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Meaningful Metrics for a Smart Society
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Date: 2019-01-24 Page is: DBtxt001.php L0700-TVM-PP-OG-Business


TVM PROGRESS AND PERFORMANCE ACCOUNTING
BUSINESS ORGANIZATION
TVM APPLIED TO THE FOR-PROFIT BUSINESS ORGANIZATION

Measure State and you Measure Progress

TrueValueMetrics (TVM) for the FOR-PROFIT BUSINESS ORGANIZATION
The purpose of economic activity is for people to improve and maintain their quality of life and standard of living. Conventional metrics have a focus on the improvement of economic performance as measure by financial suprplus or profit, with almost no attention to metrics that focus on people and their quality of life.
There are very powerful and efficient metrics for the business ORGANIZATION which has become very efficient at optimizing profit while ignoring all the externalities that are outside the perview of the the reporting entity. For a very long time, there has been the assumption that what is good for business is good for people and society, but in recent years this assumption has increasingly been questioned. While this idea may have been valid for the early years of the industrial revolution, since the 1970s, the correlation in all rich economies has disappeared. More and more consumption is still good for profits, but more consumption is bad for the environment and is becoming more and more unsustainable.
There are very powerful metrics around the accounting and reporting of business performance as measured by money transactions and profit. What may be referred to as conventional accounting, tracks all money based transactions related to the organization and organizes the information into accounts that facilitate reporting of the balance sheet ('state') of the organization and the profit and loss account ('flow' or profit) of the organization.
This system of metrics is powerful because
(1) There is clarity about the STATE of the organization ... the 'balance sheet accounts' and the Balance Sheet, and the ACTIVITIES or the organization ... the profit and loss accounts and the profit and loss report (P&L Account); and,
(2) it allows for easy summarization of the data for reporting and in addition allows for 'drill down' to detailed levels all the way down to the individual transaction.
Conventional accounting metrics do not, however, incorporate the impact the activities of the organization are having on the external world. All the focus in on the profit performance of the organization and all the impacts on people, planet (environment), society, etc. are ignored.
To some extent, recent legislation and regulations by governments are getting the attention of the business community on the external impacts that are doing damage to society and to the environment.
Perhaps as important, or maybe more important, there is a concern about these matters among the general pubic and especilly younger people who are an important consumer demographic. Business needs to pay attention to this because it is these consumers that are going to pick and choose the products they buy, and this in the end will drive business decisions.
TVM is a system or framework that expands conventional money accounting, to include all the transactions that have impact on everything ... on all the capitals, not just the financial capital and on all the elements of the transactions, not just the financial element of the transactions.

Navigation within this page
Go to Revenues (Output / Products)
Go to Cost of Sales
Go to People / Social Impact
Go to Impact of Payroll on People
Go to Impact of Supply Chain Processes
Go to Impact of Products
Go to Materials / Supply Chain
Go to Energy
Go to Payroll
Go to Plant and Equipment
Go to Process
Go to Philanthopy
Go to Taxation
Go to Enabling Environment

CONVENTIONAL ACCOUNTING -v- TVM P&P ACCOUNTING

ECONOMIC IMPACT / FINANCIAL IMPACT

CONVENTIONAL ACCOUNTING TVM ENHANCED ACCOUNTING
Conventional PERFORMANCE
Profit is the all important 'bottom line' measure of business performance. Operations in the corporate organization have been optimized for profit performance, and the metrics for this are very sophisticated and very powerful.
Analysts also look at the 'top line' ... the sales revenues.
For investors and investment analysts the trends of sales and profits are a major determinant of company (financial) value and stock prices.
In totality, almost everything to do with the valuation of business performance is about impact on financial wealth, and not much else.
TrueValueMetrics (TVM) PERFORMANCE
In TrueValueMetrics (TVM) performance is about People, Planet and Profit (the Triple Bottom Line) that has been talked about since 1995 when it was described by John Elkngton.
Economic activities result not only in profit (or loss) that are measured in money, and impact financial capital, but there are impacts on all the capitals, that is every aspect of Economic Capital, Social Capital) and Natural Capital.
Since the beginning of the industrial revolution, a large part of progress in respect of quality of life and financial wealth has been achieved at the expense of the environment and natural capital. This is real, even though it has never been brought into account using conventional accountancy and classical economic analysis.

Just two key numbers
(1) Revenues
Measured only in financial terms
(2) Profits
Also measured only in financial terms
There is only one audience for these numbers ... it is the investors, and the whole ecosystem of regulation is simply to protect investors. None of the other participants in the socio-enviro-economic system are participants in the information ecosystem around the corporate for profit business.
Three summary numbers for:
(1) Economic impact;
Economic impact is the same as sales revenues and corporate profits in conventional accountancy.
(2) Social impact;
Social impact is a number computed by reference to elements like
(a) the payroll profile, that is how the payroll exploits or rewards workers;
(b) the price, quality and performance of the production and how the products impact society

(3) Environmental impact
Environmental impact is a number computed by reference to the activities that have impact on natural capital in all its dimensions
Sales Revenues ... Outputs / Products
In the most simple terms. profits are the amount of Sales Revenue less the Costs incurred in doing everything to make those sales.
The revenues are a function of the output and the price. To the buyer this price becomes a cost. For the seller, the profit is the amount the revenues exceed the costs. The impact of the product is a function of the early supply chains, the latest process, the use stage and the post use waste stage. For a full understanding of the product, the whole life cycle needs to be taken into consideration. Modern technology is enabling more information about the price of a product and what others think about the product, but the technology has not yet been applied to providing information about the impact the product is having on the complete enviro-socio-economic system.

Cost of Sales
All inputs into a production process have purchase price which becomes the cost of the input. In conventional accounting the accounting is done based on the money value of the tansaction.

But this is not just a single simple number, it is also a number that reflects the whole history of the supply chain.
In order for the material to get to the point of purchase it has already gone through a chain of processes all with a full range of elements of cost and impacts on everything. Each material going through a process has cost along these lines: materials, energy, labot payroll, labor benefits, taxes on labor, plant and equipment costs, advertising, financial costs, pro-good expenditures, government taxation, distributions to owners and retained profit. All of these are money costs to the business, but these costs also have impact on the people and place where the process is located.

EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is used by finanicial analysts as the key metric for financial performance. Earnings is the gross revenues less cost of sales.


PEOPLE / SOCIAL IMPACT
Organizations have a huge impact on the quality of life of people.
In conventional accounting people are not considered per se.
There is a cost of payroll (salary and benefits) which is used in the accounting for costs and the calculation of profit.
And in conventional accountancy sales are associated with customers, but it is only the mony price dimension of sales that is accounted for.
Many dimensions of social impact / impact on human capital
Every worker in an organization should be paid a living wage.
Every worker should work in a safe environment.
Every worker should have the opportunity for advancement through training
The total payroll profile should not be significantly different from the profile of staff contribution to the organizational surplus

Payroll
Payroll costs include the labor payroll, the labor benefits and maybe also taxes assessed on labor. These are all costs to the business (economic activity / process). However, these expenditures are also very important benefits to the individuals concerned and their families and the broader society in which they live. In economic analysis there is the impact of the 'multiplier' which associates the money earned in one activity with the money that subsequently flows through the economy in other activities. This has been computed recently in the Local Multiplier 3 (LM3) initiative for different locations in the UK, but is widely understood in economics. In the end it is payroll that funds aggregate demand. There is however, the perverse problem of more payroll is good for the broader economy but a lower payroll is good for the profit of the organization and the wealth of the owners. Productivity enables a lower payroll and more profit, but this sam productivity can end up destroying aggregate demand. In the short run the business does well. In the long term the business fails.


What impact do supply chain processes have on people
What are the labor practices in the supply chain ?


What impact do company products have on customers (people)
Are there environmental health issues?
Are food products sage and nutritious?
Are products priced fairly?


What impact does the company have on the place
What impact does the place have on the company?
What impact does the place have on the workers of the company


ENVIRONMENTAL IMPACT
Organizations also have a huge impact on the environment.
In conventional accounting environmental remediation of all types is considered only as a charge against profit
Environmental impact of all types is ignored ... it is outside the reporting envelope.

Energy
The financial and impact accounting for energy is similar to that of materials in that there is a supply chain, and the use of energy in a process results in both benefits for the process, but also impacts on the environment. The accounting logic is the same, but the computation of impact is based on a different set of standard impact values. There are standard impact values for each type of energy: electricity from hydro is different from electricity from coal, for example. Electricity from wind or solar has a different standard.


Plant and Equipment
An economic activity usually has some plant and equipment that is needed for efficient production. This plant and equipment has a capital cost. It also needs maintenance. The cost of using plant and equipment should be factored in using depreciation and accruals for maintenance that is being deferred.


Process
The process transforms products that are inputs into the products that are outputs. The technology and efficiency of the process determines both money costs and environmental and social impacts.The cost and impact of process may be represented by standard costs for the various aspects of the process.


Philanthropy
Philanthropy or 'Pro-Good-Expenditures' have a cost that is a charge against the profit or surplus of the organization, but the activities that are funded with this money may have an important impact on the environment and on society depending on the activities. In some situations the cost of philantrhopy reduces the cost of taxation which increases surplus but reduces the impacts associated with the payment of taxes.


Taxation ... payments to Government
Taxation and other payments to government have a cost that reduces the profit or surplus available for distribition to investors, but the funds that flow into government are essential for the funding of government and the services that government has to provide in a modern society. The idea that less government is always better is wrong. The issue is the efficiency of government and the quality of the programs that are implemented.


Enabling Environment
The enviro-socio-economic system is very complex. Value adding economic activity is essential in order to support quality of life and standard of living, and for this activity to thrive there must be an efficient enabling environment. This means that there must be a system of laws and justice so that economic transactions can take place with a minimum of risk, that investments may be made, and so forth. In many places around the world setting up a business is a very difficult process that costs in both time and money, and in many places economic transactions are constrained in all sorts of ways. Business flows most easily with an enabling environment that has the least rules, but at the same time, too little of rules and regulation also may result in a range of abuses like inadequate workplace conditions, inappropriate exploitation of labor and pollution of the environment. Getting the balance right between ease of operation and good practice that has favorable impact for society and the environment is important and not easy.



The text being discussed is available at


TrueValueMetrics (TVM) is an Open Source / Open Knowledge initiative.
It has been funded by family and friends plus donations from well wishers who understand the importance of accountability and getting the management metrics right.
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