What is Added Value Unit

Cosmin Cricleviți

Added Value Unit - an "exotic" indicator

During our activity in business management, we often meet quite a few medium and large companies that have not identified, within the operational activity, the "Added Value Unit". Also, within small, entrepreneurial companies, the percentage of those who have defined this essential element, thus relating their operational and financial performance to it, is also very small. We mention that the lack of the Added Value Unit does not necessarily lead to the blocking of the business, but it certainly blocks the clarity and correctness of the decisions of general managers or entrepreneurs, causing direct consequences in the business. Therefore, in most cases, when a company is small and processes low volumes of products, services or customers, it can operate without many managerial tools; but this happens at the "expenditure" in time and stress of those in management.

So, starting from the question - why many organizations do not identify the Added Value Unit preferring to run their business without a common reporting point of income and expenses, the answer is certainly complex, having many explanations and causes that we will not research here. What we can emphasize, however, is the necessity and usefulness of reporting performance and expenses to the most important objective and parameter in a business - the Added Value Unit.

What does AVU mean?

The Added Value Unit is what the customer is willing to pay when they call on our business. Whether it is the production of a consumer item (furniture, food, maintenance products, etc.), the provision of a service (accounting, marketing, etc.), the provision of facilities (fitness room, real estate, etc.) or any other form of added value for which one is willing to pay a sum of money, there is always a common unit in relation to which the volume of activity and coverage of market demands can be measured. For example, in production activities, this parameter is represented by "Work hours", in service activities it can be "Work hours" for services (eg: marketing, architecture, dentistry, law, or "client" for services consumer-oriented - restaurants, gyms, beauty services, etc.

Cost optimization through the Added Value Unit

By understanding and integrating the Added Value Unit in our own business we will be able to orient our resources much more efficiently and clearly so that we will be able to multiply the number of Added Value Units in a cost-optimized way thus and having, of course, expenses as much as possible reduced per unit. Establishing the level of quality that we offer, regardless of whether it is products or services, is directly proportionally correlated with this concept, being also integrated with the structure of internal processes that must also be strictly aligned with what must happen to obtain an efficient and measurable Unit of Added Value.

Ultimately, the company's profit is obtained in practice, by summing up the difference between the income related to the Added Value Units and the costs incurred to obtain them. Thus, when we look at things from the perspective of the Added Value Unit, that is, rationally and objectively, we can conclude that the money obtained is strictly related to the Units actually obtained and delivered to the customer; the expenses are related, in reality, to the number of units actually delivered rather than to the number proposed in the objectives or in the targets of the performance indicators.

Importance of the Added Value Unit

Starting from the examples above, from our perspective, it is vital to know how much revenue it brings us and how much it costs us to labor an hour in a production facility, how much it costs us to service a customer, and what is the average revenue earned from of it, how much it costs to produce a Kwh of electricity in relation to its selling price, etc.

From the perspective of the use and integration of the Added Value Unit, it is particularly important to understand what the structure of the cost per Added Value Unit is, along with the monthly evolution of the types of expenses that make it up. In this way, we will be able, on the one hand, to understand the usefulness and necessity of these costs, on the other hand, we will have total control of the costs in the organization, and the natural consequences of this will be not only the (rational) cost optimization elements, but also the visible improvement of the company's competitiveness and profitability.