Measure and Monitor Value

To measure and monitor the value created in a financial institution requires an understanding not just of the value and risk in the assets held and the utilisation of capital but the efficiency and effectiveness of the work performed.

Financial institutions are becoming more interested in measuring and monitoring value created. After all, investors putting money into a corporation will expect a financial return at least as good as, if not better than, that which they can obtain elsewhere. With widespread deregulation, the expansion of equity markets and the availability of sophisticated financial information for investors, there is a new imperative for businesses and managers alike to maximise value for the shareholders.

Value in this context is defined as the long-term worth of the organisation. This can be measured by estimating the future free cashflow generated by the organisation which can be invested in its growth and discounting it to a net present value. Measuring shareholder value at the corporate level is relatively easy, but breaking down the areas within the organisation to identify in detail where value is created or diluted requires additional forms of analysis.

Understanding where value is added requires a full awareness of all resources within the organisation. Resources include capital, technology and people and to understand how they add value it is first necessary to understand how they are used. Traditional management information focuses on the measurement and management of capital utilisation but provides little support to measure and manage human resources, technology and processes within the organisation. Activity-based analysis provides the necessary information to do this.

Activity Based Management focuses on the activities of all departments within the organisation in order to provide focused information for the purpose of decision making. The goal is to understand the behaviour of all costs within the organisation, linking operational and sustaining costs to the value chain in such a way that management can identify the factors that drive expenditure and, thus, manage these costs more effectively and maintain or enhance value.

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