Value Based Management with a Practical Example

Nowadays firms perform their activities in a business environment which requires them to implement such a system of indicators that will better illustrate value and profitability. Financial indicators that are now used by firms to follow their profitability and value creation are inconsistent with the mechanism of capital markets and with what market considers to be crucial for determining value. Constantly bigger efficiency in the capital markets requires a more efficient allocation of capital within firms. Therefore a new system of indicators, as for example VBM (Value Based Management) which better reflects opportunities and threats, is urgent and needed. Within the VBM (Value Based Magement) framework the author especially focuses in this paper on the economic value added (EVA) and on the cash value added (CVA). In the theoretical part, he analyses and estimates advantages and disadvantages of both indicators, at first by comparing them with standardized financial indicators and then by comparing them between each other. In the empirical part, the two indicators are applied on a selected firm (a manufacturer in the automotive industry). At the end of this paper, the author emphasizes and advocates the thesis that a simultaneous choice of both indicators, i.e. EVA and CVA, has an important effect on managerial resources and on the selection of a strategy as well as on the question of how investors (owners) estimate an individual firm as their potential investment.