Balance Method in the Analysis of Economic Activity

Balance Method in the Analysis of Economic Activity


the comparison of interrelated indicators of economic activity for the purpose of ascertaining and measuring their mutual influence and calculating reserves for raising production efficiency. The balance method in the analysis of economic activity expresses the relationship between individual indexes which have an equality after various mathematical operations are performed on the indexes being compared. This method of analysis was called the balance method because historically the first example of coordinating a large number of indexes of economic activity by deriving an equality of their two results was the bookkeeping balance. The equality of results (balance) established by the balance method shows that the analysis takes account of all the interacting factors and the economic indexes reflecting them and that the relationship between them is represented correctly . For example, the dependence of sale of production on its output and on the change in the remainder of unsold production in the period under study is used to ascertain the causes of a change in the volume of output sold by comparison with the preceding period. The balance is drawn up according to the following outline: the increase in the sale of output equals the increase in the production of output plus the decrease for the year in the unsold remainder of finished output (at the warehouses of the enterprise, en route to the customer, and at the warehouses of the customer) or minus the increase in this remainder. On the basis of a similar comparison, one can analyze the dependence of the fulfillment of the plan for sales on the fulfillment of the plan for production of output and the change in its remainder.

The balance method is often used in the analysis of the utilization of resources. For example, to ascertain the possibilities of improving the utilization of equipment, a balance of utilization of operating time is drawn up in machine tool-hours; to determine the effect of losses of working time on labor productivity and the volume of output, the balance is drawn up in man-hours; to ascertain the possibilities of saving material resources, a balance of consumption of material resources is used.

The balance method is effective in various areas of analytical work, but it has become especially widespread in the analysis of the financial condition of an enterprise, where the bookkeeping balance serves as the main source of information. With the aid of the balance method, the items of the balance are regrouped, and as a result the balance is, in a way, broken down into a number of separate balances: a balance of working capital for which norms are set and sources of this capital, a balance of the enterprise’s accounts with its debtors and creditors, and others. After this, a consolidated analytical table is drawn up, showing the distribution of working capital used above the norm in the credit items of the bookkeeping balance. The left side of this table (the credit side) shows, in the form of separate items, above-norm reserves of commodity and material values for which norms are set, debtors’ liabilities, dispatched goods and other unplanned credit items, while the right (debit) side reflects sources of an increase in capital—above-plan profits, Gos-bank loans, remainders of special funds, liabilities to creditors, and other factors. The sums of the table must balance, since they reflect the same additionally utilized working capital in two different groupings.

The balance method is also used in the verification of calculations done by other special analytical methods.