Posts Tagged green accounting

Blue Ocean, Green Accounting

Posted by on Sunday, 7 March, 2010

Blue Ocean Strategy is a method of creating a business plan which has been applied successfully by many well known companies recently. The idea behind it is to leave the red ocean of well established competitors and aim for a new target market, the blue ocean. Of course, innovation and market segmentation are not new ideas, so the real breakthrough here is to create a strategy that allows you to change a few elements in a company and transform it into an entirely different competitor.

Value Innovation is the goal of the Blue Ocean Strategy. If you follow this link you’ll see the pyramids consisting of cost and value. This is often referred to as a tradeoff as it is considered the cost of quality at each level, and accountants can calculate which levels of quality each target market is willing to pay for. The goal of blue ocean strategy is to break through this tradeoff by completely eliminating traditional costs in the firm’s market that don’t actually add value, and apply the savings to add new features which open up a new market. Successful application allows a product launch with features competitors can’t match at a lower cost, while opening up a channel to additional customers.

Cirque Du Soleil is the most widespread example of this strategy. Critics of the theory mention that the group didn’t set out by planning to use the blue ocean strategy, although in my opinion it still explains why they managed to use it successfully. This case also involves sustainability elements as it replaces negative elements of the circus industry with positive elements. Circuses are well known for several acts, including the animal exhibits, concessions stands, and a ring with star performers. Cirque Du Soleil eliminated all of these. Customers are concerned with animal cruelty, getting ripped off by concessions stands, and don’t wish to pay a high price to see stars that are not well known outside the industry. This eliminates several negative elements without losing much value, but it’s only half the story. Cost savings were applied to improve the popular elements that are positive. Sound and visual effects were greatly improved, and elements of traditional theatre were added so that the performance would tell a story. The Moscow Circus acted as a benchmark for this part of the plan. So what does this story have to do with green accounting?

Green processes are considered too expensive in many companies. Management is always concerned with the bottom line, and telling the boss to consider the environment can make you sound like a hippy who wants to waste other people’s money. The point behind Blue Ocean is that you can create value and cut costs at the same time, so here’s an example. A lot of companies use bulky packaging to make their products visible on the shelf. They might even mix different components of the container to create an effect, like combining metal, plastic, and paper to make the package easy to see. Recyclers can’t handle this type of waste and it fills up the landfills. It’s possible to significantly cut the packaging costs, even as far as creating a plain brown paper wrapping. Why? Because this would open up a new market channel of environmentally conscious customers, while eliminating the added costs of the packaging which will just be discarded anyway. Similar strategies are possible in many other businesses, this was just the first one that came to mind for me.

Solar Panel Payback Period

Posted by on Friday, 5 March, 2010

I see ads all over the place for solar panels. Many people have mentioned that you can install them on your house and significantly reduce or even eliminate your electricity bill. Even better, it’s possible in some areas to get payback from the electricity company and receive money each month instead of losing it. Receiving a payment from the power company does depend on two things, you need an inverter so that you can send the energy you harvest back into the grid, and you have to have a contract with a power company that accepts this setup. Is it cost effective? Of course it will cost a lot of money up front, so it is definitely an investment that will take years to pay off. Worthwhile? Possibly. Homeowners are familiar with purchases that can cost a lot of money upfront, especially if they end up reducing costs in the long run. What the solar panel buyer wants to ask is what is the payback period? Another way to explain a payback period is the amount of time until the breakeven point is reached. After that, the solar panel owner will make a profit each month with each check from the electric company.

So what do we need to know here? We’re going to separate the initial costs out from the overhead, so let’s figure out the bills we need to pay to get the system up and running. It is a lot easier for me to visualize with some sample numbers, although to shorten the calculations I’d use algebra variables like a, b, c, to make the formulas. Besides, the real numbers will depend on many other factors that are specific to each household, so keep in mind these are just placeholders and don’t represent your real costs.

You record the initial costs first:
Solar Equipment $30,000
Installment Costs $2,000
Permits $2,000
Government Rebates ($10,000)

Total: $24,000

Then you record the cost savings:
For example, let’s say your power bill was $100 a month, and you installed the panels so now you
are receiving $250 a month back from the electric company. Calculate this as an average, as your power usage and the amount of solar power you collect will vary with the seasons.

$250 – ($100) = $350 a month revenue

You’ll also add the depreciation and repair costs here. Repair costs, like the power bill, is an average amount you budget each year. Straight line depreciation is the cost of the equipment divided by how many years it usually lasts if well maintained.

Let’s say the panels last 20 years, and cost $24,000, so depreciation is $1200 a year, or $100 a month.

$50 a month for repairs
$100 a month for depreciation
Total: $150 a month expenses

So a simple payback period would be $24,000 / $200, which would give a result of 120 months, or ten years. It can also be added to the house value for buyers or lenders at cost minus depreciation, as the solar panels do add value to the house. This can be estimated by another straight line depreciation that includes your installment and permit costs in the value of the asset: The total cost is $24,000 and the panels last 20 years, so subtract $1,200 from the value each year until the panels are depreciated to zero.

This analysis doesn’t account for other factors that might show up. It is a nominal calculation, not a real one; if inflation occurs it’s possible that energy prices will rise sharply. Oil resources are limited, so you might be expecting this factor to limit supply and raise costs in the future, I know I am. You’ll also have to consider interest charges, for borrowing the setup costs to be able to get the system up in the first place. It can be a complex calculation with other factors, although these are the most important costs and revenues to consider.

Welcome to Costing a Green Future!

Posted by on Tuesday, 2 March, 2010

Welcome, everyone. I am writing this article to continue some of the topics which I learned about in accounting coursework at Humboldt. We focused on several main topics, including how to explain why it can be much cheaper to deal with environmental issues when designing operations, what kinds of tools exist to keep track of possible environmental costs, and how to deal with keeping track of natural resources.

I am writing here today because I think there has not been enough focus yet on sustainability when keeping track of natural resources. The traditional accounting and costing systems do not always record the true costs of operations, especially when they include extraction and cleanup costs. Lately, some additional factors have entered the picture. The new SEC Press Release on climate change disclosure mentions a few major elements that are now necessary for a publically traded company to report.

For example, if the ocean rises and the coast is flooded, it can put a company’s offices underwater. Since this is a predictable risk and is likely to happen if people continue to use nonrenewable sources of energy, it should be recorded as a possible liability under generally accepted accounting practices. Similarly, if a company owns farmland in an area that is heating up and drying out, then it will soon find its farm has become a desert, which will drastically reduce its land value.¬†Again, this is predictable, so it must be reported.

Four areas are specifically mentioned in this press release. Deloitte has offered some additional explanations for what this press release means. The effects of existing and pending legislation should be mentioned. This includes fines and penalties, and compliance costs, for not only the company but also its competitors. In addition, the effects of international accords should be disclosed. Many climate change treaties will have international effects and regulations in another country could materially affect profits in the USA. Indirect effects could also occur. The example that the SEC gives is that consumers who are following the climate change news might decide that they are more interested in buying products which produce less waste carbon during their lifecycle. This could definitely affect profits, in a good way or a bad way depending on how the company has designed its operations. Finally, a company must also report on the physical effects of climate change on its business. The examples of coastal flooding and desertification of farmland are two possible consequences of climate change which are predictable enough that a company should account for them.