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SCORE – How to Measure Returns and Create Value

20 October 2023 by Shweta Jhajharia

Business owners and management teams that understand how to run the ‘business’ end of the business – finance and the language of money – get real results. They focus on improving their critical business skills to create sustainable financial success and don’t rely on ‘lucky breaks’. So, how can business leaders improve their financial mastery to become better, more informed leaders?

A few financial concepts bring together the best ways of understanding the performance of a business. By combining knowledge gleaned from various parts of financial statements, business leaders can work out what their business needs to measure and work towards improving.

How to measure returns and value creation

To measure the value the business creates, you need first to measure the return that capital deployed in the company can generate and compare this against what the capital costs – often in opportunity costs.

The principle here is that every business owner has a choice over how to deploy their money (capital). Among several options available to them, they can invest in bank deposits, use them to build a property portfolio or invest in shares of other businesses.

Therefore, an accurate assessment of the use of this capital in the business is to review the return that the investment has earned for the business owner and compare it to the return that they could have earned elsewhere.

If you invest £1 million in your business and generate £100,000 in net profits, you have received a 10% return. You then compare this against the return you could have achieved by deploying your money in other avenues. Different risks are associated with different investments, which also need to be considered. Value is created when the return generated in a business is more than the cost of the capital.

The most critical measures of return in a business are the return on invested capital (RoIC) and the return on equity (RoE). The RoIC measures the total return all capital providers to the business receive, whereas the RoE measures the return the equity shareholders receive.

 

This is the first instalment in the series of blogs about business finances and how to ensure that you are creating real value.

 About the authors:

Amol Maheshwari is the Managing Partner and M&A head at Growth Idea.  Shweta Jhajharia is a leading global business coach and founder of Growth Idea. Their new book Score is the ultimate handbook to help SME business owners and senior leaders master the fundamentals of finance to propel them towards unprecedented success.

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Shweta Jhajharia

Shweta Jhajharia is one of the leading authorities on Business Value Building and the creator of the unique 6M Model. Shweta is widely respected as an impactful, intelligent and results orientated professional who helps business leaders unleash their potential to reach meaningful, higher objectives. This realisation of potential and maximisation... Read more
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