Thursday 20 December 2018

An application of economic value added (EVA) – Performance measures

Economic Value Added

Economic Value Added (EVA) is a value based performance measure that gives importance on value creation by the management for the owners. EVA require to be tailor in line with accounting system, management philosophy and the degree of demand of such a system.

The performance of a company more measured based on a ratio-financial ratio for a given period. Measurement based on financial ratios is dependent on the accounting method. Or treatment used in drawing up the financial statements of the company.

So often the company's performance looks good and is increasing. Which is actually not experience increase performance and even declining. The need for a performance measurement tool that shows the actual management achievement with the aim of encouraging activities. Even or strategies that add to the economic value (value added activities). The eliminate activities that undermine the value of the (non-value added activities).


Economic Value Added (EVA) is very relevant in this case because the EVA can measure performance (achievements) management. It can be base on his little big added value create during a certain period. EVA can also be use as a guide in terms of goal setting, capital budgeting, performance assessment, and the incentive compensation of an enterprise.

Influence of added value in a company as a whole is very important. So that these things don't get miss in the preparation of the strategy of the company.

How to apply as performance measure?

The company's performance is mostly measure by analysis based on the financial ratio for a specific period. This type of measurement is highly dependent upon the accounting methods used in preparing the financial statement. Therefore, a company's performance often looks good and improving overtime, but in reality its performance is deteriorating.

The unreliable accounting measure needs an improved performance measure that will recognize and encourage management actions and strategies to increase the overall value of the company and ultimately to punish any activity that reduce value. The introduction of Economic.

Value Added (EVA) has been very relevant recently because based on its definition, EVA measures the amount of value added created by specific action or strategy taken in a company. EVA is also used in the process of goal setting, capital budgeting, performance assessment, and most importantly, incentive compensation within a company. Its implication to the overall being of a company is so important these days that it should not be overlooked when companies plan their strategies.

Goal: Objective-based strategies

The goal of the company just to generate the highest possible profit already less relevant again in the present because corporate responsibility not only to the owner only. Responsibility to all its stakeholders becomes very important so it is demanding the company to weigh all of the strategies that were taken and the impact to stakeholders.

Based on this then the appropriate goal is to maximize the value of an enterprise. In the case of a public company corporate values associated with the value of the outstanding shares in the market. Goal setting properly will greatly affect the process of the achievement of the objectives and performance measurement later. Error determining destination will result in an error of the strategy taken.

Performance measurement errors will result in an error in giving rewards for achievement. Performance management and achievement as measured by ratio-financial ratio cannot be accounted for because of the resulting financial ratios depend heavily on the accounting treatment or method use.

The existence of this accounting distortion performance measurement base on the earnings per share. (earning per share). A growth rate of profits (earnings growth) and the repayment rate (rate of return) is not effective anymore.

Economic Value Added (EVA) & Management strategy

Because the measurement on the basis of this ratio is unreliable in measuring the value added create in the given period. Then criticism ask questions about how valid performance measurement based on financial ratio. It may indicate the actual performance from the management company of the existence of Economic Value Added (EVA). To be relevant to measure performance base on the value. Because EVA is a measure of economic value added generate by the company as a result of activity or management strategy.

With the presence of EVA, then the owner of the company would only reward (reward) activities that add value and dispose of activities that damage or reduce the overall value of a company. A value added activity can be separated from the activities of non-value added based on the value added assessment process.

It is expect the company's owners could encourage the management to take actions or strategies. Which value added because it allows companies to operate properly. Management will be hire in large numbers, if they create a great added value.


Many other things within the company where EVA also plays a role. Economic Value Added help management in terms of goal setting internal. (internal goal setting). In order that the objectives of the company are base on long-term implications and not the short term only.

In terms of the investment EVA gives guidelines for decisions receipt of a project. (capital budgeting decision), and. In terms of evaluating the performance of routine (performance assessment) management. EVA conduces value added activity. EVA also helps the existence of payroll system or the granting of incentives (incentive compensation) is right where the management was encourage to act as owner.

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