Economic Value Add & Profit

Personal EVA is similar to business Economic Value Add

Chapter 10

p.1

I often hear people in referring to “EVA”. At first I thought they were speaking of some electrical component. Now I suspect it has something to do with business success. Can you explain it to me?

We widely refer to Economic Value Add. EVA for short, is the most effective way of measuring business success.

EVA is the final measure of business value. It is what investors will pay for the business. The market usually looks at two aspects:

Results: Profit measured in Rands and Cents.

Expectations and confidence:

The market’s expectations of the company’s ability to sustain, repeat and grow the profit stream. (Usually reflected in the P/E rate.)

Personal EVA is similar in that it is measured in terms of what you are worth to the company, your actual results and your economic value added to the business. Here you create space for sustainable personal income.

Are you telling me that the value of the company is related to the margins that I made on my last deal?

But how does it all hang together and how can I improve my performance?

The following diagram explains what the Economic Value Add (EVA) of our business is all about.

If your employment does not translate into more profit, why should your relationship with the company continue?

You will have noticed that this book contains several diagrams which explain key aspects of business and the company. It will be worth your while studying these carefully. For instance The Order Cycle, Areas of Growth.

Using the same diagram from the previous page, I will explain how your individual EVA ties in with the EVA of the company. By following these guidelines, you should definitely be able to improve your contribution.

Let's say this diagram represents two moments in time relating to you:

Profit

In order to raise your
individual EVA and
contribute towards
growing the EVA of
the company, you
have to improve two
factors which in
effect create a:

a) Increase the
customer Net
Value Potential.

b) Increase the
Customer's
Customer Value
Potential.

Raising profit by
increasing the price without a
corresponding lift of
factors and would hardly make good business sense. Profits can be raised by increasing sales and/or expanding the market. This reduce expenses and drives cost down.

Well, I am beginning to understand EVA. I guess if one improves all the elements listed above, you must be able to make a contribution to the wealth of the company.

But what else can I do?

Let me add five key truths about increasing EVA:

Understand cost and value.
Measure and communicate value.
Optimize cost.
Increase value.
Increase market.

Remember the following fundamental concept:

Wealth = Sustained profit over time + Growth

Extra resources:

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