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I am not going to say that rate of return is a magic wand for every occasion in business. There are times when you have to spend money just to stay in business, regardless of the visible rate of return. Competition is the final price determinant and competitive prices may result in profits which force you to accept a rate of return less than you hoped for, or for that matter to accept temporary losses... Nevertheless, no other financial principle with which I am acquainted serves better than rate of return as an objective aid to business judgment.

The problem with the Balanced Scorecard is it doesn't give you an actual score of how your company is doing. For instance, if you were playing basketball, the Balanced Scorecard could tell you the number of rebounds, turnovers, blocked shots and a lot of other statistics about the game, all of which help to some extent, but it couldn't tell you the score. EVA provides that score.

The earnings game is bizarre because it consumes a huge amount of time and energy in managing earnings rather than managing the company.

The presumption is that value revolves around one number: earnings. But even if that number is accurate, it is only a very small part of the story. What's strange is that there is strong agreement between management and the market that it's crucial to put earnings in the proper context of all the measures that determine value, but many companies don't believe that their internal systems are strong enough to provide accurate information.

A VBM initiative should pursue three objectives, according to Olsen. First, it should work to increase returns from existing assets. Second, it needs to help senior management make incremental investments that have rates of return above the company's cost of capital. And third, it should free up cash and return it to investors when profitable investments are not available.

Measures that do not incorporate all three dimensions will bias decisions or behavior and will not link well with TSR [total shareholder return] performance. Commonly used measures like ROE [return on equity], earnings, RONA [return on net assets] and EVA are, in fact, biased because they don't accurately reflect all three of those drivers of value creation.

Why do so many people cling so hard to the notion of efficient markets? Andrew Lo, an economist at MIT, suggests that they may be suffering from a "peculiar psychological disorder known as 'physics envy'...We would love to have three laws that explain 99% of economic behaviour; instead, we have about 99 laws that explain maybe 3% of economic behaviour. Nevertheless, we like to talk as if we are dealing with physical phenomena."

Paying with stock is a strong signal that not only do you think your shares are overvalued but that you are not totally confident about the success of the deal.

If you are reluctant to sell, you are typical of American investors, who sell their winners and keep their losers. Investors do this because the act of selling at a loss is an admission that they were wrong.

As investors, we deceive ourselves a thousand different ways, both large and small. We attribute gains to acumen when they are the product of luck, and attribute losses to ill fortune when they are often the product of stupidity or inattention. The common problem is that we fall in love with a company that is unworthy of our affection.

Discounted cash flow (DCF) techniques such as NPV and internal rate of return (IRR) work well with traditional capital budgeting problems, such as replacement decisions or alternative production methods. Where they fall down is on strategic investments, such as evaluation of new product lines or investment in R&D.

The problem has not been the use of options in themselves but the ability of someone to exercise options and sell the stock in the short termÂ…Remove the short-term incentive-that's the real cure.

Â…restricted stock forces you to ride the stock's rise and the stock's fall. An option is an expectancy of a future profit. It can be worth a lot, or it can be worth nothing. There are no negative wealth implications to you of owning an option; the worst that happens is that you walk off with no more than you walked in. On the other hand, stock that you're awarded can fall in value, which represents a personal wealth diminution. I believe that to create the proper alignment with the shareholder, you have to give the executive an incentive to ride the stock up and share the glory with the shareholders, and if the stock falls, share the pain.

Accounting has historically not defined income as change in wealth, or change in net worth or value. It has defined it by thousands and thousands of conventions that measure allocations of historical costs.

Â…if accounting prompts strange behavior solely because of the accounting, that's not a good answer.

This is the crux of the fair-value debate: each side agrees both qualities are important, but fair-value advocates emphasize relevance, while historical-cost advocates place greater weight on reliability.

Just-in-time inventory means just in time for the largest, most powerful member of the supply chain. Its suppliers are forced to carry more inventory so they can always perform to the big dog's satisfaction. Working capital follows the same pattern: The most powerful player improves cash flow while its partners bear the brunt of long payment cycles.

Corporations typically run on annual budget cycles, but new ventures can't. They need money when they need money-typically, a commitment of funding should come every few months. Those commitments should come only after the venture has reached clearly defined milestones. Poker players will tell you that, in seven-card stud, most of the money is lost on the fourth and fifth cards, as players indulge the unreasonable hope that an uninspiring hand might turn into something good. The same is true of [new] ventures: Companies should place new bets on them only if, at each stage, they are able to show real prospects for success.

Gaming the numbers is squeezing the life and spirit out of many companies and their employees. It's a mentality that says, "Do what I said last January, no matter what."

Earnings have proven to be a poor tool for valuing companies, and not just because they are subjectively determined. Earnings also ignore the crucial consideration of the cost of capital.

What amount of value creation can be assigned to the efforts of management for a particular time period? That is the essence of accounting. Otherwise, it's simply an appraisal process.

Anyone who has tried to justify investments based on cost avoidance rather than cost reductions knows it is difficult to make the financial case by comparing against "what might have been."

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Some companies that have lived through the free fall of their market value have learned to reprice with the frequency of a fat man visiting the refrigerator. It's always defended as a way to keep employees, yet no one ever seems to ask: If they feel entitled to share so lavishly in the upside yet not bear any responsibility for the downside, do you think maybe we've got the wrong employees? What seems to be forgotten here is that stock options are by their very nature speculative; if they were meant to be guaranteed, why not hand every new hire a fat, juicy check for deigning to occupy one of your cubicles?

So let's try some logic, Ms. CEO: Nasdaq tumbles. Your stock goes down. If market conditions are to blame, so does everyone else's stock. If you're worried that all the talent will flee, the company across the street is probably worried too. So why not just hire all of its panicky, selfish, greed-motivated employees to replace your own?

I think finance executives need to step back a bit and reassess each of the different ways that they can add value. When they do, they're likely to see that the best path to becoming a true business partner cuts through the terrain of decision support, analysis, planning and performance management. Finance must offer its insights at crucial points in the organization in a way that helps bolster the current and future value of the business. To boost current value, the function must comply with regulatory reporting requirements, identify and avoid economic shocks that could knock the company off its moorings, and process transactions as accurately and efficiently as possible. To improve an organization's future value the finance function must excel at the intangibles: budgeting and forecasting, scenario planning, and analyzing the organization's capital structure to identify return on investments.

Eventually everything shows up in earnings and cash flow, but it shows up late.

Returns to investors reflect changes in a company's financial performance, not the level of its performance.

The stock price of any company reflects investor expectations for the future. If investors expect a company to do very well, and these expectations are reflected in a high stock price, then delivering on those expectations will not increase the stock price; it will merely prevent it from falling. The only way to create sustained increases in shareholder value is to consistently surprise the market with increases in profitability. This is something that few companies have ever been able to do.

Although investors can be quite adept at spotting a winning formula and assessing a company's ability to exploit it, they are much less able to predict whether or not a company can capitalize on changes in the basis of competition. Therefore, firms that can make these kinds of leaps have a much greater likelihood of surprising capital markets, and thereby creating shareholder value.

ABC/M can't tell you in which direction to point your company, but it can show you where waste exists and where more resources are required. Those facts are the basis for developing strategic plans.

The notion that the Federal Reserve and the movement in interest rates will motivate or demotivate the economy is one of the fantasies of economic life...It may have a little effect on the housing industry, but its larger economic effect is one of the great hoaxes and errors of the time. And it only shows how little the financial community has to think about, that they rush recurrently to the interest rate as something that will be important.

Return on capital measures the productivity of capital investments. How useful is this measure for businesses in which capital investments tend to be small and returns of more than 50 percent are common? For people-intensive businesses, it is more important to know about employee productivity than capital productivity.

Traditionally, most companies allocate IT funds based on net present value (NPV) or ROI. The problem with this approach is it naturally favors projects that deliver productivity benefits, even when other projects with less tangible value may be more important to the overall business strategy. Projects with the highest NPV or ROI don't necessarily create the most value. What really matters is whether an investment supports critical business processes and affects key value drivers.

Profit is an incomplete measure that ignores capital and is inappropriate for making the many business decisions that trade off between income statement and balance sheet. Tied to incentive compensation, this can lead to dysfunctional behaviour among managers.

We often find that improper costing of fixed costs and capital, such as the cost of capacity, creates misleading signals of performance and value in a business's portfolio. First, traditional costing systems today ignore the cost of capital. Second, the treatment of excess capacity is often incorrectly treated as a unit cost, instead of the period expense that it truly is.

Indirect overhead costs are often capitalized and recorded as inventory, rather than expensed as period costs. The capitalization of overhead costs where there is no cost for capital actually makes these costs "free," and creates a great short-term incentive to overproduce to inventory rather than make to demand. This characteristically leads to month-, quarter- and year-end production spurts, production-planning problems, excess inventory, trade loading, and stale, discounted product pushed onto the customer.