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: