FREE online courses on Financial Management and Creating Value - Chapter 3 -
Chapter 3
FREE online courses on Financial Management and Creating Value - Chapter 3 -
Measuring Value
Before we dive into value-based metrics, let's recap some
important points that have been covered in this course:
- Traditional accounting and financial functions
need to spend a lot more time on real financial management. This can encompass
many things that are value-driven. For example, using a new decision model
program for capital investment decisions can help ensure that investments end
up creating value.
- The financial function should be prepared to lead
the way on value-creation by becoming a strategic center on how to increase
values. This can lead to Value Based Management (VBM), a formal program for
managing the organization in terms of economic performance.
As we indicated in the last chapter, we need a new way of
measuring value-creation. Fortunately, in recent years there has been a
proliferation of measurement programs for VBM. This chapter will focus on three:
Economic Value Added (EVA), Cash Flow Return on Investment (CFROI), and Residual
Cash Flow (RCF). It is important to note that since value-based metrics is a
relatively new field, new conclusions and ideas are still forth coming. Also,
since this is an evolving field it is important for all organizations to not
place their entire emphasis on one measurement system. The most prudent approach
to measuring value (like capital budgeting) is to use a combination of metrics
when evaluating value-creation.
