Economic Value Added (EVA)

Every capital has a cost and when earning is more than the cost of capital, there is a creation of value for the stakeholders. Economic Value Added (EVA) is a measure of financial performance and is based on this concept. EVA simply provides a measure of profitability that is more accurate than the “plain net income” since it is a measure of how well a business has fared based on the amount of capital invested. The financial performances and the creation of shareholders wealth with time are directly linked with EVA. This paper is going look at how EVA can be used to improve financial reporting, results, and success. It shall also look into the problems that are associated with EVA.

It is the goal of every manager to obtain capital and to earn a return rate on the capital that is more than the return provided by the other seekers of capital funds. EVA is a financial management system that makes it possible for both managers and employees to focus more on the way capital is utilized and the cash flow that comes from it (Wahlen, et al. 2014). When you focus on the growth in EVA, these are two main benefits realized; the attention of the management become focused towards its main responsibility (increasing investors’ wealth) and secondly, errors that are as a result of utilizing outdated cost accounting data are minimized or removed to allow managers to use their time in establishing ways of increasing EVA.

The awareness of the efficient use of capital eventually produces more shareholder value. This way, managers will end up doing a good job as much as asset management is concerned, and EVA can also be utilized to hold managers accountable for every economic outlay. It will not matter if they appear on the balance sheet, income statement, or even on the financial statements’ footnotes. This can be realized since EVA creates a single financial statement that comprises of every cost of the business and it also makes the managers accountable of every dollar spent.

Since EVA measures the profit that discounts to the net present value and maximizing on this is the most vital objective of all the companies. By the use of EVA, performance can be measured, and goals set, decisions made and bonuses established and to also keep in touch with the investors and teach finance and business basics to managers and staff members. EVA is a straightforward way of bringing the capital cost to live, and also to turn everybody in the organization into capital- conscientious, owner-entrepreneur (Brigham, et al. 2015).

The major problem with EVA is that it fails to account for the growth opportunities that are inherent in investment resolutions (Hawawini, et al. 2011). It fails to reflect the perception of the market on the value of growth opportunities. This implies that EVA is more appropriate in evaluating firms that have substantial assets in place. These firms also need to be in mature industries that have limited growth opportunities like in the public utilities.

In conclusion, EVA needs a lot of commitments of the senior managements and board of directors to utilize these measures in managing the business. All the business employees have to accept the plan for it to be successful. It also needs so much training and communication directed to the staff. The staff must be knowledgeable of the basic theory underlying the idea of economic value creation. However, EVA is not the answer to everything. It is the responsibility of the manager to solve business problems and not EVA’s. If everything is done as required, EVA will surely assist in improving financial reporting, results, and success.

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