Magazine article Management Today

Cash, Capital and Common Sense

Magazine article Management Today

Cash, Capital and Common Sense

Article excerpt

British managers are at last beginning to appreciate the significance of shareholder value. It has taken an age for this concept to get across the Atlantic, largely because of the staggering failure of fund managers and analysts to give it proper attention. Now that it is reaching a wider audience, managers in commerce and industry cannot afford to ignore it.

Consultants are ever keen to turn an idea into an industry. In this case there is nothing to be gained. The underlying principles of shareholder value are pure common sense. They are second nature to almost all ownermanagers. To this group, the point of running a business is to generate cash, rather than profits. (As a senior venture capitalist remarked recently, good private businesses have been ruined by discovering the notion of profit.) But shareholder value has another key ingredient besides an appreciation of cash-generation. It is equally vital that cash returns should be measured against capital deployed -- which includes newly generated funds retained in the business. This, again, is well understood by the owner-manager, who recognises the sense of taking money out of the business and transferring it to his or her own pocket or pension fund--unless it is going to generate a measurably better return by being reinvested.

At last, public companies are on to the secret. As Terry Smith points out in Many Happy Returns (p56), an increasing number are choosing to hand back surplus funds to their owners rather than diminish shareholder value by continuing to invest in low-yielding operations. …

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