Analysis

A NEW WAY TO MEASURE THE VALUE A COMPANY CREATES 
Financial profit captures the value to the shareholder, while the Integrated Profit and Loss (IP&L) captures the value to society
F Pamminger, P Sukhdev, C Baldock
Publication Date (Web): 11 August 2017
DOI: https://doi.org/10.21139/wej.2017.025


Critical to every company is knowing the value it creates. After all, isn’t that why a company exists? Historically, we have relied on traditional accounting profit and loss statements to measure performance and rate success. And while this has served us well to date, it only provides one perspective of value, and that is monetary return to the shareholder.

Today we want to know more. We also want to know if society gains value from the company’s existence, or is adversely effected. We want to know what our contribution is towards liveability. And we are all seeking to place ‘customers at the centre’. But how can we measure all of these?

One methodology that does include a broader perspective to measuring value is Integrated Profit and Loss (IP&L). This includes measuring a company’s impacts on natural capital, social capital, human capital, together with financial capital. 

Each capital then requires parameters to be selected that capture the potential impacts. For example, natural capital at Yarra Valley Water is experienced through land clearing, pollutants discharged into waterways, water extraction, and greenhouse gas emission. Each is quantified, and each requires a separate analysis to determine the environmental impact, in many cases drawing upon previous modelling done elsewhere and translated to this site. And for each of these, an economic value is then determined, also using the best available methodology.

Trucost together with GIST Advisory compiled Yarra Valley Water’s IP&L account for its 2014/15 financial year. In a year where traditional financial accounting methods recorded a profit of $50m, the IP&L account was $446m, made up of $374 in financial capital, $53 in natural capital, $13m in human capital, and $6m in social capital impacts. Interestingly, the profit to the shareholder using traditional accounting is 11%, while the value to society recorded using the IP&L makes up the balance of 89%. Having access to such information provides actionable insight to inform strategic decision making to grow the integrated value we create.

From Yarra Valley Water’s perspective, the question of value is fundamental, and we consider the greater access we have to more and more data, the better our final decisions will be. Maybe it is akin to a pilot flying a plane, who has a large panel of gauges to access to make the decision. We too, as managers, want to equally have as many gauges as possible.

And finally, an Integrated Profit and Loss (IP&L) Report provides business a new way to measure the value a company creates. Interestingly, it may be the deeper discussion that such an analysis opens up, rather the actual results in themselves that may be of greatest value. And after all, for utilities who are seeking to place ‘customers at the centre’, we all need a different way to assess the value we not only provide our shareholders but also the community and society. An Integrated Profit and Loss report does just that.

 

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