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STANDARD VALUE PROFILE
STANDARD VALUE PROFILES FOR EVERYTHING
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Accounting for the 21st Century - Metrics for impact on people, planet and profit and ALL the capitals
Accounting for the 21st Century must include metrics that relate to the everything, not merely the activities of the organization and its owners. This is accounting for every part of this amazing and complex system that is the environment, the society and the economy.
True Value Accounting addresses this need. The goal is for TVA to be an easy to use tool that will expand the capabilities of conventional accounting so that the impact of economic activity on everything is brought into account.
Conventional accounting has a focus on a single dimension represented by money, while TrueValueMetrics accounts for not only money transactions, but also the impact of activities on everything. TrueValueMetrics is multi dimensional and accounts for everything.
TVM enables analysis that embraces not only the impact that money profit has on financial capital, but how economic activity impacts on all the other capitals. TVM uses a framework of metrics that can be used in every parts of the socio-enviro-economic system.
The same data and analysis architecture works for a person, for an organization, for a product, for a place and for all the processes that produce a product as it flows through the supply chain.
The logic is relatively simple … but as usual, the devil is in the detail.
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Measurements for everything
The TVM framwork is designed so that it measures everything. That is, the same framing of measurement may be used for the progress and performance of a business organization, or a family, or a place, or a product.
This is not unlike the idea that financial measurement may be applied to the performance of a business, or a family or a place. A financial balance sheet may be used to describe the financial condition for a business, or a person or a place ... though this is rarely done for a place, nor even the governnment of a place. A financial profit and loss, or the simpler variants of receipts and payments may be used to show financial activities for various different entities.
The TVM framework expands the ideas of conventional financial measurement to the very important other dimensions of the socio-enviro-economic system.
The STATE or balance sheet of an entity comprises not only the financial capital (which is a part of economic capital) but also ALL of the other capital ... all social capital, all natural capital, and all economic capital.
The idea of a 'balance sheet' to describe the STATE of a business is commonplace. The idea may be applied to the STATE of an INDIVIDUAL, a FAMILY, a COMMUNITY ... or the STATE of a PLACE, or the STATE of a PRODUCT ... not to mention the STATE of an ORGANIZATION ... or the STATE of a COUNTRY ... but this is rarely done.
The idea may be used not only for the value that is expressed in 'money terms' but also for the values that are inherent in SOCIAL CAPITAL and the values that are inherent in NATURAL CAPITAL
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The Standard Value Profile of a PRODUCT
This is essentially the STATE or balance sheet of the PRODUCT at a specific point in its life cycle ... a result derived from the accumulation of processes through the supply chain, and a computation to reflect the ongoing use of the product and then, finally, the post use waste chain.
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Open L0700-SV-PRODUCTS
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Feedback
Effective management requires feedback loops and incentives to encourage better decisions. Business organizations understand this and companies spend heavily on advertising to tell stories about the benefits customers will get when they buy the products. This is a huge problem for the global socio-enviro-economic system that cannot have sustainability and a growing middle class without significant changes in the behavior of customer and the way they choose to buy products.
People (customers) need to have better information when they buy products. At the moment the information is product PR and advertising, price and promotion. A better way will be for this information to be complemented by a complete STANDARD VALUE PROFILE for the product. This will inform the customer about the impact of the product with respect to society and with respect to the environment.
But we can go much further than merely providing better (more) information about the product, we can also issue some form of reward to the customer to reflect the 'goodness' of their buying. With even a modest incentive, the patterns of buying can be changed and changed very rapidly.
A future generation of POS (point of sale) technology will make reward systems the norm rather than the exception.
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Database of Standard Value Profiles
A database of standard value profiles should not be in the control of business entities that are in the supply chain but should be objective / independent. The information about any product is an instance of radical accountability.
The business community has a long history of 'bending the truth' in order to maintain and grow sales.
Companies have routinely 'lost track' of the supply chain as soon as there has been an incident in the supply chain that is likely to do reputational damage. The Rana Plaza catastrophe in Bangladesh hit the headlines with all sorts of big name brands being produced in the building, yet surprisingly none of the brand name companies knew that their products wre being sourced from companies located in this building. [ TPB note: as a former corporate CFO, I find the idea that a company does not know where its products are coming from to be incredible ... and the willingness of companies to lie about it very believable ]
The database of Standard Value Profiles should be built using a crowdsourcing methodology.
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STANDARD VALUE PROFILE DATABASE
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GO TOP
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TRUE COSTS AND VALUE OF EVERY PRODUCT ON THE PLANET
Well managed companies know a lot about every product that is flowing into their organizations and being produced for sale. There is nothing like this level of knowledge about the products that are flowing through society and having impact on people and the environment.
In companies one technique for documenting knowledge about products is the idea of Standard Costs and Variance Analysis which is powerful and relatively low cost. In the TVM data architecture, the equivalent are STANDARD VALUE PROFILES.
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Quantification using Standard Value Profiles for Everything
TVM uses multiple units of measure … and use standard value profiles for the accounting. Standard values are something like standard costs in cost accounting.
Money had its origins in being a measure of the price in an economic transaction. It facilitated trade and was very much more efficient than barter. How money became a store of value is a long story, and how money became a key component in money wealth creation an even longer story. Money has its uses, but it is a very poor unit of measure for almost everything that is important in the world we live in. The size of a money unit has no definition at all … it is determined by a market that is also impossible to describe and replete with 'invisible hands' that may or may not control everything.
The value of a product … goods or service … is not the amount that it can be bought or sold for. That is a price. The value is what a product contributes … to a person directly and to society in general and also taking into account the impact there is on natural capital. What this means is that there is a need for several units of measure and related quantification along the following lines.
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Quantification of PHYSICAL CAPITAL
There need to be several units of measure for all the components of PHYSICAL CAPITAL
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SOCIAL CAPITAL
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SOCIAL CAPITAL / HUMAN CAPITAL / QUALITY OF LIFE
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SOCIAL CAPITAL
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Social Capital
Social capital is the group version of individual human capital. Social capital has impact on individual human capital and individual human capital has impact on social capital. There is both
a static and a dynamic dimension.
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Quantification of HUMAN CAPITAL – quality of life
A unit of measure for quality of life may be driven by reference to the value of life itself. There is life, and there is quality of life. The value of life should not be directly related to a money unit, but be defined independently from money.
A standard life unit could be defined as 1 life = 1 million standard life units. Everything to do with quality of life is associated to this unit.
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Quality of Life
Quality of life is the underlying 'raison d'etre' for everything that goes on in our modern enviro-socio-economic system, but there is not a very good way of measuring the state and flows of everything that goes into 'quality of life. Much of the measurement of the performance of the global enviro-socio-economic system has been measured using a money metric which has been assumed to have a strong correlation with quality of life. There is some truth in this for the 'bottom of the pyramid' (BoP) but this does not work at all well in richer societies. There are many components to quality of life, and they must all be optimized ... and for this relevant measures are essential.
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The Individual, Family and Friends
The individual, family and friends are a key part of the ecosystem that enables a decent quality of life. What constitutes a good quality of life may be subjective, but there is a difference between a good quality of life and a bad quality of life, and these should be optimized. There are important differences in cultures ... but there are issues that are either good or bad with respect to quality of life. There are interactions between individuals, their families and their friends that all go into making up quality of life.
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Ability, Parenting, Education, Skills and Experience
An individual starts out with some ability that has genetic origins, and this can be developed during a lifetime by good parenting, education, skills training and learning from experience. An optimized life is one where these inputs result in making the very best possible use of an individual's inate ability.
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Health, Wellness, Food, Nutrition and Lifestyle
An individual starts out with some genetic conditions that influence health and wellness, but an optimized life is enabled by appropriate healthcare, good nutrition from food, safe water, good sanitation, and healthy lifestyles.
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Shelter, Stuff that is Needed, and Stuff that is Wanted.
Shelter and stuff that is needed are essential. A better quality of life becomes possible when shelter is better and there is more stuff that is needed and some stuff that is wanted. At some point a better quality of life is not achieved by more shelter and more stuff.
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The Surrounding Society / Feedback from Social or Community Capital
The surrounding society has a huge effect on quality of life. It is the surrounding society that makes many things that are important for quality of life to be possible or impossible. It is the surrounding society that delivers security of various sorts or not. It is the surrounding society that provides for rule of law and things like physical infrastructure that enable an efficient economy. Social capital is the group version of individual human capital. Social capital has impact on individual human capital and individual human capital has impact on social capital. There is both a static and a dynamic dimension.
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The Surrounding Natural Environment / Feedback from Natural Capital
The surrounding natural environment may have a big impact on quality of life. It is the surrounding natural environment that makes many economic activities possible, whether this is agriculture because of fertile land, or commerce and trade because of navigable rivers, or mining and manufacturing because of mineral and energy resources that enable industry.
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The Surrounding People Built Capital / Feedback from Financial Capital
The surrounding natural environment may have a big impact on quality of life.
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Money Income and Wealth
Money income and wealth are not important to quality of life, per se, but the availability of money enables an individual or a family to buy things that are critical to the maintenance and improvement in quality of life. With money comes a freedom to do things that improve the quality of life for the individual, family and friends.
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The Surrounding People Built Capital / Feedback from Physical Capital
The surrounding natural environment may have a big impact on quality of life.
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The Surrounding People Built Capital / Feedback from Intangible Capital
The surrounding natural environment may have a big impact on quality of life.
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NATURAL CAPITAL
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Quantification of NATURAL CAPITAL ... nature's resources
There need to be several units of measure within natural capital (NC) because of the many roles that natural capital plays in the success of everything. It would be good if these could be be summarized or consolidated into a single unit of measure of natural capital as a whole, but this requires more understanding of natural capital values than there is at the present.
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Open L070-CS-NC-NATURAL-CAPITAL
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Water
The value of water should be related to the value of life more than to the value of money. The price or cost of water varies depending on the abundance of water and whether or not water
is renewable in the place where it is uses. The cost of water must include the cost of release of polluted water into the environment. The unit of measure for water could be that 1 liter of net
water consumption = 1 water unit. Many things associated with water and water pollution could be related to the idea that 1 liter of fresh water has a value of 1 (say).
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http://www.truevaluemetrics.org/DBpdfs/NaturalCapital/Water/NC-Water-001-150102.pdf
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Open PDF ...
NC-Water-001-150102
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Land
The value of land should be related to a land value unit, and adjusted to reflect all the various uses there are for land, and not just those that a priced into money units as a result of
trade. There is value in land when used for eco-services (forests for carbon, wetlands for fisheries, wildland for bio-diversity, natural land for water purification, etc). The unit of measure
of land could be that 1 hectare of land = 1000 land units. Land use is constrained by a limited and fixed amount of land, and the value will change depending on the use being made of the land. Land may be used for urban development, suburban communities, rural agriculture, industrial use, tourism and various forms of ecoservice and habitat for bio-diversity. Many things associated with land and land use could be related to the idea that 1 hectare of undeveloped natural land equals 1000 (say)
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Minerals
Minerals are an essential raw material for many industrial processes that in turn produce the goods and services people need to support their standard of living and quality of life. As products move through the supply chain, the flow aspect of these economic transactions are reported using a money price, but the impact of the loss of the mineral resource is not accounted for in the state of the natural capital. The value of a mineral resource may not need to be quantified when it remains in situ, but when it is depleted the value must be accounted for based on the value the resource contributes to economic performance.
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Energy
Energy is the big driver of the modern enviro-socio-economic system. Energy is a critical input for almost everything that supports the high standard of living and quality of life that is now possible. There is a sophisticated framework for analysis of cost, price and profit within the energy dimension of the modern enviro-socio-economic system but only a partial framework for the analysis and reporting of the value and impact of everything related to energy in this system. Major investment has been made in technology to exploit carbon based fossil fuels but, until recently little has been done to exploit the massive flows of renewable energy that exist but have only been exploited on a very limited scale.
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Air Pollution
The atmosphere has been used as a waste dump for gaseous effluents since the beginning of time, but this became a serious matter during the era of industrialization and increase in energy use. Many noxious gases get released into the atmosphere by industrial processes and transport vehicles as well as particulates, all of which are detrimental to health and quality of life.
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Greenhouse gas emissions.
In addition to the air pollution referred to above, there is also the environmental degradation arising from the impact of greenhouse gas emissions on the atmosphere and the equilibrium of the weather. A unit of measure could be based on the idea that one metric ton of carbon dioxide emissions = 1000, and everything to do with air pollution gets related to this unit. Many things associated with atmospheric pollution could be related to a ton of carbon dioxide emissions where 1 ton of CO2e equals 1,000 (say).
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Ecosystem Services.
Nature is an amazing system. Even though there has been an immense amount of research and we know a lot, there is still a lot that we do not know. What we do know is that nature provides many services to maintain the quality of the environment and make it sustainable that are of huge value, but not priced at all in the conventional analysis of the enviro-socio-economic system
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ECONOMIC CAPITAL / FINANCIAL CAPITAL
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Financial Capital
The money measure needs to be better understood. It is common to use a reference currency lije 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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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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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
Organization is important. The corporate organization has enabled big business and its incredible productivity ... and profit performance. The system has been less effective in holding the very big business accountable for the damage that it has done to society and the environment ... but in terms of economic value adding it has been impressive.
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QUANTIFYING VALUE
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Standard value is key to efficient analysis
The core hypothesis that justifies the development and deployment of TVM is that money profit is not enough, there also has to be value. But value will never the there if value cannot be quantified in a widely accepted way.
If you cannot measure it … you cannot manage it
The TVM solution to this problem is to make use of “standard values” rather like “standard costs” are used in cost accounting … but even this has to be done with care. Value is not a simple metric … but it is a very important one.
Value is subjective … and this is part of of its importance as a key metric of progress and performance. A simplified value construct will not work to guide society to its best performance … or even to know what best performance might be.
Ignoring value … which is essentially what has been done in money accounting and economics certainly simplifies analysis, but over time the result of this is increasingly poor allocation of resources. Value is subjective, and as such its quantification has to have an element of pragmatism in order to be practical.
One part of the solution is to have standard values for everything that is of value … in other words, for everything.
The idea of a standard value in TVM is similar to the concept of standard cost in cost and management accounting. Everything has its standard value computed, just as everything has its standard cost computed. Periodic comparison of actual cost to standard cost makes it possible to have standard costs that reflect the actual cost very closely. Routine management analysis may be done using the standard costs … and the answers are good enough for most day-to-day decisions. Similarly with standard values … they may be used in day-to-day analysis and the answers are good enough, and easy to get.
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Price as a proxy for value
Price is often used as a proxy for value … because sometimes the price is close to the value. But this approach to value has many problems of which (1) price is determined in the main by the seller, and (2) the analysis going into determining price usually ignores almost all the elements of the value construct except what value a buyer might place on the item. In other words, you cannot set the price higher than the customer thinks the item has value if you want to sell the item!
This idea that price is best when the price of the item and the value of the item to the buyer is the same is an interesting dynamic … with the result that all value adding then becomes attributed to the business part of the value chain, and none for the consumer. In the end, a damaging economic idea.
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Value is everywhere
Examples in every sector
A standard value needs quantification, but not as money value … not as a monetization of the value quantity … but using a separate unit of measure.
Value changes depending on whose perspective is being used … and these changes are complex and difficult to explain. They are not only based on simple economics, but there are cultural and social issues as well.
Every person has their own profile of values … many people may have similar profiles … and within a community there may be only one general profile … or a relatively small number.
There needs to be a large repository of value profiles so that what people think one value is relative to another value. Many of the value ideas will be different … many will be the same. When all the profiles get linked together relatively, it becomes possible to see the aggregate average value profile.
Housing has value … a house has value … part of the value is its role in sheltering the family … part of the value is being a home for the family, the social center of the family … part of its value is the image it gives of the family … part of its role is a contribution to the neighborhood as a whole.
An education has value … part of the value is the socialization learning that children and young people get at school and college … part of the value is what they learn … part of the value is learning how to learn … part of the value is the opportunity expansion that results from being well educated.
Infrastructure has value … part of it is to enable socio-economic activities to take place more easily … a bridge saves people time in getting from one place to another, or getting there at all … a road makes it possible for people and goods to move from place to place efficiently. The value arises because people save time and things can be more productive. In some cases infrastructure makes the community safer. In some case infrastructure makes it possible for a community to expand … or to build some new economic activity in the place.
Health has value … part of the value of health is that good health enables people to live their lives in a far better way than when they are sick. All the things that are possible when a person is health become compromised when there is debilitating sickness.
Low crime has value … quality of life is at its best with no crime, but becomes impaired when there is crime. Low crime has a big social value, that is lost when crime increases. Getting low crime is expensive … police, courts, prisons and remedial programs are high cost parts of the community fabric, but important.
Electricity has value … quality of life is improved with access to electricity … when used electricity is clean … though there are questions about how clean electricity is when it is being generated.
Jobs have value … to the employee, those that are remunerated have a value in the family that is big relative to the same person when they are unemployed and unremunerated. Jobs are interesting in that they are also of value to the employer … every job helps in the process of carrying out the mission of the organization … and build value for the organization.
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Things that impact value are everywhere
Things that impact value are everywhere as well … so the framework of metrics needs to be able to handle the multiple characteristic of the value item and how issues impact the matter.
Good health has high value
Good health has a high value … but this is reduced by the onset of illness. Being sick lowers quality of life. Being cured improves quality of life. Being in good health is the desirable norm in the quality of life matrix.
Health in GDP is nonsensical
With modern GDP metrics, the cost of treatment is captured, but nothing else. The erroneous supposition is that the more treatment there is, the stronger socio-economic performance. TVM disagrees profoundly and has a very different approach.
Good health is always desirable … but maybe good health has a different value at different points in ones life. This should be reflected in the way the value matrix comes together. Maybe health value is going to be different for different people who do different jobs. The details are tricky … and they should be respected … and also there should be some simplification so that the system stays workable.
Low crime has high value
Low crime is very desirable and enhances quality of life in a community. In turn low crime has a favorable impact on the desirability of the neighborhood and house prices. Low crime reflects the people who live in the neighborhood and those that come into the neighborhood. Low crime also reflects the capability of the police and law enforcement.
In the quality of life measure, low crime should be the norm, and be a value component. All the various forms of criminality … anti social behavior … are negatives that detract from quality of life.
The cost of police and law enforcement may be needed to have a low crime outcome … but the costs are a negative in the quality of life. That money has to come from somewhere.
Efficient public transit systems have high value
Efficient public transit systems have high value and should be the norm in a well measured society. If the value of having excellent efficient public transit systems is incorporated in quality of life as the default, then the various costs can be set off against this. If there is a good transit system there is a history of investment in the transit infrastructure and the equipment, and an ongoing cost of operating staff, operating costs and maintenance. There is also a cost of congestion that varies according to the state of the transport infrastructure and the performance of the transit system. With a good transit system the desirability of neighborhoods can improve … but not always.
Urban and regional mass transit systems
It is difficult to imagine a modern city without a high performance urban mass transit system as well as regional mass transit systems. Most of these systems are run by government entities that use cash based money accounting, a system that fails completely to keep the value of past investment front and center of performance analysis.
The value of transit systems is a component in quality of life … not having one is a deficit .. and the cost of building one and the cost of running one is also a deficit … the cost of congestion is a deficit. The cost of building and running transit systems is substantial … and the matter of whether this is best paid through a public funding process … bonds, taxes, etc … or by user fees is an important question.
Not funding mass transit adequately, and having the system deteriorate is usually a value destroying outcome. At the same time, allowing high costs and low efficiency in the operation of the system to become the norm is also a value destroying outcome
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n8-Quantification-quality-of-life-1.php
In the history of measurement there has been a lot of dialog about the problem of accuracy ... especially in science and engineering. The intellectual effort has been substantial and progress has been made that is very impressive.
But in the history of measurement as it relates to economics and finance there has been little dialog and a number of crucial issues have still to be addressed ... let alone resolved.
Money is widely used as a measure in financial and economic analysis and reporting ... but money is variable and not firmly anchored to anything! At best money ... its price ... is determined by supply and demand, and these in turn are driven by underlying economic performance and global sentiment about one money relative to other moneys.
TVM has chosen to use metrics that are based directly on the underlying economic performance of the community, including the community's potential. At this stage quantification is based on the following:
... Very good is “a”
... Very bad is “z”
... Something in the middles is “m” or “n”
Nuances many be achieved using any letter of the alphabet ... varying shades of good from “a” to “m” ... varying shades of bad from “z” to “n”.
The scale of good or the scale of bad is reflected using a numerical modifier ... thus a very strong good would be “a9” and a very strong bad would be “z9”
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n8-Value-quantification-1.php
Value is subjective ... and very difficult to quantify ... but that does not mean that value should be ignored by a socio-economic system of “scorekeeping”. Value is, after all, more than anything else, what determines quality of life.
Putting a number on value! Putting a number on value is difficult ... but it has great utility. As a matter of convenience, the number is also a number for money. Because there are no capital markets that trade in “value” there is no way for value to be monetized. Value quantification is needed if the use of value as a metric is going to succeed. TVM uses the accounting concepts of standards to provide a framework for value quantification.
Value is not the same in all cultures and locations! Culture plays a big role in how value is perceived.
Modern materialism has tended to equate more and more or bigger and bigger with more value ... but that is not the only way value may be perceived. Different cultures in different places may put different values on the same things ... and this should be respected and value optimized based on what is most appreciated in the community.
In TVM, the quantification of value is independent of any money metric. The quantification is a basis for comparing all the different 'values' that go in to make for quality of life.
For example:
The value ... in this case a loss ... is different whan a 1 year old child dies, a 20 year old person dies or an 87 year old person dies. TVM quantifies the difference, recognizing that different people and different communities are likely to make this quantification differently.
For example:
A child of 5 years old dies in a rich community in the United States, in a poor community in Africa, or among the large population in China. All of these quantifications are going to be different.
The process of quantification does, however, enable a more objective analysis of what it is that goes into the idea of 'quality of life' and what are needed to improve quality of life.
TVM has value as the core metric. Value is as central to TVM as profit is to money profit corporate reporting systems. The value of a community ... or society ... is the key measure in TVM and a core determinant of how society delivers on the goal of happiness and quality of life. Value must be quantified.
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n8-Value-metrics-1.php
Value metrics are important. But value metrics are not easy, because the quantification of metrics is not easy.
Measurement of value has a large subjective component ... but it is still possible to have useful measurement. In fact, because value is so important, it is vital that there are relevant metrics about value.
The metrics of value is independent of dollar money ... currency money.
In TrueValueMetrics values are placed in a structure rather like money is placed in the structure that is double entry accountancy.
By using the concept of standard value ... a concept rather similar to standard costs ... it is possible to compare different programs and see how one program performs relative to another.
In the case of malaria control programs, the goal is to reduce mortality and morbidity. By having a table of standard values it is possible to report that one approach had more value relative to the costs than another.
The perception of value differs from place to place, and also changes over time. The changes are ongoing. Values change over time because of the evolution of society. The TVM set of standard values makes it possible to start a process of understanding value perception better, and also to make value adding the goal of economic interventions.
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Value adding ... social value adding
Value adding is a broader concept than profit. Value adding is the difference between the ending value and the initial value. It may also be thought of as the value created less the value consumed.
Value is rarely the same as price. Many things in life with the most “value” are truly priceless ... good health, friends and family, the birth of a child, happiness, and so on. It is a challenge to associate a number with value ... but TVM does this by using a dialog around sets of standard values.
Value consumed is more than the financial costs. Value consumed reflects costs but also includes issues like the damage to the environment ... or the exploitation and consumption of natural resources that have taken millions of years to create as in the petroleum industry.
Value ... financial and social
Capital markets are all about value ... but it is financial value only. A stock has a value based on its financial profit history and profit potential. What the company does for society is not a part of the capital market computation. It is just about profit history and profit potential ... about money flows ... about risk and the safety of money capital.
Social value is much more. It is no accident that the phrase “Pursuit of Happiness” is in the founding documents of the USA and not “Chase for Money”. Happiness derives from social values that end up making life worth living. TVM embraces both the financial and the social value and puts both in the metrics of the community.
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.
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Value Adding
Cost, price and value / productivity, profit and impact all have quite specific meanings
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.
Value adding is a derivative of value and cost. Value adding may approximate profit when the price reflects value and there are no social costs in addition to the money costs. Value adding is a much better measure of progress and performance than money profit. Value ... that is value to society ... is almost totally excluded from modern financial and economic metrics. The reasons are many including (1) it has a subjective dimension that makes valuation difficult; and, (2) it has a devastating impact on the norms of financial valuation of corporate activity. TVM has value more than profit as the key element in performance.
An economic dynamic that creates value will sustain not only at a present level, but at an increasing level of value creation ... a virtuous outcome. In a simple world it would be easy to plan progress and achieve progress, but in the world of reality there is little that is simple. Besides value creation and a virtuous compounding, there is also value destruction.
Value adding takes place whenever something that adds to quality of life occurs ... frequently in small increments
During the 2009 Clinton Global Initiative (CGI) in New York I was asked what I thought of it. My instant response was that it was largely PR, and the value of it was rather modest. I was then bombarded with statistics about how much the CGI had “raised” for global good causes and was made to feel very bad. The previous year “over $1.8 billion had been raised at the CGI”, I was told.
But essentially, I was right. The statistic of how much CGI raises is a very poor metric of CGIs value ... because much of the money described as being raised by the CGI is money that is already going to flow into philanthropic initiatives anyway.
The value of CGI is not how much money the participants talks about, and then gets published as a money raised amount. ... but the fact of the meeting and the cachet of having talked about the project in this forum ... which in turn facilitates fund raising.
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n8-Value-elements-of-value-1.php
Importance of value.
Value is the driver of quality of life ... society will be at its best when the available resources are used with a maximum of productivity. A measure like money profit, or cash flow is important for simple sustainability ... but it is the mix of value and profit rather than just profit alone that determines how well society and the economy will perform now and into the future.
What value has value
The idea of the value of value is very difficult. It is particularly difficult to include in any analysis when “value” is perceived differently by almost every individual. Value is personal in the extreme! However, to ignore value as an critical measure means that the results of analysis are essentially meaningless.
Value quantification.
If there was an easy way to quantify value, then it would very much easier to make use of 'value' as a parameter of decision making. TVM does value quantification using a methodology that may well have its origins in the Analystical Hyerarchical Process of the 1980s.
Price and value.
Market price is not a good proxy for value. For some goods and services, price may approximate value, but this is not true more often than it is true. The difference creates important and dangerous distortion on socio-economic decision making which explains some and maybe nearly all of the dysfunction of the modern capitalist laissez faire market economy.
Standard value.
TVM uses standard value to account for value flows in a simple and relevant way. Standard value is a concept derived from standard cost accounting. In TVM, everything has a standard value ... a best estimate of what the value is based on what is known.
For example ... good health has a value
... but people are uncomfortable putting a money number to define a value like this.
Global standard value.
From one perspective the same thing should have the same value everywhere on the planet ... and for this TVM has a global standard value. This is prepared based on a lot of input, but in the end it is a dataset that nobody will relate to ... and for very good reason. People and cultures are very different from place to place.
Community standard value.
The typical community usually has a reasonably common view of value that is based on cultural norms and the traditions of the community. Comparative study of the standard value profile of one community compared to another is a powerful tool for improving understanding about how progress may be optimized.
Ranking of community standard values
A ranking of community standard values helps to clarify a lot about the relevance of the quantification. What people think in terms of ranking should also be reflected in how the assigned money numbers are also showing.
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Comparisons.
There is a lot to be learned from comparison of the various standard value datasets.
For example:
... When the value rankings of different communities are compared it is possible to see how various factors change the perception of value ... maybe going beyond the anticipated issues of culture.
... The value standards for the community standard may be compared against the global standard profile to understand where the community is relative to the global average
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n8-Value-destruction-1.php
Value destruction is ignored in modern financial accountancy as well as the major macro-economic measures like GDP.
Value destruction is often associated with environmental costs that impact society, but do not have to be incorporated in the financial accounts of the corporate enterprise.
In recent times, more and more environmental regulations have made environmental degradation a cost to the enterprise and a drag on profit ... but the cost to society is still not part of the corporate accountancy and reporting system.
TVM, on the other hand, takes the cost to society and makes the cost explicit and associates this cost directly with the enterprise that is causing the value destruction.
Value destruction compounds to form a vicious cycle of increasingly difficult outcomes. Value destruction may start slowly, but if not corrected the compounding eventually takes hold, and it is very difficult to control.
In the complex reality of the economy, both value creation and value destruction are going on at the same time ... one offsets the other ... but there is always the potential for one of the other to get the upper hand. When it is value destruction that becomes dominant, the socio-economic outcome is catastrophic ... and this is what is happening in most poor settings and in societies where valueless money transactions have replace priceless real transactions.
An economic activity may be profitable, but this does not mean that the economic activity is value adding. Profits may be earned while the activity is value neutral, or the profit may be arising while the activity is destroying value.
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n8-Value-creation-1.php
Value creation
There is value creation 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 valueadd less the value consumed.
Value adding and value destruction!
Value adding happens when the resulting value is greater than the value consumed. Value destruction is when the resulting value is less than the value consumed. TVM takes into consideration ALL the issues that impact value to society and the community ... in contrast to the corporate profit measure that only brings into account the money revenues and money costs to compute profit.
Value reporting!
Value reporting needs to be as pervasive as profit reporting. Every organization should be reporting not only its money accounting, but also its value accounting. Capital markets should value stock based on both money profit and value.
Value in Not-for-Profit activities!
The concept of profit has no meaning as a performance measure for not-for-profit activities ... but value has a very real meaning. The TVM value construct applies everywhere in both private and public sector organizations that are working for the public good, but without effective performance metrics.
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n8-Value-change-measuring-progress-1.php
There is socio-economic progress when the 'state' of the person, family or community improves. A big component of 'state' is quality of life which in turn is made up of many components.
The elemental entity for analysis of progress and performance is an 'economic activity'. An economic activity consumes resources and creates value. The net of these is the valuadd, and where there is positive valuadd, there is progress.
Most financial accounting is done at the level of an organization. Most economic data are aggregated for the nation, and then disaggregated to lower adminstrative areas and places.
In order for economic activity to be aggregated in a meaningful way, it would be necessary for ALL economic activities to have a functional value accountancy system in place. IN such circumstances it would be possible for the results to be aggregated to either the implementing organizations or to the most appropriate place. Because this is unlikely to be achieved, some alternative approach needs to be adopted.
There is a technique in double entry money profit accountancy that can be used. It used to be referred to as 'incomplete records' and is a way for the financial performance of an enterprise to be reported accurately without having to record in detail all of the transactions that have taken place in a reporting period.
This technique is possible because of the unique and powerful idea of 'double entry' bookkeeping and the associated idea of balance sheet and profit and loss or operating statement. In this framework the 'change in the balance sheet' is equal to the 'profit' reported in the operating statement.
Applying this same idea in the TrueValueMetrics' framework means that valuadd ... in other words, progress ... can be determined by comparison of the 'state' between the beginning and end of a period.
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Value Chain Analysis
The value chain analysis techniques may be applied over time. In this case an activity that has costs today creates profit and value tomorrow. Value chain analysis can show how amazingly good big long term investments are for society. The TVM approach brings this into the analysis process in a rigorous way. There are many examples in many sectors of society and the economy.
Education.
The education of a child is a big expense ... but it is an investment that will pay back many times over the life of the person. Value chain analysis shows something of how a cost in early years creates opportunity for benefit in later years ... and could be the basis for economic analysis to justify investment not only by parents, but also by society in education and building human capital for the future.
Health.
Treating disease is another big expense ... and again with an economic dynamic that changes over time. A strategy that invests so that there is no need to treat disease because the disease is controlled or eradicated is much better than one that merely waits and treats the disease when it is debilitating and has all the associated costs. Value chain helps to determine whether prevention rather than cure is the optimum strategy.
Infrastructure.
The building of the US Interstate Highway System is another example. The system cost the US Government more than $100 billion ... but the immediate incremental property values around the country were way more than this ... and the productivity improvement of the national economy way bigger, and long lasting.
Parenting
Maybe the biggest gift to a child are the parents who are way more important than modern society maybe wants to acknowledge. Science seems to be discovering that parents set the stage for the child's development in ways that we do not really understand ... but it is clear that good parenting is a huge contributor to a health socio-economic outcome. This is very valuable, but maybe not easy to quantify.
Community
Beyond family, it is community that makes for quality of life. A good deed done today turns up as a favor returned sometime in the future. People have memory that works, even though society has no way of measuring these important intangible.
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n8-Value-chain-over-time-1.php
The value chain analysis techniques may be applied over time. In this case an activity that has costs today creates profit and value tomorrow. Value chain analysis can show how amazingly good big long term investments are for society. The TVM approach brings this into the analysis process in a rigorous way. There are many examples in many sectors of society and the economy.
Education.
The education of a child is a big expense ... but it is an investment that will pay back many times over the life of the person. Value chain analysis shows something of how a cost in early years creates opportunity for benefit in later years ... and could be the basis for economic analysis to justify investment not only by parents, but also by society in education and building human capital for the future.
Health.
Treating disease is another big expense ... and again with an economic dynamic that changes over time. A strategy that invests so that there is no need to treat disease because the disease is controlled or eradicated is much better than one that merely waits and treats the disease when it is debilitating and has all the associated costs. Value chain helps to determine whether prevention rather than cure is the optimum strategy.
Infrastructure.
The building of the US Interstate Highway System is another example. The system cost the US Government more than $100 billion ... but the immediate incremental property values around the country were way more than this ... and the productivity improvement of the national economy way bigger, and long lasting.
Parenting Maybe the biggest gift to a child are the parents who are way more important than modern society maybe wants to acknowledge. Science seems to be discovering that parents set the stage for the child's development in ways that we do not really understand ... but it is clear that good parenting is a huge contributor to a health socio-economic outcome. This is very valuable, but maybe not easy to quantify.
Community
Beyond family, it is community that makes for quality of life. A good deed done today turns up as a favor returned sometime in the future. People have memory that works, even though society has no way of measuring these important intangible.
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n8-Value-chain-in-the-supply-chain-1.php
Value Chain From Raw Material to Final Consumer to Eventual Disposal
The value chain from raw material to consumer to final disposal helps to show why some companies are very profitable and others are not. The value chains show how costs accumulate and what profits are extracted from the value chain.
The petroleum value chain helps to explain the various connects and disconnects between the origin of oil in a poor part of the world to gas being used in rich places. How is it that excellent crude oil in the Niger Delta makes some Nigerians super rich, with the country remaining terribly poor. How is it that there is seemingly little rational link between high gas prices at the pump and the costs of producing this gas? How do markets work ... and who do they work for?
The coffee value chain does the same for coffee. How is it that coffee consumed in a retail coffee shop is many times more to buy now than years ago ... but the price paid to farmers for their coffee has increased so very little. Where is the money going? Value chain shows that some of the organizations that were created to make the economic playing field fairer for the farmer have been gamed and have ended up being merely a way of extracting profit from the value chain without doing very much if anything in return.
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n8-Value-chain-in-development-1.php
Value chain analysis shows where costs are incurred and value arising.
The normal situation for the past several decades has been that a big part of the money mobilized for relief and development gets disbursed within the donor economy rather than in the beneficiary economy. This is shown in the following graphic:
When valuadd is used as the main metric for progress, then the generalized situation is that for the same amount of economic activity measured in money, there will be much more valuadd in a poor society than in there is in a rich society.
If the objective is to have as much socio-economic progress as possible ... the maximum of valuadd ... then the following would be a more desirable approach. The following graphic shows the improvement in development performance that results from a development process where the bulk of the available financial resources are used in the beneficiary economy.
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n8-Value-chain-analysis-1.php
Value chain analysis is a technique that relates cost, price and and profit ... and value consumption and value creation in a complete transaction matrix. The value chain analysis explains the aggregate of value consumption or destruction and the aggregate of value creation and value adding and reconciles the aggregate with the winners and losers at different stages of the value chain.
The value chain analysis may be applied either over time, over geographic space, or between organizational entities. Value chain analysis shows how critical local community based economic activities are to the community and how damaging many profitable global value chains are to society.
Consolidation accounting is a part of this paper because hardly anything is as simple as it seems, and consolidation accounting has the essential critical logic that helps to sort this complexity into its component parts. Community is impacted by many different economic entities and activities, and the way in which these interact and are recorded has been defined comprehensively in the accounting principles associated with consolidations.
Very few transactions are simple an have impact only on the direct participants ... most have other ramifications which are important in the money accounting of the business world, but have even more importance in the context of the combined flows of value and money around the community.
Modern corporate accountancy is complex. Most of the rules apply to the way an organizations reports to the financial stakeholders and, to a much lesser degree, to the public. These reports are the result of complex consolidation that takes into consideration the way the internal and external value chains impact costs, revenues and profits.
Managing these value chains makes it possible for a corporate organization to minimize its exposure to taxes, duties and other regulations that impact its financial performance ... and understanding and having data about value chains makes it possible for the public to hold organizations accountable for their performance in the community and towards society as a whole.
Value chain analysis is used to identify the winners and losers in various parts of the economic structure, and makes it possible to understand the systemic flaws in the way the economy operates. Value chain analysis is used to show cost and profit distribution across multiple areas and organizations as in the petroleum industry, or across time as in the case of education and the student's subsequent career.
TVM uses value chain analysis so that what appears as a success in one part of the value chain can be associated with the impact ... positive and negative ... in other parts of a value chain.
Value chain analysis can be used to identify the winners and losers in various parts of the economic structure, and makes it possible to understand the systemic flaws in the way the economy operates. Value chain analysis is used to show cost and profit distribution across multiple areas and organizations as in the petroleum industry, or across time as in the case of education and the student's subsequent career. Value chain from raw material to consumer is important. It shows why some companies are very profitable and others are not. The value chain show how costs accumulate and profits are extracted from the value chain. For example:
- Petroleum The TVM petroleum value chain explains the costs and profits between the origin of oil in a poor part of the world to gas being used in rich places. It explains how excellent crude oil in the Niger Delta makes some Nigerians super rich, with the country remaining terribly poor. It explains the links between high gas prices at the pump and production costs ... and how markets work!
- Coffee The TVM coffee value chain does the same for coffee. How is it that coffee consumed in a retail coffee shop is many times more to buy now than years ago ... but the price paid to farmers for their coffee has increased so very little. Where is the money going? Value chain shows that some of the organizations that were created to make the economic playing field fairer for the farmer have ended up being merely a way of extracting profit from the value chain without doing anything in return.
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n8-Value-1.php
For all practical purposes there is no organized data about value. Value is subjective ... and therefore difficult to quantify using a single number.
The value is arguably far more important than money cost or money price. The challenge with value accounting is how to have quantification of value that is an integral part of the system.
The TVM solution to this is to have elements of value, just as there are elements of cost, and to have standard values that reflect the perception of value that people have. From this it becomes possible to have standard value profiles for a community ... and from this to create reports that reflect the consumption and creation of these values.
The difficulty with using value in metrics is that value is subjective and therefore not easy to quantify ... but value is much more at the core of socio-economic performance and quality of life than anything else. Value is what the recipient thinks it is worth. These relationships are key:
- When value is greater than cost there is value adding; and
- When cost is greater than value there is value destruction.
Value is subjective ... and therefore difficult to quantify. Even though value is very important, it is not routinely quantified. The challenge with value accounting is how to have value quantified with numerical values that can be an integral part of the system.
The TVM solution to this is to have standard values that reflect the perception of value that people have about all the elements of value ... just as there are elements of cost in financial, cost and management accounting.
From this it becomes possible to quantify standard value for all the value elements and from this to create reports that reflect the consumption and creation of these values.
TVM uses a range of standard value profiles depending on the characteristics of the people and the community. This is a recognition of the fact that people have different views about the value of different things.
Even though quantifying value is challenging because value is subjective it is essential that it is done. Value is much more at the core of socio-economic performance and quality of life than anything else.
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Price is not value.
They are two different concepts. Value is often expressed in terms similar to a price ... but they have a different origin. Value has to do with perception ... what someone is willing to pay for something in order to be gratified.
Because the money numbers associated with value are rarely articulated, and not the subject of conversation and news reports, there is a weak set of value information. It is critical that this is changed. Associating a money number to values is regarded as a difficult ... even impossible ... task. However, this is very important if society is to have metrics that reflect what is the most important in society.
Value in markets It is perceived value that sets the price in a market. If value is lower than price, there is no incentive to buy the item. Conversely when value is higher than price, then there is an incentive to buy.
Something may have a low price, but have enormous value to the person using the product. An aspirin may have a low price ... but getting rid of a headache has big value.
Society is in a good place when goods and services have low prices and these goods and services have high value for the community.
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