Economic Value Added Analysis
In This Chapter
- Understanding 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 profit and loss 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 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, reinvesting the proceeds, and then getting another job someplace else, hey — you’re not doing yourself or your family any financial 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 you pay 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, and then invest ...