The Logic of Economic Value Added Analysis - dummies

The Logic of Economic Value Added Analysis

By Stephen L. Nelson

You need to understand Economic Value Added analysis (EVA) to get the most out of QuickBooks 2012 when it comes to managing your business. 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 you’re not doing yourself any favors by running your own business.

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 $20,000 a year in profits, right?

(The stock market doesn’t promise 10 percent annual returns, but neither does your business. So just suppose that these numbers are right for the purposes of this discussion.)

In this simple example, running your own business doesn’t really make sense. Sure, you’re making a salary. And sure, you’re earning a return on the money that you and your family have invested. But you aren’t getting anything more than that. You may as well just sell your firm, reinvest the money in the stock market (just one option), and get a job working for the phone company.

Don’t get all bummed out here —you don’t need to consider selling your business. You just need to understand how to use a powerful tool, EVA, to better manage your business.