Q. Explain about Value based management?
Value based management (VBM) is an approach which focuses on strategies and actions to create more value for shareholders. Value being measured by share price (market capitalisation), dividends and other principles such as RI or EVA. Value based management can often be referred to as shareholder value analysis (SVA).
A value driver is any variable which significantly affects the value of an organisation. Alfred Rappaport developed seven 'value drivers' which can be used to improve shareholder value.
1. Sales growth e.g. growth in sales from one period to the next.
2. Operating profit margin e.g. PBIT ÷ Capital Employed.
3. Cash income tax rate e.g. minimising tax improves profitability.
4. Incremental fixed capital investment rate e.g. investment in non-current assets to finance projects would reduce cash-flows and therefore shareholder value.
5. Investment in working capital rate e.g. investment in current assets like inventory and trade receivables will reduce cash-flows and therefore shareholder value.
6. Planning period e.g. the further into the future organisation can predict cash-flow then the greater the net present value and so shareholder value that would be created.
7. Cost of capital e.g. the lower the cost of capital the greater the net present value and consequently shareholder value which would be created.