Value Based Management: Value measurement tools & techniques
Value Based Management: Every shareholder has greed and need to increase the value of his investment in short run and long run business means creation of value in corporate world, owners (Shareholder) do not have direct control over business. They are not taking any business related decisions. When managers are responsible for value creation they must understand value based system, so they are aware in day to day transactions. Corporation runs by agency system where managers take all operational decisions.
Value Based System has three steps
- Step I – Value Creation, which can be done by business executives may be engineers, marketing professional or any one.
- Step II – Value measurement which is measured by financial professional may be any one Chartered Accountant, Management Accountant or any one.
- Step III – Value Management – Management take initiatives to manage when value creation is not satisfied or enhance through various tools, techniques, strategy and its execution.
Value Measurement – What can be measured, can be managed. So measurement is very important. This measurement assumed various value Drivers. These value drivers are as under (say)
- 1. Sales Growth
- 2. Operating Profit Margin
- 3. Tax rate
- 4. Net Working capital / sales
- 5. Other long term assets / sales
Value measurement tools & techniques :
- 1. Profit & Loss Accounts
- 2. Earnings per share
- 3. Return on investment = NOPAT / Total Assets
These traditional techniques has following limitations.
- 1. Accounting profit do not equal cash flow.
- 2. Accounting numbers do not reflect risk.
- 3. Accounting practice varies from firm to firm.
- 4. Accounting numbers do not include an opportunity cost of equity.
Modern Methods :
These are as under
All are well aware, how to compute in details so I have only listed them out.
1. Free cash flow. A company’s free cash flows are equal to its after tax cash flows from operations less any incremental investment made in the firm’s operating assets.
After tax cash flow from operations
(+) Non-operating income
(-) investment in current assets. Investment in new working capital, Investment in fixed assets free cash flow
2. EVA = NOPAT – Weighted Average Cost of capital x capital
3. Cash flow Return on Investment = Sustainable cash flows / Current gross investment
On analysis of last five years, company came to know to what extent value is created or disturbed and based on these future can well be estimated for five to ten years.
Management – To take benefits of value base management suitable modern method is to use. Value Based Management is relevant in the wake-up of 5 trillion economy. Investors hate when value destroys of the company.
Value Management is a hot topic when strategy is to formulate and implement for better value creation. Government also set policy keeping this mind. VBM equally important for private and public sector.
Today’s leaders’ agenda is a value creation based on Value Based Management Program. Most of the companies do not have such system. Most of the company uses only traditional methods, which are not much useful. Managers needs training and proper education for the same VBM has many benefits for the future prospects of the company.