I-Capex Is the New Capital Expenditure
November 4, 2010 by Mary Adams
Capital expenditure (capex) is an accounting concept that has ingeniously supported the tangible economy for centuries. It allows a company to apply to its balance sheet the cost of investments in its future productive capability. This is called “capitalizing” an expense. Then the cost of this investment or capital is depreciated over a period of years. This is an extremely important feature that helps companies avoid having to show decreased earnings in a period where they make large investments. It is through a corporation’s capex that the tangible production value of the company (and by extension, its balance sheet) is built and maintained.
The idea of capital expenditure is actually very relevant to intangibles. U.S. businesses are already investing as much or more on their intangibles as they are on tangible investments in property, plant, and equipment. We know this from macroeconomic data. And we can see the benefit of it in stock and valuation data. But we don’t really know on the individual company level because no one counts it. That’s right. No one really knows how much is being spent on intangible capital expenditures (i-capex) by American companies to build their knowledge infrastructure.
If you read this blog, you have some appreciation for the importance of intangibles in most businesses today. You have seen the value of creating scalable, automated processes that make your people smarter every day. But, if you go into the office tomorrow and ask your CFO how much you spend on intangibles, you will probably get a blank stare. You will hear all kinds of arguments about how you don’t own your intangibles, they don’t have a fixed value, that no one really understands how they work. He or she will insist that they deal in facts, not suppositions. Hard dollars are the job of the accountant and intangibles are not hard. They’re soft. Intangible. “Not my job,” they will tell you.
Our goal is to help you understand the arguments you will hear from your finance staff and your accountants. Because intangibles are hard to see, they are hard to count, they are hard to value, at least at this point in the development of the knowledge economy. But we have already shown you in the first section of this book how to identify and even inventory your intangibles. So the real question is how to link that inventory with your financial statements.
Much of today’s focus on intangibles addresses the question of the value of intangibles. We think that is a dangerous distraction. Value is not really the job of the average businessperson. Your job is to operate a company profitably. And intangible value is a meaningless metric for that purpose. Focusing on the value of your assets would be like recommending the purchase of a piece of equipment or the construction of a factory because it would have a great liquidation value.
The important question for intangibles is the same as it is for tangible assets: how much will it cost me to build it and operate it? Intangibles investment is actually a piece of valuable hard data that could be available to you and your board and your investors and your bankers right now—but is completely ignored by almost everyone today. We encourage companies to keep track of their investments in intangibles every year. We are not out to change accounting standards, it is too soon to do that. But we are out to help businesspeople everywhere get a little smarter. And the simple act of counting and reporting your intangible investments has the potential, we believe, to be very powerful.
Lots more to come on this new “accounting.” It’s a key skill for anyone interested in leveraging their intangibles as a business asset. We’ll show you what we know about the level of investment already occurring. We will arm you to rebut the value card that many people (in both business and academia) use to justify ignoring the question of cost. We’ll show you where to look for investment data in your own company. And we will suggest a path for you to begin to use this data to make better decisions in the future.
Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.