Value Based Return (VBR)

What is Value Based Return (VBR)?

Value Based Return (VBR)

Value Based Return (VBR) is a fundamental concept in the field of logistics that measures the creation of value within a business. It provides a comprehensive understanding of the profitability and efficiency of an organization by considering both economic profit and capital charge.

To grasp the concept of VBR, it is essential to understand the two key components that contribute to its calculation: economic profit and capital charge. Economic profit refers to the difference between total revenue and total costs, including both explicit and implicit costs. It takes into account not only the monetary expenses incurred by a business but also the opportunity costs associated with the use of resources. In other words, economic profit reflects the true financial gain or loss generated by an organization.

On the other hand, capital charge represents the cost of capital invested in a business. It includes the interest or return that could have been earned if the capital had been invested elsewhere. Capital charge is a crucial factor in determining the profitability of a business, as it considers the opportunity cost of using capital within the organization.

By subtracting the capital charge from the economic profit, we arrive at the Value Based Return (VBR). VBR provides a comprehensive measure of the value created by a business, taking into account both the financial gain and the cost of capital. It allows organizations to assess their performance in terms of value creation and make informed decisions regarding resource allocation and investment.

VBR is a valuable tool for businesses as it enables them to evaluate their profitability in a holistic manner. By considering the cost of capital, it provides a more accurate reflection of the true value generated by the organization. This, in turn, helps businesses identify areas of improvement and make strategic decisions to enhance their overall performance.

In conclusion, Value Based Return (VBR) is a measure of the creation of value within a business. It considers both economic profit and capital charge to provide a comprehensive understanding of an organization's profitability and efficiency. By calculating VBR, businesses can assess their performance in terms of value creation and make informed decisions to optimize their operations.