasing retail space, commissioning new facilities, etc.
Intensive factors include a change in the quality of economic growth. Their characteristic is a measure of good fortune for each specific resource used. Indicators of the use of financial and production resources to a large extent depend on the quantitative ratio of these two factors.
What do they depend on
Speaking about the volume of production in its value terms, they mean the function or the results of using the entire combination of resources. Since the production process is possible only with the integrated action of all the elements of the labor process in close interconnection, it is almost impossible to identify a separate influence on the result of any particular factor.
These two types of resource use (intensive and extensive) can be used interchangeably. An example - a shortage of labor is compensated for by an increase in labor productivity. Or vice versa - an increase in output may come from the additional attraction of working reserves.
Any of the indicators of the resources used also consists of the action of a number of its own determining factors. In particular, labor productivity is affected by both an intensive value (the duration of the labor process) and intensive ones - the load during the working day and labor productivity, determined by various factors, including the conditions of the production process.
Where to start the assessment
At the necessary initial stage of the process of analyzing the overall efficiency of an enterprise’s production activities, it is necessary to evaluate the costs incurred with methods for their distribution, draw up and control the necessary estimates, calculate the cost of the product and manufactured products, determine the threshold for profitability of production and sales. The results of such an analysis are received by the enterprise administration and provides the necessary information about the state of the object of analysis.
Interested parties called subjects of analysis are united by a common goal - obtaining key parameters with which it is possible to accurately assess the current state of an object with prospects for further development. Along with production issues, it is necessary to take into account the interests and goals of various entities interested in its successful work.
Who is interested in?
So, owners and lenders who have invested in their organization either borrowed capital and implying interest or dividends are interested in everything related to the financial results, stability and liquidity of the enterprise. Career growth with decent pay is relevant for the administration. She is interested in any aspects of the company’s activities with a focus on efficiency. The staff is most interested in decent wages and the availability of social contributions. Suppliers and buyers are concerned about pricing and, accordingly, the financial condition of the company.
With the entry of our country into a market economy, previously existing methods for assessing such a parameter as economic efficiency have become largely irrelevant. Until recently, there were practically no new developments on these issues. Recently, the information and methodological vacuum has been actively filled with manuals and materials prepared by competent experts.
We examined the concepts of "effect" and "efficiency." The difference, as you see, is significant.