Added Value

This is the third post in a series on the C12 Group‘s Tri-Value model for measuring the performance of the leadership in a business. In the first post, I did an overview of the Tri-Value model and its purpose. In the second post, we looked at Team Value Added component of the model. Here, in the third post, we will focus on Economic Value Added (EVA) component.

Simply put, EVA measures whether the business’ value is being sufficiently increased or spent by the leadership responsible. Let’s start by taking a look at the formula itself:

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Operating Profit – Taxes – Cost of Capital Employed = EVA

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Breaking It Down

Operating Profit is easy to define: Gross Sales – (Cost of Goods Sold + Selling, General & Administrative Costs). Taxes are also easy to understand and quantify. It is the true Cost of Capital that causes a little more confusion.

The first response is usually to consider the cost of capital as what is paid to borrow it. This is not necessarily incorrect, but it only tells a small part of the story. We really need to dig a little deeper to get the rest of the story.

This description from the C12 material says it better than I can:

The total of all the invested capital tied up in the business (i.e. real estate, equipment, inventory, working capital, assets of all kinds) should be producing a return equal to or greater than the same amount if used to purchase another investment of equal risk.

While it is not critical that we go into too much detail about the risk, it is generally agreed that a conservative risk return is 10% for most businesses. I would argue that it should be higher, but you really need to settle on a number that is comfortable for you.

The Risk

Quite simply, if you sold the business and everything you have invested in it, how much cash would you have? If you invested that cash, over a long period of time in a similar-risk investment, what return would you expect to receive? Go with that number here. Why would you accept less? (There are arguments here, but we will save those for later!)

Taking that number (we will use 10%), along with the total market value of your business, you should be able to finish the equation. To make it easier to follow, I will use sample numbers assuming the following:

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(Market Value = $500,000) X (Return = 10%) = Cost of Capital $50,000

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Now, in this example, the leadership produced $20,000 in added value. If Operating Profit had been less than $80,000 for the year, then they would have actually spent value, rather than adding it.

Of course, this is not the ultimate measurement. C12 still recommends benchmarking the performance of your business against comparable businesses in your industry. You also need to know your own critical metrics for your business – those numbers that drive the health and performance of the company.

How did your business do in this exercise?

Are you showing added value or spent value?

If you are spending value, what needs to change?

If you are in corporate America, there are a number of metrics that analysts use to gauge your performance. If you are in a small business or non-profit organization, these metrics are likely different. Being a Christian business owner or leader adds a twist to this issue.

Perspective

Adding value to your business can be defined differently, depending on your perspective. We are going to look at this method from the perspective of a Christian business owner or leader.

The C12 Group has a model for measuring this added value in the Christian business. However, the main difference between the C12 model and almost all other models is the perspective. While most businesses measure success or performance on a monthly, quarterly, or annual basis, the C12 model is very different.

Tri-Value Model

In stark contrast to most other business added value models, C12’s Tri-Value model considers the eternal perspective. Rather than judging a business’ leadership based on short-term performance only, this model takes a more balanced approach. The Tri-Value model is certainly not the final word on measuring performance. Instead, it is designed as a tool to keep us focused on the truly important areas of our jobs as well as to facilitate accountability in those areas.

In this post, I will give you a brief overview of this model. In the following three posts, we will look at each of the three components in more detail.

Overview

The first component of the Tri-Value model is Team Value Added (TVA). This measurement deals with how well we are creating added value within the team of people that work in our company. There are two main categories in TVA. The first looks at how well the team is operating as a whole. The second category considers the development of the individuals on the team.

The second component is Economic Value Added (EVA). EVA measures whether the business is worth more in solid equity from year to year. It is a simple formula that helps us determine if we are adding to our company’s value or spending it.

Finally, the third component of the Tri-Value model is Spiritual Value Added (SVA). If we are truly looking at our company from an eternal perspective, and I cannot think of a single good reason why we would not, then this is our most important measurement. SVA attempts to measure the eternal fruit our company is producing.

Disclaimer

Please do not think that I am saying that all performance can be measured with numbers. Nor can we quantify all spiritual aspects of ministry in business. That is simply not possible. There are some aspects of business success that are impossible to put into a formula. Certainly, the Holy Spirit works in ways we cannot even understand, much less measure!

Instead, this type of model is intended to be a tool to elicit discussion and create conversation around our performance as it compares to our vision. The Tri-Value model should be used as a part of an ongoing planning and assessment process in your leadership of the business. If so, it can provide clear accountability for your leadership while helping you to remain true to your eternal vision.

Make sure to follow along all week as we break this model down into its components and look at how to use it!

What tools are you currently using to measure your performance in your business?

Do you feel these tools are effective at gauging your performance from the eternal perspective?

What benefits do you see in the Tri-Value model?