Abstract
The choice of financial performance measures is one of the most critical challenges facing organizations. Performance measurement systems play a key role in developing strategic plans, evaluating the achievement of organizational objectives, and rewarding managers. The measurement of financial performance in terms of accounting-based ratios has been viewed as inadequate, as firms began focusing on shareholder value as the primary long-term objective of the organization. Hence, value-based metrics were devised that explicitly incorporate the cost of capital into performance calculations. In this chapter, the following value-based measures are discussed, by focusing on their measurement logic: the economic value added (EVA), the cash flow return on investment (CFROI), the shareholder value added (SVA), the economic margin (EM) and the cash flow value added (CVA). The recently emerging emphasis on market value-based measures as the best metrics for value creation is also briefly analyzed.
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Notes
- 1.
According to their reliance on measurement resulting from the survey: 58% of the organizations were identified as measurement-managed, as senior managers agree with measurable criteria for determining strategic success and management updated and reviewed semi-annual performance measures in at least three of the six types of performance areas.
- 2.
The empirical findings emerging from this survey are even more impressive because of the high representativeness of the sample: the companies range from small (15.1% of the sample firms have sales less than $ 100Â million and 19% less than 500 employees) to very large (25% have sales of at least $ 5Â billion and 35% more than 10,000 employees), they operate in many industries (manufacturing weighs 31%, but other sectors like retail, tech, transportation, banking, public utilities are represented) and cover a wide spectrum of ownership structures and CEO characteristics (age, tenure, education, insider ownership).
- 3.
A company-specific, market-implied discount rate is that rate which equates a company’s forecasted net cash receipts to the company’s current market value (Credit Suisse-HOLT 2011).
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Venanzi, D. (2012). Competing Financial Performance Measures. In: Financial Performance Measures and Value Creation: the State of the Art. SpringerBriefs in Business. Springer, Milano. https://doi.org/10.1007/978-88-470-2451-9_2
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