Management accounting is no longer strange to most enterprises, and plays an increasingly important role in their daily business decisions. In the era of mobile, internet and big data, higher requirements are put forward for the in-depth application of management accounting. The following is a five-dimensional model of enterprise value management that I bring to you. Welcome to reading.
1. The importance of strategic cost management to enhance enterprise value
No matter in the new economic era (mobile+internet plus Big Data) or the traditional economic era, strategic cost management is the key point for enterprises to shape and maintain their core competitiveness.
First of all, let's look at the most basic theories and tools of management accounting from the perspective of strategic cost management-cost-volume-profit diagram and fixed cost VS variable cost. Because of different cost habits, enterprises pay great attention to how to match light and heavy assets in business practice, so as to actively adapt to the economic environment and business cycle, thus reducing the cost of unit products or services, improving the comprehensive cost performance ratio under the premise of ensuring the marginal contribution rate, and realizing the target profit rate and EVA (Economic Value Added). Break-even point and guaranteed sales. Secondly, the accuracy and effectiveness of enterprise strategic cost management comes from another pair of important cost classifications-direct cost and indirect cost. The ideal state of cost-effective financial management is to allocate all kinds of indirect costs to accurately located business units, divisions, product lines, regions or target requirements in the most reasonable way and with fine classification standards for other specific management purposes. Only the refined cost allocation can realize the accurate and normal standard cost calculation of various management standards, and provide the basis for the market and sales strategy decision of products or services.
Finally, we need to mention an important value management tool-sensitivity analysis.
Based on clear and accurate cost positioning (fixed cost or variable cost) and allocation (direct cost or indirect cost), financial analysts can establish simple or complex financial models for the problems in enterprise management, and fully display the specific problems existing in enterprise management (all enterprise management problems will eventually be reflected in high cost or low profit). In front of the model, we can clearly understand the main problems that enterprises need to solve next, that is, the various elements in the model. Assuming that other factors remain unchanged, the percentage change of the final result (cost, profit, cash flow or other related factors) caused by the change of a single factor is usually called sensitivity. Sensitivity analysis greatly improves the accuracy of analysis, and can quickly and efficiently find problems and solve them directionally.
2. Five-dimensional model of enterprise value management (COWDS)
Focusing on the microeconomic behavior of enterprises shaped by strategic cost management and core competitiveness, and combining with the management practice of multinational corporations and large and medium-sized domestic enterprises, the author has created a "COWDS model of enterprise value management" in the field of management accounting, which has already had a certain influence in the industry.
As shown in the following figure, traditional enterprise financial management puts more time and resources on the first three financial statements (balance sheet, income statement and cash flow statement) and targeted financial statement analysis or financial statement analysis (biased towards business analysis), but this is far from meeting the requirements of new financial management and value management. How to carry out all-round value management before, during and after the event, and make the economic added value (EVA) and market value (MVA) of enterprises grow steadily, has become the pursuit goal of the latest financial management.
Around the practice of strategic cost management, the four black rectangular boxes on the right side of the figure below are four important dimensions of the model (combining accounts receivable management, inventory management, accounts payable management and comparative analysis of investment and financing input and output, WACC, ROIC, dividend distribution method for maximizing shareholder value, etc.). Through the daily financial management of these four dimensions, this set of complete management accounting tools can help group enterprises finally achieve efficient strategic cost management, ensure the normal growth of enterprise intrinsic value and the continuous valuation of enterprises. Finally, Black octagon describes the last dimension of "five dimensions", that is, the ultimate goal of enterprise value management is the continuous rise of enterprise valuation (EVA), the lasting return of shareholders, the continuous growth of market value embodied by the company, and the maximization of interests of all stakeholders (sustainable development).
Below, briefly explain the latest practice summary of management accounting-"five-dimensional model of enterprise value management" and its specific application and guidance in enterprise financial operation:
Optimization of capital asset structure
The financial management team of an enterprise, especially CFO, should always be able to clearly calculate and plan the current situation of its capital asset structure, which is reflected in the weighted average cost of capital (WACC) in addition to the traditional asset-liability ratio index. Traditional financial management only considers the average cost of liabilities mainly in the form of bank loans, ignoring the capital invested by the owners, and these inputs are also part of the cost.
The correct management mode is to measure the actual weighted average capital cost of all sources of funds, and whether the weighted average capital cost can be reduced to a lower level by adjusting the weights and cost rates of different sources of funds. Whether all the capital involved can achieve higher output after being put into use. This is the capital structure optimization we are pursuing. So how to set the goal of optimization, and what kind of goals need to be set and completed in the process to finally achieve it?
For a certain industry or a certain type of enterprise. Only when the weighted average capital cost of an enterprise is lower than that of its competitors can it win at the starting line.
Return on project investment
The daily business activities of an enterprise consist of large and small foreign investment or capital expenditure in the process of operation. From the point of view of value management, the correct way is to use DCF for dynamic decision-making and management, and pay attention to and compare whether the return on invested capital (ROIC) is continuously greater than WACC? Only in this way can we ensure that the enterprise value (EVA) is positive, that is, the value of the enterprise will increase after being acquired or capital expenditure.
Another technical problem is how to choose the discount rate. Theoretically, the discount rate must be greater than the weighted average cost of capital (WACC) of the enterprise. This discount rate is generally called "expected return on investment", that is, a few percentage points are added to the empirical value as the set discount rate, and then whether the capital investment behavior is feasible is judged according to the financial net present value (NPV) of cash flow in a certain period.
Efficiency of working capital management
Through foreign investment and capital utilization, we finally want to maximize the enterprise value, which is reflected in a series of business behaviors and results, such as the best scale effect of accounts receivable (AR), the best scale effect of inventory management, and the best management of accounts payable (AP). However, in the daily operation and management of enterprises, few financial or senior managers of enterprises have copyright. Do not publish or disseminate these optimal management standards or indicators without the author's consent, otherwise it will be very troublesome. Let the capital investment of each unit reach the maximum input-output ratio.
Reasonable dividend distribution
In addition to the normal repayment of loans by enterprises, it is also the core point of enterprise value management to continuously bring investment returns to shareholders. Otherwise, it is difficult for a company that can't continuously return to shareholders not to be abandoned by shareholders. Therefore, how to choose and locate good foreign investment projects and manage the input-output ratio of daily business operations becomes extremely important.
However, we will also find that in fact, in most cases, the shareholders of the company are more tolerant and patient. Even if you can't get rich returns in the short term (such as dividends, company valuation premium or continuous market value increase, accompanied by a good equity circulation market), as long as you are optimistic about the future growth of the enterprise, that is, sustainable development, shareholders will continue to hold and vote for it and push the enterprise forward in the right direction.
Therefore, it is extremely important to plan and arrange regular returns for shareholders reasonably.
Sustainable development, enhancing enterprise value
If a good financial team, CFO and senior management team can lead the enterprise to achieve the above four points successfully, it will be easier to continuously improve the enterprise valuation and bring the maximum return to shareholders. Combined with the company's strategic adjustment and optimization, good foreign investment projects and good daily operation management, the company's market value management has been integrated into the core objectives of the whole management accounting.
Of course, even if an excellent enterprise achieves the above four dimensions, without a good concept and methodology of investor relationship management and market value management, it may still be a good start rather than a good end.
3. Concluding remarks
It may not be difficult to train and parachute an excellent CFO who can help enterprises practice management accounting, but it is difficult to train and bring up an excellent team who is proficient in and integrated into enterprise value management. This view seems to be the opposite of what we used to say, "a thousand troops are easy to get, but generals are hard to find."
Enterprise value management (EVA) is like a bright light on the top of the mountain, and "Kautz" is the way for all climbers to gain a bright management accounting practice.
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