MANAGEMENT METRICS
STANDARD VALUE PROFILES
ECONOMIC CAPITAL ... DRIVER OF RECENT RAPID PROGRESS
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QUANTIFICATION OF ECONOMIC CAPITAL
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Unit of Measure
Units of measure for everything in nature and the encironment should not be driven simply by reference to money value, but by something that is more complex but more relevant to the realities of the behavior of nature.
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Quantifying the Value of Economic Capital
Investors quantify the value of a company and the stock market responds to reflect what investors think about the value.
Accountants do not quantify the value of a company but record merely the cost of what the company purchases. If the item is consumed as part of a production process, the cost is 'expensed' whereas is the item is used over and over again as a production tool it is expensed over the anticipated life of the item.
Investors interest themselve mainly with the amount of profit that is being generated by a company. They want the most profit from the least expenture ... they want the best possible 'return on investment' ... and especially the best 'return on their investment'.
There is however an important difference between 'return on investment' and 'return on assets employed' and all sorts of ways for accountants and lawyers and investors to work together to get the best outcomes for the controlling investors which usually will not be the best for the 'average' or small investor.
And both these measures and the related behaviors ignpore the important impacts that corporate economic activities have on society and the environment.
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Quantifying the Impact of Activities that Use Economic Capital
Conventional financial accounting uses 'money' as way to value transactions. The use of money to represent transaction value goes back to very ancient times in what is now referred to as the Middle East. There is every reason to continue using a 'token' of some sort to represent the 'value' of a transaction.
An intrinsic characteristic of the use of a token that is 'exchanged' means that there is an embedded 'double entry characteristic associated with the transaction. This is a key characteristic with conventional financial accountancy.
But this can be expanded logically to include not only the impact of economic transactions on the various aspects of 'economic' capital but also the additional impacts of the transaction on the 'social' capital and the 'natural' capital (that is the 'environmental capital.
This is considerably more complex and for most of history has not been needed because there was considerable congruence between economic impact and social impact and the impact on the environment was sufficiently small as to be insignificant. In modern times the population of the world has grown (by about 5 times in the last century) and the economic activity per capita has also grown by a similar amount. Natural (environmental) capital is now stressed as never before but there is no widely accepted way of reporting this and the general public has little idea of how serious this issue has become.
Worse ... a lot of people with power and influence who ought to have known better have spread a massive amount of misinformation over the past forty years and the corporate world and investors have put profit and wealth accumulation ahead of everything else in prioritizing business decisions. This must not continue and better metrics need to be used to ensure there is an adequate level of corporate responsibility relative to both society and the environment in addition to investors.
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ECONOMIC CAPITAL ... PHYSICAL CAPITAL
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Physical Capital
Physical capital includes products, the goods and services needed for people to have a decent quality of life, it includes buildings and infrastructure. Physical capital needs to measured both in static and in dynamic terms, and in terms of money units and in terms of various impact units. Of special note are products that flow through the enviro-socio-economic system delivering impact in the form of quality of life and impact on everything else as they go through the life cycle.
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BUILDINGS
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Buildings
Physical capital
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Water water / Sewage
Waste water and sewage is
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Industrial Processes
Roads are
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VEHICLES / TRANSPORT EQUIPMENT
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Goods vehicles / Lorries
Lorries are
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Passenger vehicles / cars
Lorries are
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Passenger vehicles / Buses ... trams ... light rail
There are
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Passenger aircraft
Passenger aircraft are
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Cargo ships
Passenger aircraft are
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Passenger ships / Cruise ships
Passenger shipes are
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Inventory (1) ... raw materials
A certain amount of inventory is needed 'in or close to the factory to enable immediate production
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Inventory (2) ... incoming in-transit
Some inventory is going to be 'in transit' and on the way to where it is needed from somewhere in the supply chain
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Inventory (3) ... Work-in-Progress
A certain amount of inventory is needed 'in or close to the factory to enable immediate production
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Inventory (4) ... Finished Goods
Some inventory is going to be 'in transit' and on the way to where it is needed from somewhere in the supply chain
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Accounts receivable and trade finance
Accounts receivable are are
Trade finance is more sophisticated serving mainly for international transactions where goods are 'in transit' over longer distance and for longer periods.
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ECONOMIC CAPITAL ... FINANCIAL CAPITAL
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Money / Currency
The money measure needs to be better understood. It is common to use a reference currency like the US dollar, but local currency also matters, and there may be funding currency as well. Besides the US$, other reference currencies might be the Euro, Japanese Yen or Chinese Yuan
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Corporate Purpose is Financial Profit
The
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FINANCIAL INSTRUMENTS / STOCKS AND BONDS
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ECONOMIC CAPITAL ... INTANGIBLE CAPITAL
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Institutional Capital
Institution capital has impact. There are money costs to support institutional capital and impact costs when institutional capital is inadequate. There is both a static and a dynamic dimension.
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Knowledge Capital
Knowledge capital is the enabler of a high performance enviro-socio-economic system. Knowledge may be thought to behave somewhat like energy ... potential energy, kinetic energy, heat energy and so on. Knowledge has money costs to support research and all sorts of impacts when knowledge is used, bot good and bad. There is both a static and a dynamic dimension.
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Organizational Capital
Organizational capital is
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