This article throws light upon the three financial test ratios used to find out the state of profitability in the farm business. The financial test ratios are: 1. Cost Ratios 2. Capital Ratios 3. Income Ratios.
1. Cost Ratios:
These show the relationship between costs and returns. Cost ratios are averages and their magnitude reflecting physical production efficiency, selection of enterprises, prices received for commodities and the expenses for production elements.
(a) Operating cost ratios. This gives the percentage which the operating expenses absorb out of gross profit. The calculation is:
Operating cost ratios =
Improvement in operating efficiency is directly related to this ratio. This ratio is to be watched year after year.
(b) Fixed Ratio =
For a growing and efficient business the rates of increase in gross income should be faster than the rate of increase in fixed cost. Better ratio is achieved by keeping fixed cost constant but increasing the production.
Gross total cost per year
(c) Gross cost ratio =
(d) Cost per hectare. Gives the total cost (cost C) in the production of per hectare of crop. This is popularly known as the cost of cultivation. This does not include marketing cost.
2. Capital Ratios:
This analysis is meant for judging the organisation with respect to resources of the farm.
(a) Capital per unit of gross income =
Capital per unit Rs. 100
(b) Rates of capital turnover =
A good turnover is a sign of efficient farming and the higher the capital turnover more quickly the quicker is the recovery of capital invested. This rate varies with the type of investment.
3. Income Ratios:
(a) Capital turnover ratio =
(b) Gross ratio =
(c) Rates of turnover on capital =
This ratio is important as it gives net income per rupee invested. The date for all these calculation can be had from the books of accounts. There are many factors which affect the farm income.
Out of these factors there are many which are under the control of the farmer as a manager and therefore he calculates certain measures which give him a clear picture of his success as a manager but there are certain factors which are not under the control of the farmer as an individual.