Creating Wealth

Rewarded by knockout results, managers and investors are peering into the heart of what makes businesses valuable by using a tool called Economic Value Added (EVA). EVA focuses managers on the question, "For any given investment, will the company generates return above the cost of capital?" Most companies overly complicate financial management. The standard financial model uses cash flow analysis for capital budgeting reviews, turn to earnings, EBITDA, and return measures for performance reporting and investor relations, interjects yet another scorecard of metrics for planning and managing purposes, and generally ties bonus awards to beating budgets. Although each element in it is a simple and well established, the system as a whole is a complex jumble of metrics, methods and messages that managers find very difficult to understand. EVA is the measure of the management's ability to add value to tangible assests by creating and leveraging intangible assets. By integrating the business philosophy based on EVA, the companies that embrace EVA have bonus compensation schemes that reward or punish managers for adding value to or substracting value from the company. The best companies keep it lean and linked to value. In other words, EVA reflects and implicitly values all forms of innovations and differentiation. It is the value of mind over matter.