A business accounting and planning model will include 4 different types of business energy. I use the words ‘energy’ and ‘potential’ because they fit perfectly with business. This language also fits into current accounting practices with minor adjustment. Most importantly the language enables use of powerful prediction , planning and optimization mathematics for a business. Here are the four types of business potentials written in the form of the Fundamental Energy Equation for Business in terms of Potentials: The four business potentials are internal, work, sales, and external forces. In this blog each of these potentials are described with examples. Internal Potentials The Natural variables of Business are Cash, T, S, W, Phi i, Phi j and N. Any force that causes change of a Natural variable is a potential. The sum over time of a potential ‘acting through some Natural distance dx’ is energy. Free Energy Cash is the most simple of these. Cash is socialized free energy. Cash and accumulated free cash flow are free internal business energy. Cash energies are accounted for in GAAP as company current assets. All other internal energies are potential energies. Example: Any bank account with instant no cost access to cash for the Business is Free Energy. Potential Energy Typically other Inventory, Equipment, and Plant assets are another form of potential energy which can be potentially sold for cash. These energies are recorded as Tangible assets in the company books and depleted through amortization and sales. Example: A Unit of product in inventory is a Potential Sale and its Cost as its Potential Energy. Example: A desktop computer is purchased for $1,000 cash. Each year the energy is used up through employee use. At end of year 1, $200 is lost as Work and $800 remains as Potential Energy. There are two other types of potential energies: TdS and dTS. Over a time period, these potentials combine to form the potential energy TSN. Example: The “Book of Sales”, describing customer sales over a time period is internal potential energy. The internal energy of the Book of Sales = TSN. It is predicted future sales. The first of these types, TdS, are the changes to sales caliber S, where T is expected profit margin. These quantities of change are seen in Intangible assets or in Shareholder Equity. These assets help the company increase distribution. If the asset is acquired through M&A it is reported as Goodwill. All others are recorded as Shareholder Equity. This makes TdS an important energy to Investors! Example: Business acquires 10 new customers and sells each optimum product quantities. This increases Shareholder Equity by a factor dT dS. Example: Business acquires 10 new customers by purchasing a company and sold each optimum product quantities. This new business may change T, S and N for the business. Sales, Goodwill and Shareholder Value are affected. The term dTS are the Intangible assets/potentials in the company that increase margin T with fixed Caliber S. These are assets that give the business a price advantage in the market. It could be low cost mineral in a company owned quarry. It might be a lease that gives ability for the business to produce cheap products. It might be greater access to N such as media share. Example: A Patent that gives a business production, processing, or pricing advantage. Example: Key Person Potential. Professional employees are often considered assets of business practices such as programmers, Lawyers, Medical Doctors. Company Work Potentials Expenses needed to run a business are the result of Work potentials. They drain cash out of the company. They also support company employee wages and benefits. These expenses (energies) help company departments achieve their goals. Example: A company buys product in bulk and Works to repackage the product into smaller units in order to get a higher T and higher Sales. This is a Work Potential on dT and d(Sales). General and Administrative supply company admin and security. It seems that all other work is directly related to improving T, S and N. Sales and marketing work to improve T, N and S. Engineering and development efforts may also work to improve market advantages on T, S or N. Engineering and Sales also spend money/energy to improve conductivity rho of business between customers and suppliers alike. Sales Potentials The ability of the business to operate with a positive margin are the sales potentials that it develops, customer i paying phi i per unit dN. Each customer represents a potential and each customer will produce different levels of potential. Example: Customer 5 will pay $60 for a unit that costs $50. This is Sales Potential of $10. If the sales potentials are ordered by magnitude, greatest to least, and we take the gradient of these potentials we find a great tool for managing the optimal distribution problem, which is: How do I choose which customer gets unit n when prices vary from customer to customer? The business wants to make the most profit AND wants to have a large, diverse customer base. They want maximum Sales plus Maximum customer goodwill. They want max (Sales + Goodwill) which is max(TN+ TSN) It turns out that the gradient of the sales potential is a key to solving this problem. If all prices are the same, gradient of sales potential is zero, then optimally the sales distribution is flat and each customer gets same volume N, produce same margin T, and same Sales TN. But in many businesses the gradient of the sales potential is not flat and managers must solve the distribution vs profit dilemma. The Business Hamiltonian of the Business performance goal and the Business Energy Equation offers a solution to the dilemma. It offers a simple set of calculations that determines the optimal sales distribution given any sales potential gradient. External Forces For an external force to impact the energy of the business, the force X must ‘act through some distance’ dx, where x is among {T,S,N,phi}. The force must act on the one of the first three terms (Internal Energy, Work, or Sales) of the energy equation to affect the company’s performance. Example: Business tax rates are a negative external force on Sales which becomes a Work potential. A tax rate lower than the competition may be seen as a positive ‘relative’ potential giving the business an advantage. The ambient temperature phi of a product market is a force that will affect all businesses except monopolies. Each customer will have other options to conduct business to purchase N units. The ambient Temperature of the market will place a force on the prices customers will pay, pushing low prices up and high prices down toward a average/ambient price. Conclusion By making this simple assumption “Cash is socialized free energy”, business can be described as a machine whose future states are predictable and controllable. The machine is designed to produce free energy for investors. A very good goal for any business would be to produce the greatest total energy over some time period. Here I hoped to show that accounting for intangible energy asset TSN is vital for investors and managers alike who care more about consistent sales in future periods than the current period sales. After establishing a performance goal of the company a Hamiltonian can be written and solved showing the predicted future states of the business. References Dragan Sutevski, “What is Business Potential Energy and Why This Matter to You?“

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