Value Based Management ("GBV")

Opportunity to Integrate Information
Creating Value

The concepts of value creation have been scattered over a large volume of academic literature and experimental data. However, value based management concept became another disappointment for many managers, despite being one of "fashion" of greater demand.

More and more often read articles about "EV economic value added” and "Economic Profit". Both concepts are defined as earnings after tax less cost of the use of invested capital, in turn represented by properties, land, and equipment plus operating working capital. According to financial and economic theory, value is created when return exceeds cost of capital employed.

Reality tells us that understanding the concepts is not enough. The implementation of value based management as a whole set of tools and methods are an even greater challenge: How to make the entire organization and its people guide the daily work to create value.

Our business consulting experience indicates that most managers understand the concepts of value. The main difficulty is how to realize the conceptual benefits through profitable management decisions. How to implement value-based management in the Organization? This is the real challenge.

One of the reasons why companies have difficulty implementing VBM is the state of disintegration posed by operating information and accounting systems, even performance scorecard indicators and financial ratios can be misleading, this situation constitutes an opportunity to integrate concepts and systems to produce a source of relevant business information, enabling the right indicators consolidated in one common place.

In most companies, the current scenario is as follows:

• Information on financial statements under international financial reporting standards, US GAAP and other accounting principles as the ERP system setting, historical accounts and reports issued by another system.

• The budget and medium term plan to reside in a separate system or a set of spreadsheets, difficult to index only by the analysts in charge, and the measurement of performance is obtained with great difficulty after many adjustments.
• Variable production costs and fixed costs under the standard method or ABC management are calculated by the cost accounting department and serve to make decisions on pricing, distribution channels, or desired range of margins.

• The financial strategy of how much, how and when funding is not integrated to the medium-term cash is managed in applying criterion immediately. Therefore, short-term loans grow at the expense of the company and its liquidity.

• Reference prices of products (for trading on international markets, such as oil, metals, electricity, sugar, etc.) Are obtained by external information systems and trends, cycles and seasonality are handled in the specific function of marketing and sales.

• Some analysts study the company and compare with the industry by segmenting the market for products, regions and channels. This market information came from external sources on the Internet or subscriptions to specialized service firms.

• Finally, there are financial experts who try to assess the company and its business units, depending on the transaction at the time, apply for loans as long-term issue or stock shares to acquire a company or to review and assess the business strategies.

This is a familiar scenario for a business executive who knows the characteristics of regional companies and suffers when an analysis is made where it is necessary to know the information in each area above-mentioned.

Value Management is precisely measure the current and projected performance in terms of business and shareholder value. It requires a major effort to estimate these mechanisms are incorporated into the planning, corporate performance, control and compensation and thus achieve beyond the expectations of the stakeholders of the company: customers, managers, employees and shareholders.

To achieve this goal and implement VBM successfully, we then begin to integrate the accounting, budgeting, planning, intelligent information of business, "benchmarking", to produce a new paradigm for information for better business decisions.

Integration Diagram Example

ed1 1 If this basic condition is completely fulfilled, the concept of value-based management becomes a reality and can create profound changes in the activities of the company.

Creating a system for planning, budgeting, measurement and control of integrated management is definitely a difference. Here is the information organized and used for decision making through half computer will be able to enhance business intelligence.

Technology has evolved to offer the opportunity to apply a concept and really realize the benefits offered to sophisticated corporate clients.

The multidimensional databases or information cubes, OLAP systems that extract information stored in bins that contain important business information of each of the integrated systems, is what is known as business intelligence. This intelligence is focused on achieving beyond the expectations of customers, employees, suppliers, shareholders and society in general, as a central integrator of administrative and accounting systems, budgeting and planning, and relevant business variables to produce a single source of consistent and reliable.

Planning Activities

The value is created based on clever ideas, operational and financial. All planning activities should be also integrated. Actually companies are doing more and more planning activities.

Software investments should increase in quantity and quality, even with the CLOUD benefits. When transactions are controlled effectively, they must incorporate systems to facilitate decision making at management level.

Measuring value creation, project and control should be virtually simple matter.

Ernesto Seijas

Professor of International Finance at the MBA Program at the Metropolitan University, Regional Advisory and Financial Planning in VBM in the Oil and Power Sector in Venezuela, MBA Pace University, Graduate School of Lubin.