Why use revenue to define top companies?

(Article of mine published in the Vancouver Board of Trade’s Sounding Board of October 2003)Some of you will likely wonder why I ask this strange question. By recently reviewing such a list, I wondered about the relevance of the revenue criterion. Indeed, this review raised an interesting question: What does top 100 really mean? Are the companies the best? Are they the most profitable, the most sustainable, the most viable? Or are they just the ones cashing in the most revenue? If so, what about the cost side, in particular the cost control aspect, of business we hear so much about when we hear business specialists comment on company performances? Are the high revenue companies also the most cost efficient?
Clearly, investors and money lenders are much more focused on profit than on revenue. And what about working capital and cash flow? It seems we hear about them only when it is too late.
To define the best, it would be quite interesting to present the list based on an indicator such as economic value-added (EVA), which is a combination of profit and working capital. Such an indicator provides a good estimate of how the company uses its resources and how it financially performs. It also reflects how much wealth is created and allows simple comparisons between companies, not so much on how big but on how efficient and viable in the future they will be. Using this indicator as a management tool will also create a totally new approach to business, by aligning goals from all departments and staff, from the CEO down to the workers. Everyone will have the one and same objective: A higher value for the organization, which nicely meets the current trend towards more value-added products versus producing mostly commodities and raw materials. Further, an EVA-like approach would help make communication and employee compensation simpler and more consistent.
Creating more value for companies, together with a positive competitive atmosphere between businesses of all sectors, would stimulate our economy to excellence.

 

Copyright 2009 The Happy Future Group Consulting Ltd.

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