The New Accounting

November 2, 2010 by  

The accepted wisdom inside the IC world is that we should ignore accounting and accountants—they will never “understand” what we are doing. I went along with that for a number of years, accepting the view of many that IC is special, it cannot be truly measured, that it must be appreciated.

Well, I am way beyond that now. And I feel that the only course of action is to talk very explicitly about the link between accounting and the group of knowledge assets known as intangible capital.

Once you have come to understand your business as a knowledge factory and understand the management implications of this new operating model, you are find yourself needing an intangibles information set. The information set you will need is not that different from the set you would use to operate a tangible factory. You just need to learn some new techniques for generating it.

You need to be able to answer these questions:

•    How much did it cost you to build the factory?
•    How much does it cost to operate the factory?
•    Is it running the way it should?
•    What needs to be changed?
•    How will you be able to track your progress?
•    Why is reputation the new bottom line?

Even though the knowledge factory is intangible, the money that you spend to build and maintain it is very real—so are the results you yield from it. There is no reason that you should not get a good financial and operational understanding of this critical side of your business.

The basic toolset of the intangible capitalist (indeed, all businesspeople) must include three kinds of data: investment, assessment and indicators. Together, these data are the backbone of a new kind of accounting, one that helps you track the business of yielding financial results from nonfinancial assets. You will use this information internally every day. If you work in a public company or get involved in a merger or acquisition, this information will have a second use. It will be part of the analysis that will be used to generate a financial valuation of your company.

Ultimately, however, all the other measures do not matter as much as reputation. So, after helping you see all the ways to measure intangibles, we will take on the idea that judging your success with a financial “bottom line” is no longer enough. The success of your organization will ultimately depend on how you manage the network of your employees, partners and stakeholders. Earnings will always be important but they only tell what you accomplished in the past. Your reputation is your license to continue to generate earnings in the future.

In the coming weeks, we’ll get into the detail of all these aspects of the new accounting in greater detail.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

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