Cash Value Added

Erik Ottosson & Fredrik Weissenrieder, 1996-03-01

CVA
Cash Value Added - a new method for measuring financial performance

Erik Ottosson
Strategic Controller Svenska Cellulosa Aktiebolaget SCA Box 7827 S-103 97 Stockholm Sweden

Fredrik Weissenrieder
Department of Economics Gothenburg University and Consultant within Value Based Management FWC AB Aschebergsgatan 22 S-411 27 Göteborg Sweden

Study No 1996:1 CVA Cash Value Added – A new method for measuring financial performance Erik Ottosson Fredrik Weissenrieder

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Erik Ottosson & Fredrik Weissenrieder, 1996-03-01

CVA Cash Value Added - a new method for measuring financial performance
Shareholders have financial requirements on management’s strategic decisions, i.e. strategic investments. Those are the decisions in corporations that create value. It should therefore be obvious that those investments are the ones that should be financially evaluated - from the shareholders’ perspective.
In the last decade both scholars and practitioners have started to emphasize the importance of nonfinancial performance measurements such as the ”Balanced Scorecard” proposed by Kaplan and Nortoni. Despite their focus on non-financial measurements, they emphasize the importance of measuring company success also in financial terms; ”A failure to convert improved operational performance, as measured in the Scorecard, into improved financial performance should send executives back to their drawing boards to rethink the company’s strategy or its implementation plans”. The fundamental problem is that corporate management has no accurate method of measuring financial performance. As shown by Salomonii already 30 years ago traditional measurements such as the ROI do not give management correct guidance when evaluating the financial outcome of their investment strategies. The biases in accounting causes management to choose inappropriate investment strategies since management is influenced by their inaccurate