From the contemporary dominance of the shareholder value approach arises more and more the necessity to precisely detect its performance as shareholder value is broadly seen as a significant indicator determining a company’s success or failure. However, measuring the performance of a company’s shareholder value can be very challenging. Hence, the purpose of this paper is to deal with a well-known approach that enables businesses to detect its shareholder value performance: Economic Value Added (EVA).
The thesis discusses the correlation between EVA and shareholder value, it further outlines its main drivers. In the second part, the paper elaborates on the specific links of the EVA approach to a regional Sales department and identifies the department’s main leverages on EVA. In order to detect the influence of the main operative decisions on EVA, the thesis introduces the key figure Effect-on-EVA. The applicability of Effect-on-EVA is shown in a model calculation. Above all, this project thesis shall create a profound practical value by sharpening the awareness of how to influence EVA in a positive way. In order to meet the recommended scope, the paper does not elaborate Asset Management, Accounts Receivable Management and Incentive Compensation in detail, but strives to point out the respective links to EVA.
Table of Contents
1. Introduction
1.1 Introduction to the topic
1.2 Purpose of this paper
2. Definition of Economic Value Added (EVA)
2.1 Short Overview
2.2 NOPAT (Net Operating Profits After Taxes)
2.3 Capital Charge
2.3.1 Basic formula
2.3.2 Net Operating Assets (NOA)
2.3.3 Weighted Average Cost of Capital (WACC)
3. Rationale and purpose of EVA
3.1 Rationale behind EVA
3.2 Purpose of EVA
3.2.1 EVA as capital market-oriented evaluation tool
3.2.2 EVA as performance measure for companies
3.2.3 EVA as a solution for the Principal-Agent approach
3.3 EVA and Shareholder Value
4. Drivers of EVA
4.1 Decisions with impact on EVA
4.1.1 Overview
4.1.2 Operative decisions
4.1.3 Investment decisions
4.1.4 Financing decisions
4.2 EVA driver tree
4.3 Drivers of NOPAT
4.4 Drivers of the Capital Charge
5. EVA in the specific business context
5.3 Importance of EVA for Global Players
5.5 Adapted leverages for a regional Sales department
5.5.1 Overview
5.5.2 Result Management
5.5.3 Working Capital Management
6. Effect-on-EVA
6.1 Purpose of Effect-on-EVA
6.2 Components of Effect-on-EVA
6.2.1 Overview
6.2.2 Effect-on-NOPAT
6.2.3 Effect-on-Capital-Charge
6.2.4 Example
6.3 Implementation
7. Conclusion
Objectives and Core Topics
This thesis examines the concept of Economic Value Added (EVA) as a critical performance indicator for shareholder value. It investigates how a regional Sales department can influence corporate EVA through specific operative decisions, introducing a practical key figure called "Effect-on-EVA" to measure and control these contributions.
- The theoretical foundation of EVA and its relation to shareholder value.
- Identification of primary drivers of EVA within an organization.
- Application of EVA levers in a regional Sales department context.
- Development and implementation of the "Effect-on-EVA" calculation tool.
- Analysis of the Purchase-to-pay and Offer-to-cash processes.
Excerpt from the Book
6.2.4 Example
When assuming an order with sales volume 100.000 €, a granted customer rebate of 1%, and purchase prices of 30.000 € (2% early payment discount) and 50.000 € (3% early payment discount), the following calculation is to be made88:
Effect-on-NOPAT = (30.000*2% + 50.000*3% – 100.000*1%)* 70%
Effect-on-NOPAT = +770 €
The Order Volume would be 99.000 €, the cumulated Purchase Prices 77.900 €. The consequence would be a positive Effect-on-NOPAT of 770 €.
Referring to the order volume of 99.000 € (customer included) and total Purchase Prices of 77.900 € (early payment discounts included), the following assumptions are made: The customer agrees with two Advance Received; 30.000 € paid 180 days before acceptance, 40.000 € paid 90 days in advance. The customer balances an Account Receivable of the remaining 29.000 € 30 days after acceptance. The supplier agrees to Accounts Payable (trade credits): 30.000 € are paid after 30 days, 47.900 € after 60 days.89
Chapter Summaries
1. Introduction: Outlines the shareholder value approach as a primary corporate goal and introduces EVA as a performance indicator.
2. Definition of Economic Value Added (EVA): Provides the technical definition of EVA, its formula, and its core components, NOPAT and Capital Charge.
3. Rationale and purpose of EVA: Explores why EVA is used as a management tool and its role in resolving principal-agent conflicts.
4. Drivers of EVA: Analyzes the specific decision planes—operative, investment, and financing—that influence a company's EVA.
5. EVA in the specific business context: Focuses on the application of EVA for global players and the specific leverage available to sales departments.
6. Effect-on-EVA: Introduces the "Effect-on-EVA" key figure as a practical method to quantify the influence of individual contract decisions.
7. Conclusion: Summarizes the findings and emphasizes the importance of balancing EVA-orientation with stakeholder relationships.
Keywords
Economic Value Added, EVA, Shareholder Value, NOPAT, Capital Charge, WACC, Net Operating Assets, Sales Department, Effect-on-EVA, Working Capital Management, Performance Measure, Principal-Agent Approach, Value Spread, Financial Management, Corporate Strategy
Frequently Asked Questions
What is the central focus of this thesis?
The thesis focuses on explaining Economic Value Added (EVA) and determining how a regional Sales department can actively improve it through specific, manageable levers.
What are the primary themes covered?
The main themes include the definition and rationale of EVA, the identification of value drivers, the integration of EVA into sales processes, and the practical application of a new key figure.
What is the primary objective of the research?
The objective is to provide a practical tool ("Effect-on-EVA") that enables employees in sales to measure how their contract and payment agreements contribute to the company's shareholder value.
Which scientific methods are employed?
The author utilizes a descriptive and analytical approach, combining existing financial theory with a model-based application (the "Effect-on-EVA" calculation) to demonstrate practical utility.
What subjects are addressed in the main body?
The main body covers the theoretical definition of EVA, its components, the identification of relevant business drivers, and the implementation of specific levers within the Purchase-to-pay and Offer-to-cash processes.
Which keywords characterize this work?
Key terms include Economic Value Added (EVA), Shareholder Value, NOPAT, Capital Charge, and the custom metric Effect-on-EVA.
How does "Effect-on-EVA" differentiate between NOPAT and Capital Charge?
Effect-on-EVA splits the impact into two: Effect-on-NOPAT, which deals with earnings and expenses like rebates, and Effect-on-Capital-Charge, which focuses on cash flows like advances and trade credits.
Why does the author argue that sales departments are crucial for EVA?
Because sales departments directly negotiate the terms of contracts—such as payment deadlines, rebates, and advance payments—which significantly impact both the revenue and the capital tied up in the business.
- Citation du texte
- Dirian El Amine (Auteur), 2011, Economic Value Added (EVA). Drivers and Leverages, Munich, GRIN Verlag, https://www.grin.com/document/212413
