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TRUE VALUE METRICS
... for SMEs
VERY POWERFUL WHILE BEING VERY LOW COST
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MONEY WEALTH / MONETIZED VALUE
Money / Profit growth / GDP growth / Stock Prices / Cost push inflation / Wages chasing prices
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IMPACT of the SMALL and MEDIUM SIZED ENTERPRISE (SME)
The purpose of economic activity is for people to improve and maintain their quality of life and standard of living.
The business ORGANIZATION can be a very efficient way of implementing economic activity.
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 not proved valid in practice. While it may have been valid for most of the industrial revolution, things seemed to change around the 1970s.
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 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.
These 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.
TVIA is a system of accounting that expands conventional money accounting, to include all the transactions that have impact on everything ... on all the capitals, not just the financial capital.
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TRIPLE BOTTOM LINE / 3Ps
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PROFIT
Profit is the all important measure of business performance. It is very well developed in the corporate organization, but is not enough.
In its most basic form it is simply the amount of Sales Revenue less the Costs incurred in doing everything to make those sales.
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Outputs / Products ... Sales Revenues
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.
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Input Materials / Supply Chain ... Cost of Sales
All materials that are inputs into a production process have purchase price which becomes the cost of the input. 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.
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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 sales dimension that is accounted for.
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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
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What impact do company processes have on people
What are the labor practices in the supply chain ?
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What impact do company products have on customers (people)
Are there environmental health issues?
Are food products sage and nutritious?
Are products priced fairly?
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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
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PLANET / 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.
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ELEMENTS OF THE P&L ACCOUNT
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Products
PRODUCTS are what gets sold. In financial accounting 'price' and 'cost' of products are identified in the accounts. In addition to these there is also 'value'. For TrueValueMetrics PRODUCTS are also associated with IMPACTs ... the impacts on society (people), the impacts on nature (planet / environment) and the impacts on the economy (financial, physical and intangible). In order to have enhanced accounting that incorporates all of this, products have to be associated with a 'Standard Value Profile (SVP)'.
A set of benchmark SVPs is being developed for various classes of product. An individual specific product may also have an individualized SVP, which shows how a precific produce compares with the benchmark SVP.
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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.
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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.
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Materials
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.
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Plant and Equipment
An economic activity usually has some plant and equipment needed for efficient production. This plant and equipment has a capital cost which is accounting for through a charge for depreciation. The plant and equipment also needs maintenance which must be accounted for in systematic way. These costs have to be accounted for in cost of sales.
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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.
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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.
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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.
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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.
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