Financial Management for the Successful Company Value

Financial Management for the Successful Company Value

Jakub Horak (Institute of Technology and Business, Czech Republic), Veronika Machova (Institute of Technology and Business, Czech Republic) and Jaromir Vrbka (Institute of Technology and Business, Czech Republic)
DOI: 10.4018/978-1-7998-6643-5.ch008
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Abstract

This chapter deals with the issue of valuation of business entities. Based on literary research, which forms the basis of the chapter, two practical examples are given. The aim of the first example is to evaluate the financial situation of the concrete company for the period of 2007-2019 using valuation tools (financial analysis, creditworthiness and bankruptcy models, EVA). The purpose is to capture the course of an expansion disrupted by the great financial crisis that erupted in 2008 and to monitor the gradual return of corporate activities. The results of the analysis show that the financial crisis initially had a significant impact on the company but was nevertheless averted. The aim of the second example is, with the help of neural networks, to determine the relationship between the value generators of a company and EVA equity of small and medium-sized enterprises operating in rural areas of the Czech Republic in the period of 2013-2017. It is found that successful companies are distinguished from unsuccessful ones by the degree of human capital involvement.
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Introduction

We can say that the majority of expert literature including the leading world economists share the opinion that the primary strategic aim of every business entity, regardless of its industry should, in general, always rely in the growth of its value. Knowledge of business value is very important, mainly because it is necessary to continuously increase the wealth of shareholders and the interests of other interested groups. Mainly due to this, it is equally important to understand and also determine the factors that influence the value of the business entity. The aim of running a business is, thus, the value of the business that is of course dependent on its ability to generate future yield. That means that it quite significantly depends on the uniqueness and quality of product or service on offer influencing the product´s demand, on an efficient cost management, on the business´s position on the market, innovative ability of the business employees, efficiency of the use of available resources or the ability to search for new investment options (i.e. manage processes and activities within the business). At the same time, it means that all decisions within the given business must be accepted from the perspective of impact on the value of the business. At the moment, the process of determining the value of a business entity is among very promising fields. To get to the most exact result possible, it is necessary to pay great attention to this issue, and give it enough space as well.

In today´s still transforming economic environment, the problem of business evaluation keeps on growing its importance. The process of evaluating business entities represents the main element serving the understanding of resources serving the competitive ability of an enterprise and it represents the source of support in establishing enterprise strategy. Even the current generation of entrepreneurs is fully aware of how significant it is to know both their value and financial condition, mainly in case of strategic decision-making. It may be declared that information about the financial situation of a company is practically necessary. Information about the past may help the company discover in which areas it was doing well, which goals and tasks were fulfilled, but it may also point at situations, which the company was not able to deal with or which situations may be expected in the nearest future. Some expert literature even claims that the success of a business entity is directly dependent on an exact prediction of its future development. There are opinions, very often, that the motto of a company where the managers are capable of high-quality management and decision-making it is necessary to have truthful information, both about its situation as well as its current situation, but also about the situation of its individual branches. Due to this, it is useful to know about methods that are determined for the purpose of predicting the future development of the company as well as its financial situation.

We may claim that in practical terms, there is a whole range of tools with the use of which the financial condition, respectively the economic situation of a company may be evaluated. Completely primary methods of business evaluation were used mainly by tools of financial analysis the potential of which lies in an answer that refers to the total financial position of a business entity.

The basic material for this chapter will consist of a high-quality current literature review using the sources of renowned world databases such as Web of Science and Scopus. The chapter deals with theoretical as well as practical aspects, and presents specific cases of how to analyse and manage the main aim – maximization of company evaluation for shareholders. Further, examples of financial evaluation at specific types of companies using standard and innovative methods (superficial intelligence) will be processed.

The chapter deals with the financial analysis of a selected business and its analysis using artificial neural networks. The aim of the first example is to evaluate the financial situation of the concrete company for the period of 2007 - 2019 using valuation tools (financial analysis, creditworthiness and bankruptcy models, EVA). The aim of the second example is, with the help of neural networks, to determine the relationship between the value drivers of a company and EVA Equity of small and medium-sized enterprises operating in rural areas of the Czech Republic in the period of 2013 - 2017.

Key Terms in this Chapter

Business performance: The company's ability to make the best use of the resources it manages in its business activities.

Financial Management: A set of analytical tools needed for financial management and decision-making in the company.

Business value: The expected future income for the company owner.

Business Investment: The part of a company's income that is invested in capital.

Economic Value Added: A financial indicator defining the difference between net operating profit and capital costs. Currently, this is a very important value measure of the company's performance.

Value Drivers: The main business indicators that determine the value of the company.

Artificial Neural Network: Computational models used in artificial intelligence.

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