SIZE MATTERS-2

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SIZE MATTERS 2 ... KEY CONCEPTS
A workshop at MIT to link mathematics with the realities of a very complex global integrated socio-enviro-economic system that has been very badly served by money as a metric and a dangerously simplified financial system.

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SIZE MATTERS-2

  1. 1. SIZE MATTERS 2 - KEY CONCEPTS File: TVA-p3-01-SIZE-MATTERS-2-160220.odp Peter Burgess (c) All rights reserved TRUE VALUE ACCOUNTING
  2. 2. CONTEXT This slideset is a Work-in-Progress and will be updated from time to time. It is part of a series that aims to enable better metrics for the complex socio-enviro-economic system that we all live in. Metrics are powerful, but they must be the right metrics. TRUE VALUE ACCOUNTING
  3. 3. Key Concepts from Accountancy: ● Double Entry Accounting; ● State, Process and Flow; ● State, Progress and Performance; ● Cost, Price and Value; ● Quantification; ● Standard Value; ● Data at the Center; ● Feedback; ● Reporting Boundaries; ● Consolidation Rules. TRUE VALUE ACCOUNTING
  4. 4. Double entry accountancy is surprisingly respectful of the key characteristics of engineering thermodynamics, but this is only applied to account for money based transactions and impact on business performance. TRUE VALUE ACCOUNTING
  5. 5. Conventional accounting ignores impact on society and environment. Everything beyond the business and outside the reporting envelope is ignored no matter how important. The idea of 'entropy' is not taken into account in the way metrics work for the system. TRUE VALUE ACCOUNTING
  6. 6. It is a fundamental reality that all WEALTH measured in money has been created by human energy together with man built knowledge, structures and systems and exploiting NATURAL CAPITAL … and in an unsustainable way. TRUE VALUE ACCOUNTING
  7. 7. The purpose of data is to enable good decisions to be made in a timely manner and with high reliability. Data must be low cost. Data must be relevant in order to be useful for decision makers. The best decisions are made at a low level in the system hierarchy. TRUE VALUE ACCOUNTING
  8. 8. Double Entry Accounting ● Double Entry is the core strength of a good accounting system; ● Every money transaction impacts two accounts; and the system as a whole is always in balance; ● Enables analysis of State, Process and Flow The next three slides show how ACTIVITY or process and flow changes STATE TRUE VALUE ACCOUNTING
  9. 9. STEADY STATE TRUE VALUE ACCOUNTING
  10. 10. POSITIVE PROGRESS TRUE VALUE ACCOUNTING
  11. 11. DETERIORATION OF STATE TRUE VALUE ACCOUNTING
  12. 12. No information about ACTIVITIES is needed in order to measure PROGRESS … only information about changes in STATE TRUE VALUE ACCOUNTING
  13. 13. Data at the Center ● Used to plan ● Used to organize ● Used to implement ● Used to monitor progress ● Used to monitor cost effectiveness ● Used to plan follow up next steps TRUE VALUE ACCOUNTING
  14. 14. TRUE VALUE ACCOUNTING
  15. 15. State, Progress and Performance ● State is the Balance Sheet of the entity at a moment in time; ● Progress may be measured by comparing the Balance Sheet changes between the beginning and the end of the period; ● Performance is a measurement that relates the Progress to the resources consumed. TRUE VALUE ACCOUNTING
  16. 16. EFFICIENCY AND EFFECTIVENESS TRUE VALUE ACCOUNTING
  17. 17. Cost, Price and Value ● There should be clarity about what is cost and what is price; ● A buy/sell transaction takes place at a price; ● The buy price becomes the buyer's cost; ● There is a lot of data about price, but relatively little accessible data about cost; ● Value is a very important idea, but quantified data about value is missing; ● Money cost, price and value ignore all about impact on people and planet. TRUE VALUE ACCOUNTING
  18. 18. TRUE VALUE ACCOUNTING The money cost of the resources used to make the productCost Price Value The money amount that exchanged when the product is bought or sold A notional amount that is ascribed to the product by an owner or user
  19. 19. Profit, ValueAdd and Value Destruction Profit is Price minus Cost. Valueadd and value destruction are computed from Value and Cost. Understanding valueadd and value destruction will be a game changer. These are much more relevant concepts than the simplistic money profit metric. TRUE VALUE ACCOUNTING
  20. 20. TRUE VALUE ACCOUNTING
  21. 21. IMPACT ACCOUNTING Moving from Financial to Impact Accounting STATE BOP … ACTIVITY ACCOUNTING … STATE EOP TRUE VALUE ACCOUNTING
  22. 22. Moving from Financial to Impact Accounting STATE BOP … ACTIVITY ACCOUNTING … STATE EOP ● Financial accounting; ● P&L and Balance Sheets (BOP and EOP); ● Financial accounting plus GOOD impacts; ● Financial accounting minus BAD impacts; ● Financial accounting with BOTH impacts; ● Bringing in IMPACTS on externalities; ● Expanding the REPORTING ENVELOPE; ● Accounting for IMPACT on ALL capitals. TRUE VALUE ACCOUNTING
  23. 23. FINANCIAL ACCOUNTS Financial Accounts describe Economic Activity REVENUES Products Sold X Price Products Bought X Price Energy Bought X Price Employee Benefits Employee Payroll Other expenditures Asset use costs Depreciation Financial expenses Pro-good expenditures Taxation Profit TRUE VALUE ACCOUNTING
  24. 24. FINANCIAL ACCOUNTS OF AN ENTERPRISE Financial Accounts describe Economic Activity REVENUES Products Sold X Price Products Bought X Price Energy Bought X Price Employee Benefits Employee Payroll Other expenditures Asset use costs Depreciation Financial expenses Pro-good expenditures Taxation Profit Cash Current Assets Fixed Assets Intangible Assets TOTAL ASSETS Current Liabilities Long Term Debt Owners' Equity Cash Current Assets Fixed Assets Intangible Assets TOTAL ASSETS Current Liabilities Long Term Debt Owners' Equity Balance Sheet BOP Balance Sheet EOP TRUE VALUE ACCOUNTING
  25. 25. FINANCIAL ACCOUNTS ADD positive impact not accounted for REVENUES Products Sold X Price Products Bought X Price Energy Bought X Price Employee Benefits Employee Payroll Other expenditures Asset use costs Depreciation Financial expenses Pro-good expenditures Taxation Profit REVENUES Products Sold X Price VALUE to buyer Equals HUMAN CAPITAL ADD Wages and benefits What value to employee? Pro-good expenditures What value to society? Taxation What value to society? POSITIVE IMPACT NOT ACCOUNTED FOR TRUE VALUE ACCOUNTING
  26. 26. FINANCIAL ACCOUNTS DEDUCT negative impact not accounted for REVENUES Products Sold X Price Products Bought X Price Energy Bought X Price Employee Benefits Employee Payroll Other expenditures Asset use costs Depreciation Financial expenses Pro-good expenditures Taxation Profit For products and energy bought and this process Free use of the commons and public services & infrastructure Degradation of land Water scarcity and degradation Air pollution: Impact on people Air pollution: Impact on climate Air pollution: Impact on people Solid waste Resource depletion Environmental Degradation Negative impact TRUE VALUE ACCOUNTING
  27. 27. FINANCIAL ACCOUNTS ACCOUNTING FOR EVERYTHING REVENUES Products Sold X Price Products Bought X Price Energy Bought X Price Employee Benefits Employee Payroll Other expenditures Asset use costs Depreciation Financial expenses Pro-good expenditures Taxation Profit REVENUES Products Sold X Price VALUE to buyer Equals HUMAN CAPITAL ADD Wages and benefits What value to employee? Pro-good expenditures What value to society? Taxation What value to society? For products and energy bought and this process Free use of the commons and public services & infrastructure Degradation of land Water scarcity and degradation Air pollution: Impact on people Air pollution: Impact on climate Air pollution: Impact on people Solid waste Resource depletion Environmental Degradation POSITIVE IMPACT NOT ACCOUNTED FOR Negative impact TRUE VALUE ACCOUNTING
  28. 28. Financial Accounts describe Financial Impact Financial Costs Financial Profit Financial Revenues Financial Balance Sheet BOP Financial Balance Sheet EOP Impact Accounts reflect Externalities Balance Sheet Changes Impact on Institutions Impact on People Impact on Society Impact on Physical Impact on Knowledge Impact on Resources Impact on Environment Impact on EcoSystem Balance Sheet Changes Balance Sheet Changes Balance Sheet Changes TRUE VALUE ACCOUNTING
  29. 29. Financial Accounts describe Financial Impact Impact Accounts reflect Externalities Impact on Institutions Impact on People Impact on Society Impact on Physical Impact on Knowledge Impact on Resources Impact on Environment Impact on EcoSystem Balance Sheet Changes Balance Sheet Changes Balance Sheet Changes TRUE VALUE ACCOUNTING Financial Accounts describe Financial Impact Financial Costs Financial Profit Financial Revenues Financial Balance Sheet BOP Financial Balance Sheet EOP Impact Accounts reflect Externalities Balance Sheet Changes
  30. 30. Sun BOP EOP Sun Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun Financial Capital Human Capital Man Built Capital Natural Capital Sun Financial Accounts describe Financial Impact Impact Accounts reflect Externalities Impact on Institutions Impact on People Impact on Society Impact on Physical Impact on Knowledge Impact on Resources Impact on Environment Impact on EcoSystem Balance Sheet Changes Balance Sheet Changes Balance Sheet Changes TRUE VALUE ACCOUNTING Financial Accounts describe Financial Impact Financial Costs Financial Profit Financial Revenues Financial Balance Sheet BOP Financial Balance Sheet EOP Impact Accounts reflect Externalities Balance Sheet Changes
  31. 31. Ignoring Externalities is Absurd ... Conventional accounting enables the ignoring of externalities. With no money transaction there is nothing … which is patently absurd … but is the norm and has been for decades. TRUE VALUE ACCOUNTING, integrated impact accounting addresses this critical dysfunction. TRUE VALUE ACCOUNTING
  32. 32. QUANTIFICATION TRUE VALUE ACCOUNTING
  33. 33. Quantification Putting numbers on measures is a vital step in enabling management to make good decisions: ● Money is used to measure profit and much to do with financial capital. ● A measure is needed for everything to do with human life and quality of life … human capital ● Other measures are needed for : ● The Carbon Cycle; ● The Water Cycle; ● Land use (including ecosystem services); ● Various Nutrient Cycles. ● Not to mention better accounting for risk. TRUE VALUE ACCOUNTING
  34. 34. The role of monetization Monetization is fatally flawed as a method for measurement. An exchange transaction … a market … gives a result based more than anything else on supply and demand. It is a 'result' and not a 'measure'. TRUE VALUE ACCOUNTING
  35. 35. Standard Value Cost accounting is often based on a framework of standard costs. Impact accounting can be based on a similar system of standards. The standard is the norm. Variations from the norm are identified and used to prioritize action plans to improve performance TRUE VALUE ACCOUNTING
  36. 36. A COMPLEX SYSTEM The system is complex … a host of different agendas, goals, and behaviors … TRUE VALUE ACCOUNTING
  37. 37. Complex system … competing agendas TRUE VALUE ACCOUNTING
  38. 38. My version of amazing complexity … ● Global North/Global South/Community ● Big Organizations - National and International / Small communities ● Elements of Society: National level and community TRUE VALUE ACCOUNTING
  39. 39. TRUE VALUE ACCOUNTING
  40. 40. TRUE VALUE ACCOUNTING
  41. 41. TRUE VALUE ACCOUNTING
  42. 42. FEEDBACK Feedback design is key to rapid change … everyone should have easy quick data that helps the making of better decisions TRUE VALUE ACCOUNTING
  43. 43. ● Feedback is best when it is fast and very focused on practical actionable response ● In this example feedback happens in the small community BEFORE the data reaches city, state, national and big data systems at the international level. TRUE VALUE ACCOUNTING
  44. 44. TRUE VALUE ACCOUNTING
  45. 45. The next slides STATE BOP … ACTIVITY … STATE EOP How to apply the MDIA core concepts to the supply chain: ● First thinking it terms of money profit ● Secondly adding in the impact on people, society and the environment. TRUE VALUE ACCOUNTING
  46. 46. Sun FINANCIAL ACCOUNTS Economic Activity … Process Accounts REVENUES Products Sold X Price Products Bought X Price BOP EOP Energy Bought X Price Employee Benefits Employee Payroll Other expenditures Asset use costs Depreciation Financial expenses Pro-good expenditures Taxation Profit File: MDIA-Framework-004-150411-WIP.odp Peter Burgess (c) All rights reserved Sun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun SunSun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun TRUE VALUE ACCOUNTING
  47. 47. MBSS Natural Capital Human Capital PRODUCT … the SUPPLY CHAIN IMPACT ACCOUNTING ADJUSTMENTS Zero to start Costs this stage Profit this stage Price this stage FINANCIAL ACCOUNTS Zero to start Costs this stage Profit this stage Price Stage 1 FINANCIAL ACCOUNTS EACH STEP OF THE SUPPLY CHAIN Cost = Price stage 1 Costs Stage 2 Profit Stage 2 Impact Stage 1 Impact Stage 1 Impact Stage 1 Cum Costs Cum Profit Price Stage 2 Impact Stage 2 Impact Stage 2 Impact Stage 2 Cum Impact Cum Impact Cum Impact Cost = Price stage 2 Costs Stage 3 Profit Stage 3 Cum Costs Cum Profit Price Stage 3 Impact Stage 3 Impact Stage 3 Impact Stage 3 Cum Impact Cum Impact Cum Impact Financial Dimension File: MDIA-Framework-004-150411-WIP.odp Peter Burgess (c) All rights reserved TRUE VALUE ACCOUNTING
  48. 48. MBSS Natural Capital Human Capital PLACE … Where people live and work … where impact can be seen IMPACT ACCOUNTING ADJUSTMENTS Zero to start Costs this stage Profit this stage Price this stage FINANCIAL ACCOUNTS Zero to start Costs this stage Profit this stage Price Stage 1 FINANCIAL ACCOUNTS EACH STEP OF THE SUPPLY CHAIN Impact Stage 1 Impact Stage 1 Impact Stage 1 Financial Dimension File: MDIA-Framework-004-150411-WIP.odp Peter Burgess (c) All rights reserved TRUE VALUE ACCOUNTING
  49. 49. Sun Small decisions by people make all the differenceBOP EOP Sun Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun Financial Capital Human Capital Man Built Capital Natural Capital Sun TRUE VALUE ACCOUNTING
  50. 50. Sun Small decisions by people make all the differenceBOP EOP Sun Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun Financial Capital Human Capital Man Built Capital Natural Capital Sun TRUE VALUE ACCOUNTING
  51. 51. Sun Small decisions by people make all the differenceBOP EOP Sun Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun Financial Capital Human Capital Man Built Capital Natural Capital Sun Product Place Supply Chain Process Organization Enabling environment Society TRUE VALUE ACCOUNTING
  52. 52. Sun Small decisions by people make all the differenceBOP EOP Sun Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun Financial Capital Human Capital Man Built Capital Natural Capital Sun TRUE VALUE ACCOUNTING
  53. 53. Sun Small decisions by people make all the differenceBOP EOP Sun Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun Financial Capital Human Capital Man Built Capital Natural Capital Sun TRUE VALUE ACCOUNTING
  54. 54. Sun External Resources Create Impact Value Sun BOP Financial Capital Human Capital Man Built Capital Natural Capital Sun SunSun EOP Financial Capital Human Capital Man Built Capital Natural Capital Sun TRUE VALUE ACCOUNTING
  55. 55. THIS SLIDESET IS 2 OF 5 SIZE MATTERS 1 … OVERVIEW http://www.slideshare.net/PeterBurgess2/size-matters1 SIZE MATTERS 2 … KEY CONCEPTS SIZE MATTERS 3 … SYSTEM CYCLES http://www.slideshare.net/PeterBurgess2/size-matters3 SIZE MATTERS 4 … PERSPECTIVES http://www.slideshare.net/PeterBurgess2/size-matters4 SIZE MATTERS 5 … IMPACTS http://www.slideshare.net/PeterBurgess2/size-matters5 TRUE VALUE ACCOUNTING
  56. 56. REMINDER This slideset is A WORK-IN-PROGRESS. It will be upgraded periodically. It is part of a series of more than 100 slidesets. Navigation to these is available here: http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=N1-Slidesets-p3 More about the True Value Metrics initiative is at: http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=list0100-MainNav FEEDBACK is welcome. Please email to Peter Burgess … peterbnyc@gmail.com … with a catchy phrase in the subject line so that it gets attention, and please identify the specific slideset(s) or webpage involved. TRUE VALUE ACCOUNTING
  57. 57. THANK YOU Some links and contact information: Email Peter Burgess … peterbnyc@gmail.com Peter Burgess LinkedIn profile https://www.linkedin.com/in/peterburgess1 Link to TrueValueMetrics.org website http://www.truevaluemetrics.org/ Link to navigation to other resources: http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=list0100-MainNav#1 TRUE VALUE ACCOUNTING

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