Route2

Total Capital Accounting

Most businesses have a good understanding of the financial value of their operations as reflected in financial accounts. This, however, is too often an incomplete understanding of everything a business needs for and generates from its activities. Often, input costs and output benefits are not captured by traditional financial accounting or analysis and are therefore not appropriately considered.

We fill these market information gaps and provide a more complete picture of business requirements and outcomes by providing economic values and accounting structure for all capital inputs and outputs consumed and produced. Specifically, the inputs from and outputs to human, intellectual, natural and social capital, in addition to manufactured and financial capital.

Route2’s suite of services are all underpinned by a proprietary Total Capital Accounting framework. This framework is the synthesis of more than twenty years of research and development, which is still ongoing; it is also supported by two associated patents.

Conventional financial accounting has a number of limitations. One significant limitation, incentivising the misdirection of economic development, is the inability to capture the difference between private returns and costs and societal returns and costs. The consumption, production and investment decisions of businesses often affect people not directly involved in the transactions. Sometimes these effects – termed ‘externalities’ – are insignificant, but they can often be substantial. Externalities can be negative and positive and in both cases distort the market prices of goods and services. This price distortion incentivises business activities that inadvertently undermine the foundations for wealth creation. Our Total Capital Accounting framework helps correct this distortion. Systematically implemented, Total Capital Accounting has the potential to improve market pricing and help redirect the global economy to a more sustainable footing.

Pollution is the classic example of a negative externality. A business typically makes decisions based only on the direct cost of and profit opportunity from production, and does not consider the indirect costs to those harmed by its pollution. The indirect costs of pollution include decreased quality of life (for example, in the case of a home owner living near a polluted river); higher health care costs if affected by the pollution; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the responsible business, and therefore not passed on to the end user of the goods produced, the social or total costs of production are larger than the private costs. Conversely, research and development exemplifies a positive externality. R&D activities are widely considered to have positive effects beyond those enjoyed by the responsible business. This is because R&D adds to the general body of knowledge, which contributes to other discoveries and developments. However, the private returns of a business selling products based on its own R&D typically do not include the returns of others who benefited indirectly. With positive externalities, private returns are smaller than social returns.

Route2’s Total Capital Accounting framework assesses and evaluates the changing state of the six types of capital an organisation directly and indirectly depends on for their business activities (Natural, Human, Intellectual, Social, Manufactured and Financial Capital). These capital impacts can be presented in a similar manner to traditional financial accounting:

Natural Capital

Human Capital

Intellectual Capital

Social Capital

Manufactured Capital

Financial Capital

CAPITAL STOCK:

Natural Capital

The store of ecosystem goods and services produced by the natural environment’s various land covers, marine environments and atmosphere

CAPITAL FLOWS

    Output Flow

    The services provided by the stock with economic function(s) and therefore economic benefit(s)

    e.g. Pollution Assimilation

    Investment Flow

    Interventions undertaken to repair, maintain or enhance the magnitude (quantity) or state (quality) of the stock’s provision of services. Investments can be direct and indirect

    e.g. Afforestation

    Depreciation Flow

    Reduced stock productivity resulting from management decisions (e.g. reduced soil productivity from monoculture farming) or external events: natural (e.g. flooding), political (e.g. disincentive regulations), social (e.g. war), or market-based

    e.g. Soil Erosion

    Appreciation Flow

    Improved stock productivity resulting from management decisions (e.g. improved soil productivity from rotational farming) or external events: natural (e.g. clement weather), political (e.g. incentivising regulations), social (e.g. consumer preferences), or market-based).

    e.g. Clement Weather

    CAPITAL STOCK:

    Human Capital

    The physical and psychological capacity of individuals to undertake employment and pursue wider aspirations

    CAPITAL FLOWS

      Output Flow

      The services provided by the capital stock with economic function(s) and therefore economic benefit(s)

      e.g. Labour

      Investment Flow

      Interventions undertaken to repair, maintain or enhance the magnitude (quantity) or state (quality) of the capital stock’s provision of services. Investments can be direct and indirect

      e.g. Health Programmes

      Depreciation Flow

      Reduced capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

      e.g. Injuries

      Appreciation Flow

      Improved capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

      e.g. Work Life Balance

      CAPITAL STOCK:

      Intellectual Capital

      The store of knowledge orchestrating the production of economic goods and services, driving innovation and furthering the development of humanity

      CAPITAL FLOWS

        Output Flow

        The services provided by the capital stock with economic function(s) and therefore economic benefit(s)

        e.g. Knowhow

        Investment Flow

        Interventions undertaken to repair, maintain or enhance the magnitude (quantity) or state (quality) of the capital stock’s provision of services. Investments can be direct and indirect

        e.g. Training

        Depreciation Flow

        Reduced capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based

        e.g. Obsolescence

        Appreciation Flow

        Improved capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

        e.g. Working By Doing

        CAPITAL STOCK:

        Social Capital

        The store of trust between people and organizations that facilitate all human exchanges, whether economic or wider societal interactions

        CAPITAL FLOWS

          Output Flow

          The services provided by the capital stock with economic function(s) and therefore economic benefit(s)

          e.g. Trust

          Investment Flow

          Interventions undertaken to repair, maintain or enhance the magnitude (quantity) or state (quality) of the capital stock’s provision of services. Investments can be direct and indirect

          e.g. CRM

          Depreciation Flow

          Reduced capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

          e.g. Fraud

          Appreciation Flow

          Improved capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

          e.g. Corporate Citizenship

          CAPITAL STOCK:

          Manufactured Capital

          The property, plant, equipment & other manufactured goods that house economic activities, perform mechanical work & provide inputs to production processes

          CAPITAL FLOWS

            Output Flow

            The services provided by the capital stock with economic function(s) and therefore economic benefit(s)

            e.g. Mechanical Work

            Investment Flow

            Interventions undertaken to repair, maintain or enhance the magnitude (quantity) or state (quality) of the capital stock’s provision of services. Investments can be direct and indirect

            e.g. Energy Efficiencies

            Depreciation Flow

            Reduced capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

            e.g. Machinery Overuse

            Appreciation Flow

            Improved capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

            e.g. New Application

            CAPITAL STOCK:

            Financial Capital

            The cash & cash equivalents that provide a store of market value and a medium of exchange for other capital stock service

            CAPITAL FLOWS

              Output Flow

              The services provided by the capital stock with economic function(s) and therefore economic benefit(s)

              e.g. Store of Value

              Investment Flow

              Interventions undertaken to repair, maintain or enhance the magnitude (quantity) or state (quality) of the capital stock’s provision of services. Investments can be direct and indirect

              e.g. Financial Instruments

              Depreciation Flow

              Reduced capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

              e.g. Inflation

              Appreciation Flow

              Improved capital stock productivity resulting from management decisions or external events: natural, political, social, or market-based.

              e.g. Growth

              The framework first captures a business’ dependencies on the full capital stock complement at a point in time. In essence a Total Capital Balance Sheet statement is constructed for a business. This details the associated asset and liability values associated with the deployment of these capitals.

              From this reference point the framework captures how the state of these capital stocks change through business activities over a specified period of time (e.g. one year). In essence a Total Capital Profit & Loss Statement (Income Statement) is constructed for a business. This details the associated costs and benefits associated with the consumption and production of these capitals

              Total Capital Accounting can be applied to all levels of economic activity, from the business level to the country level. The framework adopts a stock-flow approach to understanding how an activity is directly and indirectly dependent on the Total Capital complement. If the magnitude and state of capital stocks are increasing or improving, an activity can be viewed as sustainable.

              Total Capital Accounting is rich with insight but also complex; we therefore aim to release a white paper in the near future to elucidate all the concepts and methods in fuller fashion. Irrespective, all engagement deliverables are supported with extensive methodological documentation.

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