Analysis is a step to creating value from data

TVM Value Accountancy is nothing without analysis. The effective use of the product of analysis for decision making and holding people and organizations accountable is what makes Community Accountancy valuable. Experience has shown that performance improves when there is active feedback and there are the data that enables people and organizations to be held to account. People may not like it ... but their performance improves. The purpose of analysis is to get a better understanding. The data are neutral ... the analysis then produces results that might suggest some conclusions. It really does not matter what analysis is done as long as the result is better understanding and improved decision making. One value step is moving from data through analysis to understanding ... another is to move from understanding to effective action. In some situations this has been done with wonderful results, but mostly there have been interventions that were more expensive than effective.

Comparative analysis

Comparative analysis has many forms ... including (1) the comparison of data from one locations with another location; (2) the comparison from one time to another time; (3) the comparison from one organization to another (4) the comparison of what should be to what actually is; (5) the comparison of one approach to another approach; etc.

Time series

Time series are very powerful ... the corporate world uses them all the time. Capital markets use time series ... the public needs to have time series that show what is going on that specifically impacts their community.

VALUE CHAIN ANALYSIS

Value chain

The value chain has been a critical factor in organizing development, production and marketing around the globe. The value chain has been structured to maximize profit for the involved organizations with little regard to the optimization of community value. The results have been predictable with favorable profit optimization largely offset by value destruction for society.

Transfer prices

Prices are critical in economic analysis and the determination of profit and value to any entity. Transfer pricing is used to put a value on goods and services as they move from one sub-entity to another within an organization, or between controlled entities. They are a tool that can be used to move profit between entities and may have inappropriate consequences.

Management accounting

Management accounting is a subset of accounting that helps to get useful analysis into the hands of decision makers. Management information is sometimes defined as the least amount of information that is needed to make good decisions reliably.

Department costs and the variants

A cost center is one way in which costs can be organized to help understand and control costs.

By pulling costs together within a unit called a cost center, it is possible to get information about a company's activities in a simple way.

Responsibility accounting

Responsibility accounting is the name given to accounting where the reports specifically identify the responsible managers. This is a useful technique for getting clarity about who is responsible for what ... and there is rarely much agreement.

Elements of cost

Materials, labor and equipment are the main elements of cost that go into most production activities ... and determine costs.

Fixed and Variable Costs

But these items also determine the behavior of costs and how costs can be improved.

Breakeven

When costs are thought of as being fixed and variable, and revenues are thought of as being directly related to quantities, in a profitable activity, there is a mathematical point where revenues equal the sum of fixed and variable costs. This is known as the breakeven point.

COST/ANALYTICAL ACCOUNTING

Cost accounting

Cost centers, profit centers, investment centers, departments, etc are all rather similar. The key is to understand what they are doing and what they are costing.

If what they are doing does not seem to have any value ... then some further questions need to be asked and decisions made.

Corporate accounting systems usually have very effective cost accounting capability, but getting useful information from these systems is not always obvious.

Unit costs, prices and values

Unit costs, prices and values are very informative ... they make comparison easy both over time and from place to place. There are some challenges because units of measure and currency exchange rates may confuse ... but when these issues are taken into account, unit costs, prices and values are very powerful.

Cost, price, value

Cost, price and value are three numbers that describe economic activity. The relationship between these numbers determines the performance of almost any economic activity. All of these measures are important ... any one missing and the understanding of the dynamic of societal progress is compromised.

Cost, price value and productivity, profit and impact.

Three critical metrics in understanding economic activity are: (1) cost, (2) price, and (3) value. The relationship between these numbers determines the performance of almost any economic activity. All of these measures are important ... any one missing and the understanding of the dynamic of societal progress is compromised. These metrics are a part of a further three critical indicators: (1) productivity ... productivity improves when less cost produces more goods or services; (2) profit ... profitability improves when price is increased and cost is decreased; and (3) impact on society ... impact improves when the value increases and the cost decreases.

Cost

Cost has multiple components, and one of the most useful data points for cost is the one that eliminates all the profit elements from the cost value chain. The socio-economic success of the last two centuries has been reduction in cost.

Price

Price is a key variable in the performance of society. It is not as important as cost, but the way price is used in society determines the way value is shared between the various economic actors.

Value

Value is what the recipient thinks it is worth. These relationships are key:

• When value is greater than cost there is value adding.
• When cost is greater than value there is value destruction.

Productivity is a derivative of cost ... productivity is the most important single metric for the performance of our global society. In broad terms science and technology has made it possible for society to live very comfortably, but leadership has not made the decisions that embrace what is possible for the benefit of a broad society but for narrow self interest.

Profit

Profit is the relationship between cost and price, and has an impact on the stakeholders of the organization. Profit measures the performance of an organization, but does not bring into account the costs to society, or on the positive side, the value derived by society. Profit is the key metric for capital markets, and profit drives corporate stock valuation. Unfortunately profit and valuation now has taken on a life that is far removed from corporate operations and the impact of these operations on society with serious consequences.

Value ... impact on society

Impact on society is a function of value and cost, but not only these metrics. Price has a role in allocating how added value is shared between different segments of society and across the value chain. Community accountancy explicitly addresses this matter both at the individual community level and across complex value chains.