MEASURING AND

CONTROLING ASSETS
EMPLOYED

Purposes of measuring assets employed:

to provide information for decision making
to measure the performance of the business unit
focusing on profits without considering the assets
employed to generate those profits is an inadequate
basis for control
unless the amount of assets employed is taken into
account it is difficult to compare the profit
performance

Purposes of measuring assets employed:

business unit managers have two performance
objectives
- they should generate adequate profits
- they should invest in additional resources only
when the investment will produce an adequate return

Measuring assets employed:

what practice will induce business unit managers to
use their assets most efficiently?
1. Cash: central control
2. Receivables: BU managers can influence the level
of receivables
whether to include accounts receivable at selling
prices or at cost of goods sold?
3. Inventories: recorded at end-of-period amount
advance payments
accounts payable

Measuring assets employed:

4. Working capital:
Gross working capital
net working capital
5. Fixed Assets

EVA vs. ROI:

ROI is a ratio
EVA is an amount

EVA vs. ROI:

benefits of ROI
- comprehensive measure
anything that affects financial statement is reflected
in ROI
- simple to calculate, easy to understand, meaningful
in an absolute sense
- common denominator that can be applied to any
unit
- interfirm performance and intrafirm comparison

EVA vs. ROI:

benefits of EVA
- with EVA all business units have the same profit
objective for comparable investment
ROI provides different incentives for investments
across business units
a BU currently achieving ROI of 30% would be
reluctant to expand unless it is able to earn an ROI of
30% or more on additional assets
another BU current ROI 5%, would benefit from
anything over 5%
ROI creates a bias

EVA vs. ROI:

benefits of EVA
- decisions that increase centers ROI may decease
its coverall profits

EVA vs. ROI:

benefits of EVA
- different interest rates may be used for different
types of assets
lower interest rate for inventories
relatively higher rates for fixed assets

EVA vs. ROI:

benefits of EVA
- EVA has a stronger positive correlation with
changes in a companys market value
several reasons why shareholder value creation is
critical
best proxy for shareholder value at the BU level is to
ask BU managers to create and grow EVA

EVA vs. ROI:

BU Cash

Rece- Invent FA
ivables ories

Total
Budget R
Investm ed
O
ents
Profit I

A
B
C
D
E

20,000
20,000
40,000
10,000
5,000

1,20,000
1,20,000
1,05,000
75,000
35,000

10,000
20,000
15,000
5,000
10,000

30,000
30,000
40,000
20,000
10,000

60,000
50,000
10,000
40,000
10,000

24,000
14,400
10,500
3,800
(1,800)

20%
12
10
5
(5)

EVA vs. ROI

B Bud.
U Pr.

CA

Req. FA
Earni
ngs
4%

Req.
earni
ngs
10%

Total Bud.
req. EVA
earni
ngs

A
B
C
D
E

60,000
70,000
95,000
35,000
25,000

2,400
2,800
3,800
1,400
1,000

6,000
5,000
1,000
4,000
1,000

8,400
7,800
4,800
5,400
2,000

24,000
14,400
10,500
3,800
(1,800)

60,000
50,000
10,000
40,000
10,000

15,600
6,600
5,700
(1,600)
(3,800)