ANNEX 3
Standard Economic Algorithms; Definitions and Procedures (Algorithms type D)

1. Definitions

By an economic algorithm, the consultant understands the manipulation of data either relating to a culture unit, enterprise unit or to a particular ‘fish farm’, in order to determine the value of an economic criteria. Thus, the algorithm has three parts: a criteria, data, and a set of instructions that shows what arithmetical operations to carry out with the data.

The ‘data’, which in this context is better called information, has been discussed in Annex I.

The most frequently used ‘criteria’, according to discussions which the consultant had (in Ministry of Agriculture and Food and at ÖRKI¹ is ‘net profit’ or ‘net income’; both terms were used but they in effect meant the same thing. The reason for mentioning several criteria is that the ‘net income’ (or profit, but from here on only the term ‘net income’ will be used) can differ depending on the analytical context (or decision situation).

¹ Irrigation and Rice Culture Research Institute, Szarvas

In the following paragraphs, for the purpose of developing these standard economic algorithms, it will be assumed that ‘net income’ is obtained in the following manner: from sales receipts will be deducted all costs, including interest payments on loans and depreciation on assets. Income tax will not be deducted. All receipts and expenditures naturally will be allocated to the period which they concern. Repayment of loans will not be considered as a cost².

² This corresponds to the data handling sequence apecified for algorithm B V/1 in Annex 2. The use of Algorithms type B will

In the following, the Standard Economic Algorithms listed below will be identified and discussed:

calculation of net income per unit of capital;
calculation of net income per unit of land (or pond area);
calculation of net income per unit of labour; and
calculation of period required to recover investment through net income.

Each of these algorithms can be calculated with or without recourse to discounting. The usefulness of discounting of course is associated with the duration of the accounting period under review. The additions needed to the standard economic algorithms to cater to discounting are (at least in theory) rather simple.

The algorithms listed above are referred to as standard only because they should be so formulated that they can be applied to any set of data entered on the Standard Formats for Economic Information (SFEI), provided, of course, that the data on the formats satisfy the ‘minimum’ data needs (see section 4.2.2).

2. Calculation of net income per unit of capital (short-term)

It is quite abvious that this algorithm should be used by decision makers, when availability of capital is the factor that limits their possibilities to act. The algorithm can be applied as much to evaluating the past (ex post) situations as to appraising the future. If the fish farm manager is appraising investment in new fish ponds, or repair of old ones, it would seem natural to discount flows of revenues and expenditures as the new (or renovated) ponds would last several years. However, we are now concerned with the short-term perspective (either expost or ex-ante) and will therefore not apply discounting.

The conclusion of the algorithms is expressed as a ratio between net income (forints) and invested capital (forints). The higher this ratio is, the better the utilization of the capital and, therefore, the more desirable the investment.

The instructions for the algorithms are outlined below:

For each accounting period, deduct ‘total cost incurred by the accounting bit during the period’ from ‘total income’ = net income;
Add ‘net income’ for each period = total net income;
Divide ‘total net income’ by the number of periods = average net income per period;
Divide ‘average net income per period’ by ‘Grand Total Investment (Cumulative)’ for the duration and multiply by 100.

The number obtained when these arithmetical operations have been completed should express the number of forints that the accounting bit will generate, on the average, for each year (or accounting period) considered, for each 100 forints committed to the activity (accounting bit).

3. Calculation of net income per unit of land (or pond area), short-term

This algorithm should be helpful to the decision maker who is considering how to make best use of a given land area and who considers that he has the funds needed to finance any development. In the short-term, this algorithm may help to compare alternative usages of particular, already existing, pond areas.

The algorithm when used should provide an estimate of the net income in forints per unit of pond area. The higher this number, the ‘better’ the particular activity.

The instructions for the algorithm would be as follows:

Calculate ‘average net income per accounting period’ (as indicated in section 2 of this Annex under ‘Net income per unit of capital short-term);
Calculate the total surface area of ponds (or enclosure) used by this accounting bit (measure in hectares);
Divide ‘average net income per accounting period’ by ‘total pond surface area used’.

The number obtained should express the number of forints that the use of one ha of ponds (or other culture unit) would yield (or has yielded) per accounting period, on the average.

4. Calculation of net income per unit of labour, short-term

The setting for this algorithm, in the short-term, is the situation when the decision maker is wondering how his labourers (or other staff) should best be used. Alternatively, he may ask himself if he is obtaining a productivity (measured in forints) from his labour that is about the same as that obtained on similar fish farms.

The algorithm should result in a number of forints (net income) per unit of labour. Again, the higher this number the better.

The instructions for the algorithm would be as follows:

Calculate ‘average net income per accounting period’ (as described earlier);
Add the number of manyears (or manmonths, or mandays - this will depend upon how the accounting period has been defined) under ‘manpower’ (or subsection of manpower) for each accounting period = total manpower use per each accounting period:
Divide ‘average net income per accounting period’ by the 'total manpower use for the accounting period.

The number now obtained should express the ‘net income’ per manpower unit (mandays, manmonths or manyears) that the particular culture activity (more precisely, accounting bit) has given (or is likely to give) on the average per accounting period.

5. Calculation of period required to recover investment through net income

This algorithm is in fact very similar to the one described under 2, ‘Net income per unit of capital, short-term’. They are used in the same kind of decision situations, and as long as the concept of ‘net income’ is identical in the two algorithms the information obtained is identical. The only difference is that when expressed as ‘period required to recover investment through net income’, the decision maker is informed directly of the number of years it would take before he has earned (through accumulation of net income) an amount equal to the amount invested. It is thus a measure of the efficiency of the investment, or use of capital. If the number so obtained, let's say it is 5 years, is treated as follows:

then y is the same as the interest rate (or ratio, or number of forints per 100 forints invested) that is obtained if the same data were analysed by the algorithm described under heading 2 of this note.

The little formula above, if added at the end of algorithm 'Net income per unit of capital, (short-term) gives the algorithm needed here.