Intangibles – Critical Success Factors (CSF)
Much of what is valuable or important to the future success of any organisation is not included within their financial statements. However, financial statements alone do not provide complete answers for either internal or external reporting of company performance or company prospects. A wide spectrum of intangibles contributes to value creation within an organisation. Furthermore. it is the overall mix of tangible and intangible investments that differentiate one organisation from another, and within this mix the following areas should be seen as key components of brand and competitive advantage.
Spectrum of Intangibles
- Knowledge and Experience
- Relationships and Obligations
- Leadership and Communication
- Culture and Values
- Reputation and Trust
- Skills and Competencies
- Processes and Systems
- Innovation and Awareness
- Power and Influence
- Options and Flexibility
Intangible Assets and Intangible Liabilities
Intangibles are the life blood of a business, without them there is no business. However, attempting to place a financial reporting value on any part of this spectrum of intangibles should be seen as unreliable, possibly pointless, potentially even misleading and dangerous. For a start, unlike tangible assets, categories are not distinct, you cannot simply add together individual components then consolidate them in a mathematical way as you would with financial statements. Many intangibles are inseparable from the business, the value of one intangible (knowledge, for example) relates to other intangibles (relationships, for example). Intangibles contribute to, and interrelate with, to each other – you use them and they remain or even grow. Just as when you look at a financial balance sheet you see assets and liabilities, so intangibles can be assets or liabilities (it is just as possible to have a bad reputation as it is to have a good one). To identify your intangibles, think first about what is valuable or important to your organisation, your job, your project and so on. Once you have done this think about what is holding you back or destroying value. Values for intangibles need to be considered in the context of value to whom and for what purpose.
Problem Solving and Opportunity Finding
When you think about business plans or financial forecasts, think about what factors are actually driving the deals that lead to the cash upon which your business plans and cash flow forecasts are based. If you don’t do the deals (and collect the money), you don’t achieve the cash flows. Think about possible missed opportunities or problems that ended in lost sales, think about errors and mistakes that your organisation may be making (no-one is perfect) and reflect on the fact that these negative elements will be hidden from view by financial accounting - mistakes, inefficiencies, missed sales, missed opportunities and so on. Management needs to be aware of what is working well and what is not, what problems need to be solved or what opportunities there are to be seized.
Value and Evaluation of Intangible Assets and Liabilities
The value of an organisation is not calculated based on its asset values (tangible or intangible) rather it is assessed based on the capabilities of the organisation as a whole to use ALL its assets (tangible and intangible) to generate deals hence cash-flows. Balance sheet values for assets and liabilities provide only limited input to the valuation process because these values do not relate directly to either the quantum or timing of future cash flows that will be generated or to risks associated with the overall portfolio of activities of the organisation. The art of valuation includes subjectivity and judgement based on a number of softer factors (intangibles) which encompass the likelihood that the organisation will actually deliver its forecasts.
Business Valuation (NPV)
When undertaking an evaluation of a particular business plan or cash flow forecast, intangible assets will be viewed as things which increase the likelihood of cash-flows and / or reduce the risks associated with them and intangible liabilities should therefore be viewed as things which are likely to reduce cash flows and / or increase risks associated with them.
The mathematics of the actual valuation process relies on assumptions for quantum of deals (cash-flows), timing of deals and risk which is represented by a discount factor (NPV).
The first problem with this mathematical approach is that you have to make assumptions for each element (quantum, timing and risk) and virtually all of the factors which enable evaluation of these assumptions are intangible in nature – hence the importance of a deep understanding of ALL the assets and liabilities of the business.
The second problem lies in failure to appreciate that organisations generally have a portfolio of activities rather than a single activity and that each of these activities will have its own cash-flow prospects and its own risks – this means that application of a general assumption for overall growth or overall risk is at best a rough approximation designed to simplify the maths rather than concentrating on the key issues which are actually driving success or leading to failure across the portfolio of activities.
IntangAbility helps organisations identify strengths, weaknesses, opportunities and threats relating to the whole spectrum of intangibles. These represent a vital ingredient for successful:
- Strategy, Planning and Execution
- Management of Finance and Investment
- Management of Risk, Reward and Uncertainty
IntangAbility can help you to develop Action Plans to:
- Improve the efficiency and effectiveness of current activities by targeting investment where it’s most needed.
- Build the components of value that will provide the options and flexibility necessary to sustain the future.
- Enable the diagnosis of problems and identification of Critical Success Factors (CSF) and Key Performance Indicators (KPI).
- Facilitate internal communication of values, goals, problems, opportunities, risks and uncertainties.
For more information contact IntangAbility