You probably heard of EVA, enterprise value added, where the company looks at the return of the company that’s generated an excess of the cost of capital.  The company is doing good if it’s earning more than what the capital costs.  In other words, what the company could be earning from the outside with the capital it has.

There’s a different way to look at it.  This way would look at it from the owner’s perspective.  There’s two parts to it:

1.  What kind of return is the owner getting from the business?  That would include the salary that the owner is taking out, any retirement funding, any particular special benefits, other perks like travel and other benefits that the owner could be receiving.

2.  Here’s the different twist.  What the owner could be earning in a salary if he or she had a regular job somewhere else.

The owner’s value added equals the owner’s return minus the market salary the owner could be generating.  In other words, what this test does is that it checks to see if the owner is making more from the company than what the owner could be making from a regular job.

The return should be quite a bit more.  The owner is taking on risk with the company and should be getting compensated for that particular risk.

So, if you’re the owner and you’re doing this calculation and you find that the numbers are turning out negative category or just barely positive, give yourself a reality check.  What can you be doing to get a higher return from your business, so that it’s more than what you could be earning with a salary from the outside.  Think about what you might be looking for for a return to compensate you for the additional risks, including the return on any capital you might happen to have invested in the company that you could be earning money on otherwise.

Suppose after doing some of this thinking, you come to the conclusion that you’re not going to be able to earn as much from the company as you could in a regular job.  Granted the company may be giving you a lot of psychic income and you get a lot of satisfaction from being your own boss and having your own company.  But, from the financial standpoint, you’ve got to question things if you’re not making as much as what you could be making in a salary.  It’s time to find ways you can step it up or, perhaps, get back into the corporate world.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value