by Sue Hirst
Managing for Value (MFV) is a simple philosophy: everything we do should maximise value for the business owner/s or shareholders. MFV provides a fresh approach to running your business. It will require us to think and act differently, to put at the centre of what we do – the overall objective: to grow shareholder value over time. It affects everything – from how decisions are made, to how we deploy our resources (time, money, people, information, materials and equipment) at every level.
We all face alternatives and make choices daily. MFV provides a framework within which all goals, objectives, decisions, strategies and achievements are judged according to whether they result in additional value being generated.
Business owners invest in a business with the expectation of receiving an appropriate return on their investment. There are many investment opportunities open to business owners. The return they receive from their business must be at least equal to, or higher than, the return they receive from other investment products of equivalent risk. The return required by the business owners therefore becomes the cost of equity capital. Our Virtual CFOs create value for our business owners or shareholders by earning a profit greater than the cost of our capital.
We call this profit Economic Profit.
In simple terms:
Economic Profit = Earnings – Cost of Capital
By using Economic Profit as a profitability measure, we can express our performance in terms of value creation.
A positive Economic Profit means value has been created; a negative one means value has been destroyed.
MFV entails managing the resources of the business to make them worth more than they would be if managed in any other way or by anyone else.
Putting MFV into practice
Value is created (or destroyed) by what we do and the way we do it. But we cannot act directly on “value”. We must therefore act on things we can influence like: the way our customers feel about the business, identifying customers’ needs and pain points and providing solutions for them, controlling costs and eliminating waste, bringing in processing efficiency etc. These activities are known as “value-drivers”.
The quality we bring to our daily work, the way we organise ourselves, the procedures we follow and the way we approach our business should all generate value. Identifying what creates value and what does not is the key to success. The value drivers govern our dealings with customers and competitors, and the way we are organised. The better we are at managing our value drivers, the more effective we will be in creating value within the business.
Our success at identifying and managing our value drivers will therefore determine the business financial performance, which in turn will positively affect the value we create for the business owners or shareholders.
How can I add value?
Everyone in the business can contribute to add value by identifying and working on the key activities that drive and add value to the business.
We can start by asking ourselves some basic questions:
Who wins from MFV?
When a business “Manage for Value”, we improve our ability to create value, and when we create value, everybody wins. The business wins because the value of the investment made by the business owners appreciate, leading potentially to even more investments, enabling growth. Our customers win because more time and effort is being put to things which matter to them, by highly motivated and effective employees. Our employees win because of increased job security and potentially newer opportunities in the business and finally the communities we live in win, because of our increased ability to support good causes and contribute to healthy local economies.
Adding value is not a one-off activity but a continuous day-to-day commitment.