ECONOMIC VALUE FLOW

The figure above depicts the flow of value in an economic entity. Like oxygen, food and other necessities to a biological system, value measured in monetary terms is the essence of economic entities.

Where does it begin?

Before an entity can generate value by itself, some value from another entity has to be transferred to the entity. This is the formation period of the entity. Such transfer enables the entity to build its most fundamental components - capacities - that enable it to generate its own value and therefore exchange with its customers. The value transfer could be either as an asset or a consumable: these points reflect the options for finance injection. After the first exchange process, value flows through the entity either via the short term cycle without the long term cycle or through both cycles. (See the PCIX Grid)

Definitions:

-          Assets: Assets are long term embodiments of value ready to be used up (absorbed) in the value addition transformation processes.

-          Expenses: Expenses are periodic outflows from Assets to value addition transformation processes in the short term.

-          Products: These are short term embodiments of value resulting from the value addition transformation process in the short term; they are ready and available for exchange with customers.

-          Consumables: These are short term embodiments of value being used up (absorbed) in the value addition transformation processes.

-          Revenues: Revenues are short term embodiments of value resulting from the exchange process with customers and are ready to be absorbed in either the short term or long term value addition transformation processes.

-          Savings: Savings are the periodic inflows into Reserves for value addition transformation process in the long term.

-          Reserves: Reserves are long term embodiments of value still in the value addition transformation process in the long term not ready for absorption.

-          Leakages: Leakages are the unabsorbed (unused) periodic outflows from the long term embodiments of value - Assets and Reserves.

Economic Value Flow Reporting

The EVF Statement (Example)

DESCRIPTION	XAF	XAF
SHORT TERM
Revenue		10,000,000
Consumables:             - Revenue Generating[1]	(5,000,000)
- Resource Servicing[2]	(1,200,000)
- Inescapable Obligations[3]	(300,000)
Total Consumables		(6,500,000)
Savings		3,500,000
Expenses:        - Assets A	800,000
- Assets B	200,000
Total Expenses		(1,000,000)
Gross Operating Value Added (Eroded)		2,500,000
Leakages:        - Assets	300,000
- Reserves	100,000
Total Leakages		(400,000)
Net Operating Value Added (Eroded)		2,100,000
LONG TERM
Opening Assets		2,000,000
Less:                 - Expenses	(1,000,000)
- Leakages	(300,000)
Add:                - Transfers from Reserves	1,800,000
Net Periodic Change		500,000
Closing Assets		2,500,000
Opening Reserves		2,000,000
Add:                - Savings	3,500,000
Less:                 - Leakages	(100,000)
- Transfers to Assets	(1,800,000)
Net Periodic Change		1,600,000
Closing Reserves		3,600,000
Total Long Term Resources		6,100,000

Performance Indicators

1.      FORESIGHT ACCURACY (FA)

Economic sustenance depends on an entity’s ability to generate value for itself. However, the context in which value is being generated is dynamic and most often very uncertain. Managers and other decision makers act based on their hypotheses about eminent changes in the future. For their decisions to yield returns to the entity, those hypotheses have to be matched with the reality at that point in the future. Otherwise, the resources allocated will be lost without any return to the entity.

a.       Objective

The objective of Foresight Accuracy (FA) is to determine the extent to which the entity’s decisions in the past enable it to capitalize on and benefit from the opportunities created by the prevailing context. This goes a long way to establish the credibility of the decision makers.

b.      Equation

FA        =	Cumulative Net Operating Value (within the Strategic Timeframe)
	Total Resources Employed (within the Strategic Timeframe)

For the hypothetical example, FA is 20.79% or 0.2079.

2.      VALUE REPLACEMENT (VR)

Economic value transformation is a dynamic process. In the transformation leading to value addition, an entity absorbs considerable value. What if the total value outflow is less than the value inflow? An entity cannot sustain itself if the value inflow is less than the value outflow indefinitely.

a.       Objective

The objective of Value Replacement (VR) is to determine the extent to which an entity’s value absorbed is being replaced by it adds through its transformation processes of value addition in the short term (production).

b.      Equation

VR        =	Savings
	Expenses + Leakages

                                    VR for the example is 250% or 2.5 times

3.      MARKET VULNERABILITY (MV)

Fluctuations in the economic context create a degree of vulnerability to all entities operating within that context. Such vulnerability is expressed in the losses incurred as a result of changes in the market place.

a.       Objective

The objective of Market Vulnerability (MV) is to determine the extent to which an entity can withstand contextual and temporal fluctuations.

b.      Equation

MV      =	Leakages
	Closing Reserves

                                    MV for the example is 11.11%

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[1] Revenue generating consumables include the cost of raw materials and direct labour in traditional accounting.

[2] Resource servicing consumables are consumption geared at maintaining the effectiveness of resources. It may include: repairs and maintenance of infrastructure, marketing costs, overhead personnel, cost of branding, cost of maintaining supply channels etc.

[3] Inescapable obligations consumables are those consumables are given with or without operations such as licence fees, fixed taxes etc.

RELATIONAL RESOURCES

Humanity has always held a firm conviction that no man is an island. However, until the rise of powerful business models built on the interaction of individuals; the inherent value of communities was taken for granted. The rise in popularity of social and professional networking facilities on the internet is evidence of technology facilitating a long held survival mechanism of humans – relations and their interactions. In social psychology, there is a formal study of a special kind of capital – social capital, it proves that beyond talent, information, finance or material goods, there is another class of resources that counts because all these must relate and interact with one another. (Social Capital Wikipedia.org)

DEFINITION, LOGIC AND EXAMPLES

A Relational Resource is the resource pool and its associated links between two or more entities established by mutual consent for their contribution to, sharing of and making use of the resource pool.

A relational resource is the integral unit of entities connected to one another

Examples of Relational Resources are Communities, Markets, Networks, Partnerships, Consortiums, and Supply Chains etc.

BASES OF VALUE

-          Connectivity: This is the extent to which member entities are linked to one another and to the pool of resources.

-          Trust: This is a measure of the extent to which members have confidence in and reliance on the responsibility and ability of other members and the resource pool.

Where the members do not have confidence in and cannot rely on the responsibility and ability of other members, there is bound to be little or no interactivity within, hence rendering the population and established connections useless.

Individuals learn to trust their communities or other institutions. Most often, the trust is dependent on the historical performance of the community.

-          Equity: Equity is a measure of the extent to which members perceive a state of justice and impartiality among themselves in relation to the resource pool.

Instinctively, some members expect to gain more than their share of contribution to a pool. However, none will be pleased to know that they are being treated unfairly while another member is receiving favors. As such, balance is reached only when the relational resource metes out to members what is merited based on defined and transparent objective criteria.

The rule of law is the main tool which has been used in the past to build equity in a community. Clear, explicit, public and active legal systems assure members that just as they cannot perks; no other entity is taking unfair advantage of the system. As such, whatever is merited to them shall be fully possessed by them.

-          Commitment: This is the extent to which members are willing to engage and be engaged with other members and the resource pool.

In Africa, there is an old saying that “tightfisted hands get nothing”. This is not true only for the sages of old; it is the same for us in this day and age. Commitment is mutual; members not willing to engage others in their affairs will hardly be engaged in the affairs of others. Societies where people engage others in their affairs and are willing to be engaged in the affairs of others advance faster than those with less commitment. It is an infinite chain of providers and customers. In receiving an engagement, an entity is a customer, while in giving an engagement it becomes a provider. (3)

-          Delay: This is the minimum time taken by a member entity to make a contribution to, share or make use of the resource pool. (2)

Time is a critical factor in building communities. Every minute in waiting is a minute wasted.

-          Critical Effort: This is the human energy and resources expended by a member entity in order to make a contribution to, share or make use of the resource pool.

-          Bureaucracy: These are the number of procedures needed to be taken by a member entity to make a contribution to, share or make use of the resource pool.

FINANCIAL RESOURCES

For more than two millennia, the world has relied on some form of financial resource for commercial activity. The complexity of the nature of financial products, especially in the advanced countries, is a hallmark of humanity’s achievement in that respect. Today, we have financial resources that range from bets through insurance policies to equities. Financial resources are ubiquitous so much so that they are the de facto instruments for the store of economic value. This function has made it such that all other resources have been forced within the financial valuation model as if they all behave alike.

DEFINITION, LOGIC AND EXAMPLES

A financial resource is the quantitatively expressed and implied information of a time-based or context-based commitment from one person (the liable authority) to another person (the holding entity).

Examples of financial resources include: Cash, Stocks, Bonds, Insurance Policies, Bets, Derivatives, Options, Swaps, and Mortgages.

Unlike other pieces of information, financial resources attain their distinction from the contractual agreement and relationship between the holding entity and the liable authority. The Liable Authority issues the financial resource and is responsible for its performance stated in the contract; to the Liable Authority, the financial resource is a liability. The Holding Entity holds the financial resource and has the right to use it in exchange for goods, services or opportunities within the jurisdiction of the financial resource; to the Holding Entity, the financial resource is an asset.

In terms of financial resources, all assets held have corresponding liabilities. Here, we validate the concept of debit and credit. However, these exist in different books. In the record of the Liable Authority, the financial resource is a liability, whereas in the books of the Holding Entity the same financial resource is an asset. For instance, MTN Cameroon issues a bond which has a face value of XAF 10,000 and is bought by Ms Iya; in MTN Cameroon’s books, there is a liability (Credit) of XAF 10,000 to Ms Iya, while in Ms Iya’s, there is a corresponding asset (Debit) of XAF 10,000 with MTN Cameroon.

Also, it is not a must that the value of the asset equals to the value of the liability except for their fiat values.

The Table below outlines examples of financial resources, the holding entities and the respective liable authorities.

No.	Financial Resource	Holding Entity	Liable Authority
1	Cash	Citizens	The Government
2	Treasury Bill	Bill Investors	The Government
3	Corporate Stock	Shareholder	Corporation
4	Corporate Bond	Bondholder	Corporation
5	Insurance Policy	Insured	Insurance Company
6	Bank Account Deposit	Account Holder	Bank
7	Bank Credit	Bank	Debtor
8	Car Mortgage	Mortgage Lender	Car Owner

Table 1: Financial Resource, Holding Entity and Liable Authority

BASIS OF VALUE

-          Visibility (V): This is the extent to which the performance of the liable authority can be monitored and evaluated by the community of holding entities.

In holding a financial resource, the Holding Entity is at the mercy on the performance of the Liable Authority. As such, in order to reduce the vulnerabilities, it is important that the Holding Entity is well informed of the performance of the Liable Authority with respect to the financial resource. Such performance is particular to the terms established during the creation of the financial resource.

Money for instance, though we are born to take this for granted, is a contract between the state (monetary union) and its citizens. In this contract, the citizens expect that the government will maintain good policies that ensure its continuity, hence the continuity of the money they are backing. For the citizens to know how well the government is fulfilling its part of the bargain, they must be informed of its performance in the areas through which they perceive is critical to the continuity and security of the government.

This concept of visibility is well understood and it drives the thinking behind investments in publicly traded companies. The whole rationale is that investors, who are the holding entities, are informed about the corporation’s relative performance in terms of profitability, sustainability, liquidity and any other measure that is deemed important for it to continue fulfilling its obligations for the financial resource it backs.

The concept of visibility establishes the need for information regarding the performance of the Liable Authority to the public of Holding Entities. Hence the need for business accounting and other business performance measures as well as their associated reporting standards.

-          Assurance (A): This is the degree of certainty that the liable authority will maintain responsibility over the financial resource and fulfill the ultimate exchange agreed upon at the initial exchange.

The essence of Visibility is to ascertain the level of confidence the holding entity is willing to attribute to the liable authority. Assurance is the amount of confidence the holding entity has allotted to the liable authority based on the available information on the liable authority’s performance. Assurance is at the core of the performance of the financial resource. In cases where the public of holding entities have very low confidence levels for the liable authority, the inherent value of the financial resource plummets.

When a firm maintains either a cash flow deficit or operating losses for a longtime, it gets investors to worry about it meeting with its pledges.

-          Transferability (T): This is the degree of certainty that the community of holding entities will continue accepting the financial resource in exchange from one another.

The relative nature of the performance of financial resources makes it such that their relative value fluctuates over time, place and context; irrespective of the performance of the liable authority. Such flux thus makes it such that it becomes impossible to hold the same financial resource indefinitely.

An implicit assumption on all financial resources is that they will be exchanged at some point in the future when the holding entity has an alternative other than holding the financial resource. Thus transferability is an implicit trait with all financial resources.

-          Financial Cover: This is a pledged compensation the liable authority of a less performing financial resource makes during the initial exchange to the liable authority of a more performing financial resource in an exchange between the two financial resources.

Financial Cover arises only in exchanges involving two financial resources of different inherent and relative performances. Traditionally, the compensation is along the line of trade-off between Interest and Influence.

o   Interest is the amount of value the LA of the less performing financial resource is willing to part with on a periodic basis in holding and making use of the more performing financial resource.

o   Influence on the other hand is the degree of control (governance, oversight, authority) the LA of the less performing financial resource is willing to take from the LA of the more performing in exchange for keeping and using the more performing financial resource.

-          Fiat Value (FV_o): This is the assumed and legally endorsed numerical value of the financial resource considered at the point of infinity (long term) established during the initial exchange and eventually at the ultimate fulfillment.

Fiat Value is fixed over time, context or holding entity. Generally in contemporary and classical finance, the par value of stocks and bonds are the fiat value, while the Fiat Value of Insurance Policies is the Insurance Cover.

No. 3: PERCEPTUAL RESOURCES

Brand, Corporate Image, Reputation, etc have long been accepted as one of the core components in the mix of tangible assets. Since the publication of the Marketing Myopia by Theodore Levitte, the invention of Market Segmentation and many other consumer side marketing innovations, organizations have been able to distinguish themselves from the crowd. The debate on business model especially on value proposition has taken the basic concept to greater heights with holistic and granular thinking at a go. Advertising, through all its forms makes the challenge and debate even more interesting. Earlier, marketing was about the 4Ps and 4As. Later on it went to include three other Ps and As. The evolution in the domain of Corporate Social Responsibility also makes a good case for corporate reputation etc. Generally, there is quite a great danger of organizational demise if due diligence is not applied in the management of its Image, Brands, Reputations etc.

DEFINITION, LOGIC AND EXAMPLES

A Perceptual Resource is the bond between an identity and a discriminating observer established through the crystallization on the mind of, holding and using of distinctive information about the identity by the discriminating observer.

Identity: This is anything that an opinion can be formed about.

Distinctive Information: Information that differentiates one thing from another in a crowd.

Discriminating Observer: A free will agent who chooses in exclusion of others based on predefined criteria (rational, emotional, cultural etc.)

A perceptual resource is a bond. The bond is established through the crystallization on the mind of, holding and using of distinctive information about the identity by the discriminating observer. The identity emits distinctive information which is trapped, crystallized, held and used by the discriminating observer. The information may not come directly from the identity, however, it always points to the identity.

Examples of Perceptual Resources include Names, Brands, Reputations, Logos, and Cultures etc.

BASES OF VALUE

The value of Perceptual Resources is dependent on an Informational Value, Contextual Fit, and Perceptual Distance.

• Informational Value: This is the inherent value of the distinctive information to the discriminating observer.
• Contextual Fit: This is the extent to which the identity and the distinctive information it emits matches to and shapes the defined criteria of the discriminating observer.
• Perceptual Distance: This is the preference number of the identity to the discriminating observer from a group of competing identities.

A perceptual resource is built entirely by the information about the identity the discriminating observer is capable of crystallizing and making use of. For a perceptual resource to be, the informational content from the identity must be valuable to the discriminating observer.The value of the distinctive information may be absolute or relative.

Contextual fit is the component of the perceptual resource that depends entirely on the make-up and decision of the discriminating observer. Irrespective of the amount of information, for an individual discriminating observer to decide, he needs to have a predefined criterion on which to base his decision. This criterion could be emotional, rational, faith-based or cultural.

In a conventional setting, the criteria could be based on product, price, place, and promotion.

CAUSAL RESOURCES

Computers have changed the world more than any other tool invented by the human mind. It has changed almost every industry we know of: media and entertainment, education, science and technology, business, agriculture, mining, financial services and more. Computers permeate every sphere of our thought. The focus here is not actually on computers; rather, it is on what a computer really is and why it takes a central role in our lives and thoughts. They are information processing agents. Like the human brain, they perceive signals, process them and provide outputs that transform perception, decisions and everything in between.

Paul Omerod believes that biological systems, social systems and economic systems are related in many ways – especially with respect to their rates of survivals and extinctions. What do all these have in common? They are predominantly causative systems that are able to adapt and change their composition over time as their environments change. They evolve. Whether evolution, involution or revolution, all these systems adapt in different manners to their environments.

DEFINITION, LOGIC AND EXAMPLES

A causal resource is a composite that purposely causes selected primal substances (matter, energy, information, or space) to change from a less useful form (input) to a more useful form (output) as determined by its internal structure.

-          Purpose driven: Causal resources are purpose-driven. A block of concrete that changes a spectrum of visible light to infrared cannot be termed as a causal resource since it does not cause the change on purpose. However, an electric light bulb is a causal resource in that it was designed or bought purposely for lighting by converting electrical energy from the main supply to light energy.

All institutions are purpose-driven. Corporations most especially may not have any other purpose other than to maximize shareholders’ wealth. Under such scenarios, the component parts of the organizations must function to deliver on such a purpose.

(Simple purposes to complex purposes)

-          Selective: Causal resources are selective. Causal resources, in interacting with their environment choose the inputs to change. The central nervous system of a human, a typical causal resource, does work only with the limited electrical activity of the neurons.

-          Internal Structure: The distinctive feature of causal resources is their internal structure, composed predominantly of agents, depositories and channels. Agents are the components that act on the input primal substances to cause change; depositories hold the primal substances while the channels provide the route for the primal substances to flow through the internal structure. The digestive system of a mammal is a typical example of the functioning of an internal structure. Food is taken into the mouth (acting as a depository), chewed and churned using teeth, tongue and the walls of the mouth (the agents), and sent to the stomach (another depository) via the esophagus (a channel).

Examples of Informational Resources include: Strategy, Software, Methodologies, Processes, Human Brain, Clocks, and Computers.

BASES OF VALUE

The value of an informational resource is based on output relevance, intelligent scope, signaling rate, memory size, memory exchange rate, memory decay, computational frequency, aggregate count and gates count.

-          Output Relevance: This is the extent to which the output information from the informational resource is significant to the perspective of the intended user.

The financial information system of a business is an informational resource intended to provide information on the financial performance of the organization to its stakeholders, potential and actual. The main output of this system, financial statement, has a track record of not being entirely relevant to its intended users.

In finance, it is very evident that the financial accounting information provided by corporations is not sufficient guide to decision makers in making better decisions within their respective roles. As such, decision makers rely more on other sources of information to supplement for these lapses. Management relies more on the corporation’s management accounting information system which thus far has proven to be more effective than traditional financial accounting information. Investors on the other hand rely more on the information they can have from multiple analysts in order to have a better picture of the firm’s viability and thus their investment decisions. We thus conclude that in decision making for both managers and investors, historical financial performance presented in the conventional financial statements is irrelevant to both managers and investors.

A classical example is the sponsored links presented by Google whenever a search is made on its popular search engine. The client will click on a link provided the preliminary information indicates some clarity and relevance to his perspective.

In business accounting, profitability, liquidity and other financial performance ratios are considered as paramount by investors because they believe these provide the most relevant information as to the sustainability of the business.

-          Intelligent Scope: This is the range of inputs (material, informational, spatial) the causal resource is capable of intelligently changing.

This is just like the concept of bandwidth for radio devices. For instance, an FM receiver is capable of reception within the range of 88 - 108 MHz. There are other radio receivers that can receive beyond the FM bandwidth – AM, SW1, SW2 etc.

For humans, our eyes, ears, skin, tongue, and nostrils enable us to intelligently interact with visible light, audible sound, heat and cold, smell and taste. As such, we say we have a broad intelligent scope. However, there are other categories that our natural senses can never sense. We have been able to extend our intelligent scope through technology: X-ray, Infrared, Radar, UV etc.

For businesses, the traditional intelligent scope was limited to financial perspective. The invention of the Balanced Scorecard expanded the scope to include customer perspective, internal perspective as well as learning and growth perspective.

Like humans, computers have very broad intelligent scope. However, their very basic nature is limited to the binary states fields: electric and magnetic.

-          Depository volume: This is the maximum unit of primal substances the internal structure can hold per unit time.

In computers, the holding capacity has been divided into two types, permanent storage (hard disk, DVD, memory sticks etc) and the volatile storage (RAM and Page file). Another interesting thing with computers is the fact that the bit is the smallest unit of information storage as such capacities can be measured and compared easily.

In humans, our current knowledge has not been able to decipher how information is being stored, whether in bits as in computers or some unknown quantity.

-          Internal Volume: This is the number of categories that can be stored in the internal structure of a causal resource.

Every causal resource has an internal volume. The essence of the internal volume is to establish, make available and preserve the internal structure as well as store the categories (input, work in progress and output) the causal resource is working on.

In an organization which to a great extent is a causal resource, the internal volume for information (memory) is beyond the physical memory contained in the information system. It includes the memory of the workers about processes, process memory, strategic memory, culture, standards, rules of thumbs and a host of other tacit and explicit information stored in everything within the organization.

In humans, the internal volume for information (memory) includes the memory of the central nervous system, sensory subsystem and motor subsystem. For organisms that do not have a central nervous system, the memory is at the level of the sensory and motor subsystems.

-          Bottleneck: This is the maximum units of inputs within the intelligent scope that the causal resource is capable of working with per unit time.

Most organizations have very low informational bottlenecks. There is so much information at the disposal of organizations; however, very few people have the necessary talent and skills to this information beyond signals to be processed.

-          Internal Exchange Rate: This is the number of categories that can be exchanged to and fro the storage points per unit time.

Internal Exchange Rate determines how well the internal structure functions.

In businesses, the internal exchange rate varies from person to person, process to process or technology to technology.

In computers and other physical informational resources, the internal exchange rate is defined by the memory operations per second.

-          Internal Volume Decay: This is the number of categories that will be ejected or disintegrated from the internal volume naturally, without interference after a period of time.

Memory Decay is critical in the functioning of the informational resource. In situations where the memory losses information within a very short time, then the K Set of the informational resource becomes very dynamic and it is very difficult to keep track and hence make matching and translations of the U Set with the K Set. The K Set then becomes uncertain within a very short time, thus creating uncertainty and infiniteness in a system that is supposed to be finite and certain.

However, memory decay is very necessary; otherwise, the informational resource may never be able to adapt to environmental changes.

There are thus two opposing concepts embedded within memory decay that must be optimized based on the perspective of the informational resource.

In humans, the brain optimizes this by making use of more than one memory type: sensory memory, working memory and long-term memory. From this, adults have the possibility of becoming too biased by their experiences, while children have the highest and best potentials for learning.

This could be one of the major constraints in creating systems that compare to human intelligence. There is no doubt that computers can perform many tasks faster than men, however, they still need a great deal of human intervention to define their K Set. This, I believe, is the main limiting factor.

-          Activity Frequency: This is the maximum number of relevant activities that can be done by the agents per unit time.

The key here is on the word relevant. Irrespective of the number of activities that can be done per unit time, how much of all that is relevant? It is not about data analysis, as in analyzing everything that we think is worthy of analysis. The issue is with respect to the number of computations that are significant in transforming the output towards the desired perspective.

I believe the best designs of informational systems with respect to computational frequency are found in biological systems. Taking the DNA for instance, it is evident that from the very beginning of life for an organism, it does just the necessary computations that are needed for every stage of development for the organism.

Computer systems on the other hand do not have that kind of computational frequency, thus the high levels of complexity involved just to do simple tasks, like retrieving information from a memory.

Organizations, most especially government agencies have a knack for being unnecessarily burdensome.

Computers have helped so much in the way work gets done in organizations based on their oversized computational frequencies.

-          Aggregate Count: This is the minimum number of inputs that must be integrated to provide a relevant output. Aggregate count ranges from one (01) to infinity.

Most computer chips have a signal aggregation of eight for them to provide either numerical or text-based characters.

Nerves could have higher measures of signal aggregation. I believe this is one of the reasons there is an average of about ten thousand (10,000) neurons connected to one another.

-          Gates Count: This is the minimum number of computations that must be done on an input for it to yield to a relevant output.