Money Revenue is Not Enough

For business … money revenue

Revenue is a big driver of corporate performance and economic metrics like GDP. Revenue is a derivative of price and affected also by aggregate demand and the specifics of the product or service.

However, revenue does not correlate at all well with value creation. Much of the revenue proposition ends up being zero sum and value neutral … or worse.

To illustrate this idea … when an affluent person who has many pairs of shoes buys another pair of shoes there is an exchange of money and an increment to revenues, but rather little or nothing changes in terms of the quality of life of the shoe owner. In money terms the business accounting shows revenue and profit increase together with asset cash up and asset stock down.

When a poor person who has no shoes gets a pair of shoes, the economic value proposition is very different. Quality of life for the poor person is substantially enhanced and the value increment is positive. What happens in the shoe supplier business, however, may not be money profit positive … in fact there may well be a money loss. In TVM the money loss to the business and the value adding to the beneficiary … to society … are taken together. In TVM, a business that has an activity that runs at a money loss while producing a social value should be judged on both the money dimension and the value dimension together.

For everyone else … value creation

In money profit accounting the creation of value is usually excluded from the accounts. This makes money profit accounting easier to understand, but it creates a serious flaw in the way markets perceive corporate performance. In the prevailing money profit reporting of performance, high profits doing nothing of social good are preferred over lower profits that include value creating activities that produce enormous social good.

In the case of social sectors like education, the money profit accounting associates education with costs in a systemic way, but does nothing to associate the value creation of education with these costs. In the case of health … the value of good health is not included in any money profit accounting system, while costs are accounted for rigorously.

Value creation happens when existing resources are used and something of more value than the resources used is created. In corporate accounting profit is revenue less cost ... in TVM, value creation is the resultant value less the value consumed.

Emerging New Metrics

Attempts have been made to have more comprehensive metrics, with more or less success.

In the area of Corporate Social Responsibility (CSR) attempts are being made to present corporate activities favorably with respect to impact on society. The idea is good … but it is difficult to give CSR much credibility without relevant metrics. Corporate CSR units do not have metrics that have anything like the same power as the money revenue metrics of the business organization. Deployment of TVM has the ability to change this.

More on Price

Price data are among the most prevalent. There is a lot that may be learned from a study of prices.

But price has its limits, notably price and value are very different concepts though in everyday use may be used Prices are very much suited to time series analysis. Time series of prices are simple, clear and powerful.

Prices … 30 years by month

As a new CFO in the fishing industry ... a major producer of marketer of shrimp worldwide ... I made a very simple plot of prices of shrimp in the New York market month by month over a period of nearly thirty years .. from 1946 to 1974. By doing this I gained a deep perspective of the shrimp industry that was better than most people had and enabled me to interpret the history of the industry very well. Because of this I was better able to predict how the oil shock turmoil of the 1970s would impact our company and how we should position ourselves for success.

More on revenue

When Price is Value

Aggregate demand

Price … Supply and demand … market behavior

Buying power

Missing Value Creation

There are metrics about business profit and all sorts of economic activity that goes into making up Gross Domestic Product … but virtually nothing in the prevailing system of metrics that addresses the matter of value creation.

Value creation may be a result of the consumption of value resources … or value creation may be something that does not have any associated value consumption.

Value creation may be costly in terms of resources consumed, or not. There are many examples of value creation that are pure win-win.

A polite society is derived from people behaving nicely … something that has no material cost, nor any consumption of value … but does have a significant value outcome.