Most companies aim to create value. We can discuss the definition of value creation be it shareholder value creation or a wider perspective considering ESG (Environmental, Social, and Corporate Governance). Regardless of your definition though it is important that you know what the key value drivers are so that you can work to impact them. However, you would be surprised to learn that many finance professionals are not sure about the value drivers in their company.
We should therefore examine further why it is important to know the key value drivers and how to create an overview of them. Most are familiar with Dupont analysis where the return on investment or equity is broken down into the main drivers. This is the simple principle that any finance professional can use to map the value drivers of their company.
Once the mapping is complete you will be much better positioned to model how different effects in the value chain will impact value creation in the company. You will also be able to facilitate much more relevant discussions about what actions to take to improve performance. Let us unfold this further.
A typical value driver tree
Each company has its own specific value driver tree, however, from a generic perspective, we could consider below as universally relevant for all companies.
Here we simply look at revenue, costs, balance sheet, and future expectations including risks. There are no other factors playing into shareholder value creation. When we discuss risks, we can even widen it very broadly to include social, reputational, and environmental risks to discuss value creation more broadly in an ESG context.
Each of the drivers can be broken down into further financial drivers and eventually commercial and operational non-financial drivers. Since it is interlinked you should be able to model what is the impact of a change in non-financial drivers on the overall financials all the way up to shareholder value creation.
Moreover, you can start to discuss specific initiatives and analyses that Finance can be a part of to improve value creation in the company. Below are listed a few for each of the four overall drivers.
This will take the dialogues that you have with business stakeholders to a completely different level!
Your interactive value creation dashboard
Let us imagine for a moment that you had created the full value driver tree down to non-financial drivers that were updated in real-time. Now you can continuously monitor how your financials are expected to turn out based on real input. In addition, it gives you the option to do a simulation of what would happen if certain drivers developed in a particular way.
It should be every finance professional’s hottest dream to create this value driver tree while having proper simulation tools at their fingertips. Not only is it good for providing real-time insights but you can also do after the fact deep dives into what happened and where in case things turn out different from what the simulation showed. Simply compare your actuals with the simulation in a like-for-like driver tree and the variances will be obvious
It all starts with mapping the key value drivers of the company. Gather a few of your finance colleagues for a brainstorm and map the drivers. Then discuss with appropriate business stakeholders to link the financial and non-financial drivers. Then all you need to do is plug it into an appropriate tool and you will be the master of value creation in no-time! What do you think of this concept and do you think it would work in your company?
This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute.
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