Scientific Sense Podcast

Friday, August 7, 2015

Quantum business

Businesses, for many centuries, have been dealing with constructs analogous to Newtonian Physics. For example, traditional finance and accounting, based on agriculture and more recently manufacturing, have devised cash flows and Net Present Value (NPV), constructs most conventional businesses apparently still run on. They stipulate precise measurement of the stock and flow of cash and decisions based on those ideas. They also introduced risk, something that became more precise over time, an unavoidable bad to adjust the cash flows, considered to be unambiguously good. All of these are precisely measurable – just as the gravitational constant and terminal velocity on Earth.

Business schools, world over, are still enamored by these archaic notions and they continue to graduate students, adept at counting and dividing, skills that have no value in the modern context. Businesses have been forced to migrate into a different regime, in which counting is delegated to computers and the velocity of Intellectual Property (IP) creation, reign supreme. Accounting metrics, profits and tangible assets, and even more sophisticated ones, free cash flow from operations, have all become utterly irrelevant. IP does not often equate to cash flows nor does it allow representation in a balance sheet, a remnant of manufacturing. The regime of quantum business has arrived and it is likely going to divide those engaged in it, into parallel worlds, some chasing the past of cash flows and the other redefining the uncertain future.

Financial statements, the least representative of the value of a firm in the modern world, still waste a sizable portion of the GDP in their creation, interpretation and consumption.

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