Shareholder Value Analysis (SVA) is an approach to financial management, which focuses on the creation of economic value for shareholders, as measured by share price performance and flow of funds. It’s lead by the principle that the management of a company should take into consideration the shareholder’s interest and advantages before meets any decision, set short-term or long-term objectives and decide company’s strategy as well. Shareholder Value Analysis is a characteristic substitute for trade business measurement, which has improved a lot by time passing. Due to the fact that company’s value is calculated based on the value returned to its shareholders, in the past had been criticized for being either short-term measured or only based in past figures. Shareholder Value Analysis takes a longer-term view and is about measuring and managing cash-flows over time. The shareholder value is calculated by estimating the total net value of the company and dividing the figure by the value of shares. Once the value has been calculated the company can set targets and objectives for improvement and measure also its managing performance.
Implementation of Shareholder Value Analysis
For a successful implementation of shareholder value analysis first managers should understand and calculate the organization’s shareholder value and gain top management commitment. Shareholder Value Analysis believes that to assess business performance though maximization of shareholder value is an objective to be accepted by the top management to be achieved and part of the root of the organization. Furthermore managers should identify the key value drivers of the organization and set performance targets providing a framework also with assigning responsibilities to individual managers, reviewing the financial performance of the business and developing strategic plans. To continue with, the approach should be communicated and the staff must be trained. In many case in order to effectively reach the SVA companies are willing to change also the organization’s information systems to monitor and measure performance. It is important also to mention that the creation of sustained value will require permanent monitoring and that’s mainly the reason for the managers to monitor review progress and refine the targets.
Advantages of Shareholder Value Analysis
Shareholder value analysis has as principal that the management of a company should first consider the interest and the advantage of the shareholders, before it meets any decision. The Advantages of Shareholder Value Analysis are performed as follows:
- It provides a long term financial view on which to base strategic decisions.
- It provides a universal approach that is not subject to the particular accounting policies that are adopted. It is therefore internationally applicable and can be used across sectors.
- It forces the organization to focus on the future and its customers, in particular the value of future cash flows.
Disadvantages of Shareholder Value Analysis
However disadvantages of the shareholder value analysis are performed as follows:
- Estimation of future cash flows, a key component of SVA can be extremely difficult to complete accurately. This can lead to incorrect or misleading figures forming the basis of strategic decisions.
- Development and implementation of the system can be long and complex.
- Management of shareholder value requires more complete information than traditional measures.