WORLD ACADEMY OF INFORMATICS AND MANAGEMENT SCIENCES
ISSN : 2278-1315
A slightly more apparent sense of engagement with robotic
they must address many different stakeholder requirements.
intelligence comes about when we interact with AI
However, as a guide to measuring value creation financial
assistants – Siri, Alexa, or Google Assistant, for example –
statements have limitations reflecting as they do the past just
to help us make sense of the myriad of data sources
as much as the present and doing little to guide toward the
available to us in the modern world.
future. In summary they do not really address whether the
firm and its management are creating value.
In 2019, more of us than ever will use an AI assistant to
There are of course complex techniques such as “Economic
arrange our calendars, plan our journeys and order a pizza.
Value Added” aimed at arriving at a version of value
These services will become increasingly useful as they learn
measurement. Although these may be effective, they come at
to anticipate our behaviors better and understand our habits.
a price usually involving a shadow reporting framework and a
large consultancy bill.
Data gathered from users allows application designers to
understand exactly which features are providing value, and
A SIMPLE PROCESS
which are underused, perhaps consuming valuable resources
What we will discuss is a simple and transparent process of
(through bandwidth or reporting) which could be better used
measuring value creation from existing data with no
elsewhere.
complicated accounting adjustments. The first step in this
process is to isolate the incremental (year-on-year change)
As a result, functions which we do want to use AI for – such
operating result. There are several reasons for this but
as ordering taxis and food deliveries, and choosing
primarily it is because the change year-on-year reflects current
restaurants to visit – are becoming increasingly streamlined
management’s influence on the business. Incremental results
and accessible.
also handily exclude the effects of inflation and historic
On top of this, AI assistants are designed to become
accounting adjustments and of course they are very easy to
increasingly efficient at understanding their human users, as
arrive at. Once the incremental operating result is known the
the natural language algorithms used to encode speech into
next step is to convert this into a present value using MWACC
computer-readable data, and vice versa is exposed to more
(Modified Weighted Average Cost of Capital) as the
and more information about how we communicate.
appropriate discount rate. This is achieved through a little bit
It’s evident that conversations between Alexa or Google
of magic involving an annuity calculation the tenor of which
Assistant and us can seem very stilted today. However, the
should be to the average useful economic life of the capital the
rapid acceleration of understanding in this field means that,
firm has invested over the same period. Value has been
by the end of 2019, we will be getting used to far more
created if the present value of the incremental result exceeds
natural and flowing discourse with the machines we share
the capital the firm has consumed in achieving it. It really is as
our lives with.
simple as that. As well as being extremely simple and straight
forward to apply, this technique is incredibly powerful. It can
be used to set budgets when looking at the incremental result
Written by :Bernard Marr of Forbes (UK)
Bernard Marr is a bestselling author, keynote speaker, and
forecast for next year and it can appraise performance by
advisor to companies and governments. He has worked with
looking at the result for the year just finished.
and advised many of the world's best-known organizations.
LinkedIn has recently ranked Bernard as one of the top 10
It can be broken down into its component parts so that all
Business Influencers in the world (in fact, No 5 - just behind
functions within the organization can be set value enhancing
Bill Gates and Richard Branson). He writes on the topics of
targets relevant to them. For instance, the sales team can be
intelligent business performance for various publications
set a revenue growth target, operations with a margin target,
including Forbes, HuffPost, and LinkedIn Pulse. His blogs
and management with a capital allocation budget. Every part
and SlideShare presentation have millions of readers.
of the firm is now working in alignment toward creating
value.
HOW VALUE CREATION CAN BE DIRECTLY
MEASURED
FROM
EXISTING
ACCOUNTING
RECORDS
Ben Walters, FCT, ACA
A firm’s performance is measured in a myriad of ways.
However, the ultimate measurement objective, that of value
creation, is the one measure that is extremely difficult
achieve. Financial reporting centers around the income
statement which fails to reflect risk, cash, historic cost
accounting and inflation. Even cash flow data is usually
reported in terms of conversion of profit to cash, but again
this not a measure of value unless there is an understanding
of what the conversion rate should be. Conversion rates are
influenced by many things, not least the rate at which the
firm is growing. In defence of financial statements,
www.waims.co.in
However, the advantages do not stop there: the target is
dynamic. Management are free to invest more capital if the
appropriate business opportunities arise. Management are not
constrained by the capital spend budgeted as long as the return
from this investment beats MWACC.
This gives management flexibility and discretion within a
dynamic value-based framework. All their decisions count
over the course of the period being assessed from the terms
granted to new customers to big-ticket M&A. Management
cannot afford to let any asset sit idle; CAPEX budgets must be
focused, appropriate and suddenly choices around working
capital count. They all influence the capital consumed and
return generated.
THE POWER OF MWACC
ENDEAVOR 2019 | WAIMS ACADMIC PRESS
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