From an economic point of view, you create value when your business generates greater income than the costs of producing it, including charges for capital allocation. This value is owned by you as shareholder, because operations have achieved a return on invested capital above the cost of that capital thanks to your good performance as a business owner. Generally, companies that are able to create value for shareholders, in the long term also create greater value for its employees, customers and suppliers.
Putting shareholders as the focus of the business activity reduces risks like capital goes to other companies, have to pay higher interest rates, face greater pressure from boards, become a target for hostile takeovers or have lower productivity. To create value, managers must have a thorough understanding of the performance of variables that significantly affect the value of the business. A value greater than zero for shareholders, is a result from improving cash flow generated from operations and minimizing the cost of capital through decisions regarding capital structure. Cash flow from operations is determined by the value drivers and is affected by operational and investment decisions made by management or by the owners.
Among the techniques available for measuring the performance of a company in creating value, valuation by Discounted Cash Flow (DCF) is one that gives valuable information not only on results but on the key value variables of your company . Periodic measurement of the ability of a business to create value is a healthy practice to support strategic decisions.
ValorAction has the capability to work with you to carry out a business valuation of your company.