Neither EVA® Nor CVA®, But NVA - Measuring Financial Performance, Uninterrupted, from Start to Finish
37 Pages Posted: 6 Feb 2003 Last revised: 10 Jun 2016
Date Written: February 3, 2016
Beyond the point of no return, the investor's cash flow based perspective is substituted with the accountant's accrual accounting perspective. That is the way it is. This paper bridges the gap between strategic investment - evaluation and the (improved) measurements of traditional accounting, presenting the best of both worlds. Neither EVA® nor CVA®, but NVA, Net Value Added. Measuring financial performance, uninterrupted, from start to finish.
NPV-calculations, exclusive of SVD i.e. Substantial Value Difference, are incomplete and traditional accounts suffer from a lack of proof. Inclusive SVD right from the start, one can calculate more realistic economic life cycles, better standard unit-costs and the expected NVAs both for each and every period and altogether at the point of no return.
Profit is a result. It starts with an investment generating cash. After deduction of value differences and taxes, net profit remains. It is all inter-related. Besides control on route and overall profit judgement afterwards, profit relates primarily to the capital budgeting decision; the go/no go decision regarding a strategic investment proposal. Cash flows alone are not decisive.
Investments, depreciation each period and profits form a trinity. Separate measures of investment worth, separate depreciation methods and solitary profit calculation systems hardly have any justification for continued usage. An integral approach is imperative (Jacobs, 1991, p. 9).
By measuring subsequent net period profits in conjunction with the NVAs as accurately as possible after done investments, one can have the corporation at one's finger tips. Triggering the whole operation. At the least little indicator one can give appropriate guidance on the necessary adjustment required. By not knowing the real period profit, one loses control.
Up until now managers have run their companies from the back seat. From sheer necessity, lacking a decent financial standard. At long last The Profit Formula(R) puts them (and you) in the drivers seat.
Keywords: EVA® reports numbers for which there is no proof, The CVA® concept cannot stand the test either, NVA i.e. Net Value Added is the proven net profit in any given period less demand, The demand is that amount of profit which is acceptable to managers and/or shareholders
JEL Classification: M41
Suggested Citation: Suggested Citation