Intangible assets play a key role in a company’s success, yet their true value often goes unnoticed due to the traditional focus on fixed assets in business valuation models and reporting. Peter Spence explores the role that finance teams can play in leading their organisations towards developing a more complete understanding of how businesses create and capturing value.
Earlier this year, I wrote about the challenges that many finance teams face when it comes to understanding, assessing, and communicating, the value that intangible assets bring to organisations – a problem that investors have attempted to solve by themselves.
If you look closely at the (market) values that investors put on businesses, you’ll quickly see that these exceed the (book) values that finance teams put on their balance sheets. In fact, for some businesses, up to 90% of their value isn’t recorded in their balance sheets. The missing value? Their intangible assets.
In the world of accounting and finance “what gets measured, gets managed”. So, what happens to intangible assets if they aren’t recorded on the balance sheet? Is the company not managing them? Well, for many companies, the answer is no.
While many still struggle with measuring the value of their intangible assets, other businesses, for example pharmaceutical companies, carefully manage these assets using management accounting techniques.
The finance team shouldn’t focus on assigning precise, discrete valuations to intangible assets. Rather it should take a more holistic view of the value that they bring to the company, focusing on truly understanding what value these assets create so that they can be managed effectively. This involves:
However, this process shouldn’t happen in isolation, or it simply won’t work. The finance team needs to proactively engage and work with business partners to agree on a common understanding of the key drivers of intangible value and creating much-needed key intangible performance indicators (KIPs).
If the finance team is to successfully contribute to the development of the business’ intangible value chain then it first need to understand how it differs from a business’ tangible value chain.
If you’ve gotten this far, you’re probably now wondering if there are the perfect tools to manage business’ intangible assets exist. And the simple answer is “not yet”. However, there are some conceptually simple and easily adoptable tools, such as the Skandia Navigator, that finance teams can use to lead their businesses on their journey towards understanding, capturing, and managing intangible assets.
Designed to provide a balanced picture of financial and intellectual capitals, the Navigator is used as a management and reporting model to manage intangible value and enhance decision-making through five interrelated focus areas:
If you intend to use this approach in your organisation, you’ll need to make sure that you fully understand the five areas, agree internally on the measures for each area, and align the measures with your business strategy. Finally, you’ll need to foster an organisational culture where intangible assets are a key component of your performance management, rather than an after-thought.
There are still a lot of questions around on the place of intangible assets in business, perhaps the biggest one is whether this should lie with the finance team at all? Many finance teams can just about keep up with all the current demands around monthly, quarterly, and annual reporting, largely focusing on the costs and value of fixed assets.
But if up to 90% of your company’s value isn’t currently accounted for in balance sheets, should you really ignore intangible assets and the potentially significant value that they bring? That doesn’t seem wise.
I’ll leave you with this thought “Curiosity is a hallmark trait of successful accounting and finance professionals”. We don’t need to revolutionise everything in a big bang. But go beyond counting inventory beans and take one small step by first listing your business’s intangible assets. Then start a conversation.
