Intangibles, the Bottom Line and Shareholder Value

U.S. business culture is very much about results. Two of the ideas that best capture this perspective are the concepts of the “bottom line” and “shareholder value.” The bottom line is a financial calculation. As we have made clear throughout this book, the integrity of financial statements that are used to calculate the profit or loss of an enterprise is seriously compromised by their failure to address knowledge intangibles. Profit and cash flow are still important to the day-to-day survival of a business. But focusing on today’s bottom line without regard to tomorrow’s bottom line can lead you to make bad decisions: To outsource a function that should be a core competency. To fail to invest in an intangible that will preserve and protect a competitive advantage. Peter Drucker put it this way Read more

Triangulation – Getting a complete picture of your intangibles

Once you have a full set of data about your intangibles, how should you use it? We like to use the image of triangulation seen here as a way of explaining how you can use the three kinds of data that we have described to come up with a unified measurement of your intangibles.

Triangulation is an approach used in a number of disciplines (including surveying and astronomy) using known points to plot out an unknown distance or space. With intangibles, you can use these three kinds of data—investment, assessment and indicators—to plot out the landscape of your intangibles and get comfortable with the future earnings potential of your business. Read more

Getting Intangible Capital Into Your Performance Measurement System

Building a performance measurement system without the right foundation information would be like designing a dashboard when you have never looked under the hood of a car. Now, “wait a minute,” you will say, “I know my business inside and out.” And you probably do. But no matter how deep your personal familiarity with the business, it still makes sense to build systems that can ensure that provide the right kind of information and controls to keep it on track. This is true in every size company. Knowledge that is concentrated in the head of an individual is knowledge that is at risk. A good performance measurement system is an essential part of the structural capital supporting your organization.

Most performance measurement systems being built today are being built without a basic understanding of the underlying intangible capital of the organization. Since IC represents 80% of the value of the average organization, this means that the integrity and utility of these performance measurement systems should be questioned. It all starts with an inventory of your intangibles. Read more

Performance measurement is the new income statement

The Income Statement

The income statement is the universal scorecard for business. It is the way that a company tracks and communicates its progress month to month and year to year to tell its operating story. The key components are the revenues the company earns by selling goods and services to its customers, the direct costs of those goods and all the other current year operating costs of the organization. The difference between the two, the “bottom line,” is profit.

The income statement is still the main tool we have to measure the profitability of an organization. It is the one place that all the financial flows come together—revenues, expenses and amortization of capital expenditures. But the income statement has been distorted by the rise of the knowledge economy. This has led to the rise of a new kind of reporting of the operating story, called the performance measurement system.

As organizations began to invest more heavily in intangibles beginning in the 1970’s and 80’s, this expense led to a gap between corporate value and the balance sheets (because these intangible investments are not eligible to be capitalized).

This investment also distorts the income statement. It is important to understand these because, while most businesspeople appreciate the distortions of the balance sheet caused by the shift to the knowledge era, few appreciate its affect on the income statement. Here are two big distortions: Read more

The ABCs of Intangibles Assessment

Assessment is a word that you are probably used to hearing in relationship with tools in the human resources area. Myers-Briggs and DiSC are two well-known tools that are used to assess the personality of people. Most people in business today can tell you the letters of their own Myers Briggs type. Another kind of assessment, 360° reviews, are used to get feedback on a manager from all sides, that is, those that work at a more senior level, as peers or as subordinates.

Over time, many of these tools have been refined and evaluated for statistical significance. The idea is to use a series of questions that indicate what’s going on inside a person’s head, how they work and interact with others. Because the output is delivered in the same way for each assessment, they become comparable across individuals and/or teams. The knowledge gained through an assessment like this helps create a starting point for change and improvement.

An assessment of your knowledge factory is more complex than the analysis of a single person but many of the same principles apply. Read more

The intangibles information CEO’s want

Every year, PriceWaterhouseCoopers (PwC) surveys CEOs around the world. Their 2009 survey asked CEOs about different types of intangibles information. Read more

Four reasons why the old accounting models don’t work and won’t ever be enough to measure the intangible economy

Today’s accounting systems keep track of certain types of financial transactions. (and mis-reports intangible financial transactions). There is a need to get good financial information about intangibles. But knowledge intangibles are a different kind of asset. It is hard to imagine a time when financial metrics alone will be adequate on their own to measure the health and performance of intangibles. There are several reasons for this: Read more

Remembering the traditional balance sheet: a wonderful, but outdated, tool (in its current form)

The roots of the balance sheet go back to 15th century Venice when merchants were building trading businesses that spanned the globe. They developed ways of keeping records for their businesses. These emerging practices were recorded by a monk named Luca Pacioli and his treatises became the foundation of the balance sheet and income statement that are still used today. The model held up remarkably well through many centuries and came into its own as standards for financial statements were codified in the early years of the 20th century. Public reporting of these statements was begun in response to calls for greater transparency following the Great Depression of the 1930s.
Read more

Will Intangibles Ever Go on the Balance Sheet?

This week, we’ve been talking about collecting data on intangibles investment.

This discussion seems to beg the question of how it will be used. In contemporary accounting, the investment by an organization in tangible assets is “capitalized” on the balance sheet and depreciated over time. This serves as a way of keeping non-operating expenses (that is, not related to the current year’s operations) out of the income statement. It also serves as a way to track the cumulative effect of investing in a company’s capacity over time. As we have explained in previous posts, this model is not used for intangibles.

So if we recommend tracking intangibles investment, does that mean that we think  intangibles should go on the balance sheet? Read more

Analyzing I-Capex: How to understand the return on your intangible capital expenditure

This is a follow-up to yesterday’s post about intangible capital expenditure.

When you are starting out, an i-capex report will just be a separate report in your accounting system or in a spreadsheet to be used to report to management or your board of directors. Ideally, you should go back a few years so that you start out with a data series that you can use to learn about the patterns of your spending. When you do this, you might want to also gather some demographic data that can be used in calculating ratios.  Read more

« Previous Page — Next Page »