In the old days, Accountants could help you understand what happened during the past months and years but they could also help you understand your productive capacity—which is really about your future ability to continue to operate and produce revenues and profits. This was possible because of an elegant solution to capital expenditures with a benefit beyond the current operating year. Instead of being expensed, these investments are capitalized on a balance sheet. Over time the net effect of these tangible capital expenditures (adding new investment and subtracting depreciation) showed whether the company was continuing to invest in building and maintaining its factories, equipment and infrastructure.
With the shift that we so often talk about from the tangible to the intangible economy, this changed. Intangible capital expenditure is largely treated as a current year expense even when it will have a benefit beyond the current operating year. No big deal, you may be saying. But cumulatively, it’s been a huge deal. It’s how the balance sheets of most American companies have gotten completely out of whack. Given the steady investment in intangibles over decades, today the average balance sheet explains just 20% of the company’s corporate value. We’ve gotten used to this issue and, as a consequence, the balance sheet is useful only for understanding current assets, current liabilities and equity. But there are no numbers for the intangible infrastructure, the intangible assets.
This means that it’s nearly impossible to get a sense of the productive capacity of a company by looking at its balance sheet. And that there are few norms for talking about these assets outside the balance sheet short of, well, talking about them. But as the Coloplast experiment shows (and our own experience tells us), talking about something and measuring it systematically are very different activities. And, guess what? Narrative isn’t nearly as effective as measurements.
Why is this a problem? Because the future of your business depends on it. You are like businesspeople in the industrial era who needed to know how much they could produce at what cost and what investment would be to add productive capacity and—here’s the big one: how well the factory is working. You need to answer the same questions for your intangible infrastructure.
So what’s a businessperson to do? Learn to measure your intangibles. Start with an inventory, build a working model of how they fit together and then measure them. We have open source tools to help you do much of this and we also offer a platform for easy measurement, all at www.smarter-companies.com.
Are you a businessperson who looks forward? Then become or hire an ICountant and bring the future into focus.