Mdia p3-03-the-profit-dimension-150420
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The document discusses shortcomings of conventional profit-focused accounting and introduces the concept of multi-dimensional impact accounting. It notes that conventional accounting only considers financial transactions and ignores externalities. Multi-dimensional impact accounting aims to account for positive and negative impacts on all stakeholders, including human capital, natural capital, and society. This involves augmenting financial accounts to also account for non-financial value created and costs imposed, such as environmental and social impacts.
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Mdia p3-03-the-profit-dimension-150420
- 1. MULTI DIMENSION IMPACT ACCOUNTING File: MDIA-p3-02-The-PROFIT-Dimension-150420.odp Peter Burgess (c) All rights reserved MDIA The PROFIT Dimension
- 2. PROFIT ➔Every business measures performance using PROFIT as the measure ➔Conventional double entry accounting is the system used for measurement ➔PROFIT and expectation of PROFIT determines the value of a business ➔Only money transactions are taken into account ➔Externalities are ignored MULTI DIMENSION IMPACT ACCOUNTING
- 3. PROFIT There are two ways of determining profit: 1 … Aggregating all the Profit and Loss Account transactions for the period 2 … Comparing the changes in the Balance Sheet for the period MULTI DIMENSION IMPACT ACCOUNTING
- 4. IMPROVING PROFIT There are two ways of improving profit: 1 … Increase Revenues 2 … Decrease Costs MULTI DIMENSION IMPACT ACCOUNTING
- 5. INCREASE REVENUES There are two ways of increasing revenues: 1 … Sell more product 2 … Sell at higher prices MULTI DIMENSION IMPACT ACCOUNTING
- 6. DECREASE COSTS There are many ways of decreasing costs: 1 … Design a lower cost product 2 … Improve labor productivity and reduce payroll 3 … Reduce research and development 4 … Outsource to lower cost producers 5 … Relocate to lower tax regimes 6 … Relocate to avoid environmental regulations 7 … Relocate to avoid workplace safety and other worker welfare issues. MULTI DIMENSION IMPACT ACCOUNTING
- 7. DECREASE COSTS There are many ways of decreasing costs: 1 … Design a lower cost product 2 … Improve labor productivity and reduce payroll 3 … Reduce research and development 4 … Outsource to lower cost producers 5 … Relocate to lower tax regimes 6 … Relocate to avoid environmental regulations 7 … Relocate to avoid workplace safety and other worker welfare issues. MULTI DIMENSION IMPACT ACCOUNTING
- 8. Modern management information systems (MIS) based on the principles of conventional double entry accounting are very powerful. 1 … They enable simple aggregate reporting of very complex organizations 2 … They enable deep drill down to great detail about every aspect of the operations MULTI DIMENSION IMPACT ACCOUNTING
- 9. MULTI DIMENSION IMPACT ACCOUNTING Sun FINANCIAL ACCOUNTS Financial Accounts describe Economic Activity 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 ProfitSun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun SunSun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun
- 10. The problem is that PROFIT is only directly relevant to OWNERS and INVESTORS. The impact on every other stakeholder may or may not be positive. This is why MDIA is important! MULTI DIMENSION IMPACT ACCOUNTING
- 11. MULTI DIMENSION IMPACT ACCOUNTING Sun FINANCIAL ACCOUNTS ADD positive impact not accounted for 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 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 Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun Sun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun
- 12. MULTI DIMENSION IMPACT ACCOUNTING Sun FINANCIAL ACCOUNTS DEDUCT negative impact not accounted for 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 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 Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun Sun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun
- 13. MULTI DIMENSION IMPACT ACCOUNTING Sun FINANCIAL ACCOUNTS ACCOUNTING FOR EVERYTHING 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 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 Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun Sun Financial Capital Human Capital Man Built Structures & Systems Natural Capital Sun