THE BASIC LANGUAGE OF VALUE

NIGEL A.L. BROOKS

THE BUSINESS LEADERSHIP DEVELOPMENT CORPORATION

Article reprint
 THE BASIC LANGUAGE OF VALUE

The word "value" means something of worth or usefulness. Language has

evolved around this word over time within the disciplines of
entrepreneurship, leadership, and management that is valuable to know.

The basic language of value comprises the concepts of net worth and
exchange.

Book value of assets, liabilities, and an enterprise

The value at which assets and liabilities are carried on a statement of

financial position of an enterprise.

A statement of financial position shows the value of assets (resources for

opportunities) and liabilities (obligations) at a point in time. The
difference between the value of total assets and total liabilities is the
owners' equity in "for profit" businesses, partners' capital in partnerships,
and net assets in "not-for-profit" associations, or government entities.
Equity is also referred to as net worth.

Net asset value is also the difference between the value of total assets and
total liabilities less an adjustment in some cases for certain intangible
assets that do not provide for economic opportunities in the future.

The basis for the valuation of assets and liabilities is determined by

purpose according to financial, managerial, and regulatory accounting
policies and principles. "Generally Accepted Accounting Principles" are
promulgated by bodies designated by the American Institute of Certified
Public Accountants.

For assets, valuation is based upon fair value when it is necessary to mark-
to-market, or historical cost less depreciation, amortization, depletion, or
impairment. For almost all liabilities, valuation is based upon fair value.

In theory, the book value of an enterprise represents what the shareholder

investors collectively would receive in the event of a liquidation (less the
costs to liquidate). However, the market value of the assets and liabilities
may differ significantly from book value at liquidation.

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Fair value of an asset or liability

The value at which an asset or a liability could be bought or sold in an

arm's length transaction in competitive markets based upon prices without
concessions, financing, or incentives, when both the buyer and the seller
are informed and are acting for their own best interests without the
influence of third-parties; or an estimate when no established market
exists.

Fair value is also referred to as exit value.

Item

An asset or a liability, or a product and/or service.

Market price

The price at which an item is offered in a marketplace for transactions.

Market value

The price at which an item would trade in an auction environment.

Capitalization

The book value of the equity of an enterprise plus the fair value of its
long-term debt.

Market capitalization

For a publicly traded enterprise, the market price per share of stock
multiplied by the number of shares outstanding, including restricted stock,
but not treasury stock. It is a measure of the market's perception of the
value of an enterprise. Market capitalization fluctuates as market prices of
shares change.

For private enterprises, the valuation has to be appraised because there is

no public market for its equity, although there may be investors willing to
buy part or all of the outstanding shares.

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Equity value

The market capitalization of the enterprise adjusted for the dilution effects
of warrants, options, and convertible securities (including bonds and
preferred stock) less the conversion costs.

Enterprise value

The equity value of the enterprise plus the fair value of its long-term debt
plus minority interests in affiliates less minority interests of affiliates and
cash and cash equivalents.

Residual value

The value remaining in an item after use as characterized by the salvage or

trade-in price.

Exchange

The process of offering an item and receiving another of the same or

similar value.

Price

The exchange value offered by the seller for an item or earned based upon
an accepted bid.

Cost

The exchange value bid by the buyer for an item or incurred when
accepted - the value that must be given up to acquire an item.

Expense

That portion of cost that expires in an accounting period.

Direct cost

A cost that is traceable to an item.

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Quality

The perceived value of an item by a prospect or customer at premium or

discount from market price or market value. Perceived value is based upon
a value proposition, augmented by abundance, convenience, scarcity, risk,
and minimal defects.

Value proposition

A statement of benefits and differentiating features for the enterprise and

its products and/or services.

Economic value

The difference between the exchange value and the cost of the value
exchanged.

Earned value

In project or production work, the budgeted cost of work performed at

standard or actual rates, or the actual cost of work performed if budgets
are not used. The cost of work performed comprises fully loaded direct
labor cost burdened with attributable project or production overhead.

Added value

The difference between the exchange value earned for an item and the
actual cost of the work performed and the direct materials and supplies.
Added value is analogous to gross profit.

Value added - technical

The cost of the effort applied to transform materials and supplies into a
item of greater value, as measured by earned value.

Value added - economic

The additional value of a commodity over the cost at each stage of

production.

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Value added - perceptual

The value of an item as perceived by a prospect or customer above a

baseline for a commodity.

Total value added

The earned value of an item plus the added value. The exchange value
earned for an item equals the total value added plus the cost of direct
materials and supplies when the actual cost of work performed equals the
budgeted cost. If the actual cost of work performed is more than budgeted,
then either both the added value and total value added are reduced, or the
exchange value earned must increase by the variance to accommodate the
loss in value caused by the overrun.

Value chain

The value added activities that earn value and add value to materials and
supplies. The activities produce a component of a product, or a finished
product and deliver it to a customer. The value chain is defined by a
process/function model. The model represents the plan, whereas the chain
represents reality.

***

Understanding the basic language of value is an enterpriship

(entrepreneurship, leadership, and management) competency.

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About Nigel A.L Brooks...

Nigel A.L Brooks is a management consultant to entrepreneurs, business

enterprise owners, executives, and managers, and the enterprises they
serve. He specializes in developing the entrepreneurial, leadership, and
managerial competencies that build sustainable advantage from vision to
value. He is an author and a frequent speaker.

He obtained his professional experience as a partner at Andersen

Consulting (now Accenture, Ltd.), as a vice president at Booz Allen
Hamilton, Inc. (now Booz and Company), as a senior vice president at the
American Express Company, as president of Javazona Cafes, Inc., and as
president of The Business Leadership Development Corporation. He has
been a contributing editor for the Bank Administration Institute magazine,
and has served on boards of entrepreneurial networks. He was educated at
the University of Exeter, Devon, United Kingdom.

His clients are in the financial services, food services, high-tech,

manufacturing and distribution, pharmaceuticals, oil and gas, professional
services, retail and wholesale, transportation, and government industries.

He has experience in North and Latin America, Europe and Asia-Pacific.

www.nigelalbrooks.com

About The Business Leadership Development Corporation (BLD)...

The Business Leadership Development Corporation is a professional

services firm that works with entrepreneurs, lifestyle business enterprise
owners, executives, and managers, and the enterprises they serve.

BLD develops entrepreneurial, leadership, and managerial competencies

that achieve performance excellence by building sustainable advantage
from vision to value through:

 Strategic Management Consulting

 Executive Coaching and Mentoring
 Professional Training via The Center For Business Leadership
Development (CBLD)
 Motivational Speaking

www.bldsolutions.com

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