!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> Streamline Training & Documentation: Business Acumen VII: Intangible Assets

Tuesday, October 10, 2006

Business Acumen VII: Intangible Assets

As indicated in an earlier post on building business acumen, basic knowledge of a company's main financial statements — balance sheet, income statement, and cash flow statement — is key.

But it is just as important that employees being trained in business fundamentals learn about the shortcomings of standard financial statements when it comes to analyzing how a company creates value.

The biggest issue is the increasing significance of intangible assets, most of which do not show up on the balance sheet. Of major importance are the intangible assets embodied in people — knowledge, skill, creativity — because 60 to 70 percent of most firms' expenditures are labor-related.1

Standard accounting treats spending on human resources — wages, benefits, training, etc. — as current expense. However, in most companies, some or all of this spending is actually a form of investment. For example, strategic investment in training increases a company's ability to generate profits over the long run, and thus is as much an investment as buying a new computer.

The good news is that researchers who combine a strong background in modeling with practical knowledge of business are making notable progress in analytical techniques for spelling out the links between HR investments and financial performance. The best example I've come upon is a working paper (pdf) by Jeffrey A. Schmidt of Towers Perrin and Bala G. Dharan of Rice University. Schmidt and Dharan explain the issues involved in measuring returns to investment in employees and describe the approaches used to pin down the relationships between such investment and a company's competitiveness and business performance.

The goal of this research is to "provide business leaders with sufficient knowledge of what levers will capture the full potential of human capital in their organizations."

1 "Tying Your People Strategy to the Bottom Line," Harvard Management Update, Vol. 8, No. 8, August 2003.