Chapter 2. Economic Value Added Analysis
In This Chapter
Introducing the logic of EVA
Checking out a simple example of EVA in action
Exploring some important points about EVA
Looking at a more complicated EVA example with debt
Here's a curious fact: Even if your QuickBooks income statement shows a profit, you may not actually be making any money. How can this be? Ah, to really answer this question you need to use a tool called Economic Value Added analysis (EVA), which was developed by (and is a trademark of) Stern Stewart & Co., a management consulting firm.
In this chapter, I discuss what Economic Value Added analysis does and how you can use the information that you create with QuickBooks to perform the EVA analysis. This is neat stuff but a bit theoretical. Fortunately, when you boil EVA down to its very essence, it's quite practical.
Introducing the Logic of EVA
Economic Value Added analysis states in a formula something you already know in your gut: If you're a business owner and you can make more money by selling your business and reinvesting the proceeds, then hey — you're not doing yourself or your family any favors by running your own business.
Let me walk you through an example to show you mathematically why this is the case. Suppose that after paying yourself a fair salary, your firm makes $20,000 in additional profits. Further suppose that you can sell your firm to a competitor for $200,000. If you did, you could probably invest the money in a stock mutual fund and earn about ...