Economy

COMPANY VALUE POTENTIAL FORMATION AND ASSESSMENT

Valeriy Shevchenko (Kharkiv National Economic University)

Summary. Theoretical approach to defining the economic essence of the company potential has been generalized. The content of the company value potential as a reflection of its ability to generalize value added and transform this value into capital gains has been determined. Theoretical study of the economic essence and peculiarities of forming the value constituent of the company potential in the general system of economic categories has been given. The structure and the content of managerial tasks being solved in the process of forming the financial strategy of a company have been identified and characterized. The exact succession of strategic financial planning in the context of providing the rise in the company value has been grounded.

Key words: value, potential, value potential, financial strategy, financial planning.

Introduction. A company appears to be an open socio-economic system operating in an active environment and forced to adapt to external transformations. External environment of economic management, with global and operational surrounding of a company being its components, can be defined as a complex mix of conditions and factors appearing outside the company regardless of its activity and is able to influence the work of the company. The environment can have direct (economic ties and counterparties of the company, business climate) as well as indirect (entrepreneurship regulations, general political, economic, socio-cultural, technological and scientific factors) influence on functioning and development of a company.

Study of the theoretical and practical aspects of solving the problems of the company strategic management has been shown in the scientific works by I. Ansoff [1], O. Batlukova [2], I. Belousova [2], A. Voronkova [3], A. Gradov [4], Y. Donets [5], Y. Lapyn [6], I. Otenko [7], V. Pastukhova [9], V. Ponomarenko [8], I. Simenko [2], O. Fedonin [10] and others. Still, many important problems of methodology and organization of strategic planning in formation and development of the company potential have not yet been researched enough and call for detailed investigation. Thus, the necessity to raise the efficiency of the company development management under present-day conditions puts forward the demands for quality, timeliness, reliability and completeness of the strategic managerial decisions taken. Furthermore, many key problems of managing a company, especially those of the theoretical basis of economic essence and concepts of the company value potential assessment, demand a more precise definition.

Problem formulation. The aim of this research is to deliver theoretical and methodological recommendations on defining the economic essence and rules of forming the value potential of a company.

Results of the research. An extremely high level of diverse and complex contradictions and problems in the socio-economic transformations of a company, ambiguous and unpredictable changes in the conditions of a company functioning bring forward a strategic character of managerial decisions on the company development. In the systems of categories used for defining the priorities of the company strategic management the leading role is given to the company potential (business potential, business/company strategic potential, business/company economic potential). For instance, I. Otenko [7, p. 53] claims that the company potential is a perfect parameter to show the dynamic state of a company as well as to reflect the processes of its functioning and development.

According to the study of the theoretical approaches [1-7] to the definition of the economic essence of the company potential performed by the author, there appear to be four main concepts of explaining this scientific notion (different in the morphological features of resources, reserves, possibilities, aims). They are:

1) the concept of resources, according to which the company potential is a generalized complex of the company resources used for solving tasks or achieving strategic as well as day-to-day goals;

2) the concept of reserves, stating that the company potential embodies hidden business facilities of solving problems mainly relating to the production process;

3) the concept of capacities, which claims the company potential to be the reflection of the maximum available characteristics and potentialities of a business (technological, organizational, socio-cultural, etc.) reflecting its unique individual peculiarities and differences from its major competitors while giving rise to the company’s permanent competitive advantages;

4) the concept of aim, defining the company potential to be a limited amount of aims of the company functioning and development (alternative, supplementary or controversial), which can be achieved with the help of the manufacturing resources available.

According to the author, each of the above mentioned concepts has numerous assets as well as flaws, making it impossible to regard any of the approaches as an objective reflection of the notion of the company potential. Due to the excessive complexity and uncertainty of the nature and origin of the company potential, resulting in numerous concepts of its essence, scientists have not come to an agreement on the final definition of types and components of a potential, as well as on the most important features according to which the elements of a potential should be grouped. Still, they distinguish the elements and types of the company potential based on the following features: the sphere of origin (inner, external, general), the task to be solved by the formation and assessment of the potential (strategic, current, operational, competitive, reforming), the object of the research (development potential, functioning potential), the activity sphere of the company (production potential, reproduction potential, reproduction funds development potential), the subject of the research (company potential, structural division potential, functional operation field potential, individual worker potential), the nature of the development capacities (financial productive capacities potential, labor potential, intellectual information potential), the functional operation field of the company (production, resources, innovation, organization, value, labor potential).

Each of the types and elements of the company potential is defined by its specific aims and development conditions, while being affected by and reacting to the various factors and forces. Complex as well as changeable combination of the elements of the company potential determines strategic and alternative tendencies, perspectives or priorities of the development of a company. The biggest impact on the potential formation is made by the elements identified by the functional operation field of the company. Huge importance of these very elements of the general potential formation is proved by the fact that each of them (production, resources, innovation, organization, value and labor potential) is in its turn the subject for a detailed study in the corresponding fields of economic research. Furthermore, the detailed content of the above mentioned concepts coincides with the evolution of the theoretical approaches to the definition of the company potential notion.

Value potential takes a special place in the system of phenomena and processes defining the dynamics of the company potential formation.

Value potential reflects the ability of the company to generate value added and transform the value into the rise in the company capital. The potential level of a company is defined by its ability to increase the market value (market capitalization, balance sheet value or any other value indicator of the company’s property valuation). Assessment of the current level and perspective changes of the potential is used for defining expedience as well as effectiveness of the strategic managerial decisions from the standpoint of possible influence on the value of the assets or the market value of the company.

Detailed research and generalization of the existing approaches to the economic nature, essence, origins and development factors of the economic potential of a company lead to the conclusions on the content and peculiarities of the value constituent of the company potential in the general system of economic categories.

Firstly, the increase in the company value is a form of a reward for an entrepreneur who performs any form of activity himself or directly manages the collective activity of the people hired personally at his peril and discretion. Such form of income is individualistic in its character and economically appears to be the easiest to get. This kind of activity, aimed at getting a certain income, should be clearly distinguished from any other social activity of a person (political, charities, etc.)

Secondly, the company value reflects the monetary value of the results in the production, marketing and financial activity while being the marker of the final financial results of the activity of an entrepreneur and his employees. In general, any income in the form of the increase in the company value is the difference of the aggregate income of a certain entrepreneurial activity and the total expenses needed for its realization. The process of increase in the value together with its qualitative indices directly depends on the effective work of all the members of the production process as well as employer’s ability to ensure the collective activity rational organization.

Thirdly, as a rule the value of the income ready to be distributed and appropriated by the entrepreneur does not characterize the whole income received as the result of the entrepreneurial activity, that is, the difference of the aggregate income and the value of goods and/or services production costs. Such discrepancy is caused by inability of defining the objective criteria to determine the resources consumption as those being either indispensable or excessive. The assessment of the company value potential in this case is not a problem, while the evaluation of the total expenses constituents remains totally subjective.

Moreover, the company value is the reflection of the activity final value indicators in the monetary equivalent. The prevalence of such operational financial results evaluation method is due to the practice of the generalized value accounting of all the indices involved – the capital employed, gross income received, expenses incurred, etc. – as well as the working state taxation rules of the financial economic relations.

Furthermore, the value potential is not the income guaranteed to the entrepreneur who has employed his own capital in any type of activity. Entrepreneur reward might take the form of an income or an increase in the company value (opposed to the losses or decrease in the company value) in case of skillful, successful and efficient business activity. On the other hand, an entrepreneur can not only be deprived of the income expected, but also lose, partially or completely, the capital employed as the result of either personal unsuccessful actions or the impact of the external factors. This jeopardy awaits the capital owners only and is not tangible for the holders of other resources. Therefore, the income acts as a pay for a risky entrepreneurial activity or the probability to lose the capital employed. In this case, the income rate and the entrepreneurial risks (expected capital losses) appear to be directly interdependent.

Another significant point is that the increase in the company value is the result of the dynamic condition of the company, its inner reorganization as well as market environment changes. The entrepreneur’s innovative role in the income formation can be implemented through creation, search, choosing, introduction and promotion of innovations, which might lead to increase in the company effectiveness, that is, visible curtailment of expenses or an intensive income growth. Here advancing development by means of creating original competitive advantages leading to income generation, which is not accessible for the counterparties, or else finding possibilities for the losses reduction by using the reserves of resources economy may be the source of the company value growth.

Finally, the increase in the company value is a complex integral evaluation index of the effective usage of the productive resources needed for selling goods and services. The company value proves to be a trustworthy basis for the economic grounding of the managerial decisions as well as an essential criterion for the optimal choice of the entrepreneurial activity method. Income dynamics tend to give the objective picture of the necessity to optimize the production expenses, increase the production and realization rates, expand the assortment, change the price policy, etc.

Thus, according to the author, the value potential reflects the ability of the company to generate value added and transform the value into the rise in the company capital. The potential level of a company is defined by its ability to increase the market value (market capitalization, balance sheet value or any other value indicator of a company’s property valuation). Assessment of the current level and the perspective changes of the potential is used for defining expedience as well as effectiveness of the strategic managerial decisions from the standpoint of possible influence on the value of the assets or the market value of the company.

The company value proves to be a monetary equivalent of the return on the capital employed which characterizes the entrepreneur’s reward for the risks of the active economic activity and numerally presents the difference of the aggregate income and the total expenses of any entrepreneurial activity. The economic essence of the company value is reflected through the realization of the complex functions that determine the position of the company value in the system of the economic relations. One of the highest priorities of the strategic management appears to be the rational distribution of resources among different fields of activity and their effective use to achieve the strategic goals of the rise in the financial results and the company income.

The author claims that long-term orientation, purposefulness providing the system of the financial goals, achievement of which directly influences the successful work of the company, the interdependence and subordination of the general economic strategy goals, balanced financial activity in every function are the characteristic peculiarities having the role and position of the financial resources in the system of the company development as well as the financial strategy in the system of other strategies as their source.

Therefore, based on the defined role and importance of the value constituent of the company potential in the system of the strategic development management, it is proposed to regard the financial strategy of the value growth as a defined long-term operation direction, realization of which allows the company to solve the complex task of choosing the optimal capital structure and its management for the rise in the company value potential; developing the dividend policy meeting the goals of increasing the shareholders income and providing the company with the funds sufficient for reinvestment; keeping the physical infrastructure and available actual inventories at a level able to maintain the constant competitive status of a company.

As the result, while realizing the financial strategy of the company the executives are forced to balance between the short-term and long-term effects of the funds used, therefore certain contradictions in the standard financial goals and strategies are observed. They include the rise in the internal assets value, the achievement of the value growth and dividend payment high rates, the reduction of the external financial sources (higher equity and loan capital ratio), the improvement of the capital structure (fixed and circulating capital ratio).

The financial strategy is usually aimed at the growth of the company value according to the market demands. Strategy main tasks tend to be the research of the character and nature of the company’s finances formation under the market economy; the arrangement of the proper basis for the possible financial resources formation and managerial decisions in case of the company’s unstable crisis financial condition; the establishment of the financial relations with suppliers, clients, budgets of all levels, banks and other financial instruments; the identification of the reserves available as well as mobilization of the company resources for the rational production capacities, fixed and circulating capital usage; the provision of the production needed financial resources; the effective investment of the temporary available funds; the identification of the best ways of performing successful financial activity and strategic use of the financial capacities, new production items, thorough personnel preparation including the rise in their organizational culture and technical equipment literacy; research and study of the competitors’ financial strategies, economic and financial capacities; taking measures to improve the financial stability; the development of ways out of the crisis, methods of personnel management and coordination in case of the unstable financial conditions.

Inner regulatory framework, which is a successful abroad experience, proves to be an essential part of the financial strategy. Thus, successful financial strategy of a company is guaranteed if the financial strategic goals meet the available economic and financial capacities in case of the proper strategic financial management able to adapt to the changes in the economic conditions.

It appears important to mention that to solve the already mentioned tasks every company should take its specific peculiarities into consideration while preserving the unified conception approach to the financial strategy formation and evaluation (Table 1). The table presents the scheme of a principle-based approach to the succession of analyzing and planning the financial condition of the company as well as solid grounding for the managerial decisions in the field of financial activity while realizing a certain variant of the strategic alternatives of a company.

Table1. Strategic financial planning scheme.

Conclusion. Value potential reflects the ability of the company to generate value added and transform the value into the rise in the company capital. The potential level of a company is defined by its ability to increase the market value (market capitalization, balance sheet value or any other value indicator of a company’s property valuation). Assessment of the current level and perspective changes of the potential is used for defining expedience as well as effectiveness of the strategic managerial decisions from the standpoint of possible influence on the value of the assets or the market value of the company. The financial strategy of the company value growth proves to be a defined long-term operational direction, realization of which allows the company to solve the complex task of choosing the optimal capital structure and its management for the rise in the company value potential; developing the dividend policy meeting the goals of increasing the shareholders income and providing the company with the funds sufficient for reinvestment; keeping the physical infrastructure and available actual inventories at a level able to maintain the constant competitive status of the company.

Further research tasks. Methodology of the company value potential is proposed to be further investigated.

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