SIZE MATTERS-2

SIZE MATTERS
2 - KEY CONCEPTS
File: TVA-p3-01-SIZE-MATTERS-2-160220.odp Peter Burgess (c) All rights reserved
TRUE VALUE ACCOUNTING

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.

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.

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.

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.

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.

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.

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

STEADY STATE

POSITIVE PROGRESS

DETERIORATION OF STATE

No information about ACTIVITIES is needed in
order to measure PROGRESS
… only information about changes in STATE

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

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.

EFFICIENCY AND EFFECTIVENESS

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.

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

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.

IMPACT ACCOUNTING
Moving from Financial to Impact Accounting
STATE BOP … ACTIVITY ACCOUNTING … STATE EOP

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.

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

FINANCIAL ACCOUNTS OF AN ENTERPRISE
Financial Accounts describe Economic Activity
REVENUES
Employee Benefits
Employee Payroll
Other expenditures
Asset use costs
Depreciation
Financial expenses
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

FINANCIAL
ACCOUNTS
ADD positive impact not accounted for
REVENUES
Employee Benefits
Employee Payroll
Other expenditures
Asset use costs
Depreciation
Financial expenses
Taxation
Profit
REVENUES
VALUE to buyer
Equals
HUMAN CAPITAL ADD
Wages and benefits
What value to
employee?
What value to society?
Taxation
POSITIVE
IMPACT NOT
ACCOUNTED
FOR

FINANCIAL
ACCOUNTS
DEDUCT negative impact not accounted for
REVENUES
Employee Benefits
Employee Payroll
Other expenditures
Asset use costs
Depreciation
Financial expenses
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
ACCOUNTS
ACCOUNTING FOR EVERYTHING
REVENUES
Employee Benefits
Employee Payroll
Other expenditures
Asset use costs
Depreciation
Financial expenses
Taxation
Profit
REVENUES
VALUE to buyer
Equals
HUMAN CAPITAL ADD
Wages and benefits
What value to
employee?
Taxation
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 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

Impact on People
Impact on Society
Impact on Physical
Impact on Knowledge
Impact on Resources
Impact on EcoSystem
Balance
Sheet
Changes
Balance
Sheet
Changes
Balance
Sheet
Changes
Financial Costs
Financial Profit
Financial Revenues
Financial
Balance
Sheet
BOP
Financial
Balance
Sheet
EOP
Balance
Sheet
Changes

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
Impact on People
Impact on Society
Impact on Physical
Impact on Knowledge
Impact on Resources
Impact on EcoSystem
Balance
Sheet
Changes
Balance
Sheet
Changes
Balance
Sheet
Changes
Financial Costs
Financial Profit
Financial Revenues
Financial
Balance
Sheet
BOP
Financial
Balance
Sheet
EOP
Balance
Sheet
Changes

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.

QUANTIFICATION

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.

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'.

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

A COMPLEX SYSTEM
The system is complex … a host
of different agendas, goals, and
behaviors …

Complex system … competing agendas

My version of amazing complexity …
● Global North/Global South/Community
● Big Organizations - National and International /
Small communities
● Elements of Society: National level and
community

FEEDBACK
Feedback design is key to rapid
change … everyone should have
easy quick data that helps the
making of better decisions

●
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.

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.

Sun
FINANCIAL
ACCOUNTS
Economic Activity … Process Accounts
REVENUES
BOP EOP
Employee Benefits
Employee Payroll
Other expenditures
Asset use costs
Depreciation
Financial expenses
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

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

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

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

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

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

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
SIZE MATTERS 4 … PERSPECTIVES
SIZE MATTERS 5 … IMPACTS

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.

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

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