The management of tangible physical capital investments is much less relevant to most businesses today. Intangible capital today takes many forms – intellectual, research and development, brand, distribution system, networks, data, workforce, etc. – that dwarf physical capital in most cases and aren’t on a balance sheet. Indicators of intangible capital are in the income statement to some extent and management’s discussion and analysis in financial statements. Financial analysts have models that try to incorporate broader definitions of capital. Economic value added and other economic profit models adjust financial statement information to better show and predict long term shareholder return. These approaches have a level of effectiveness at the large entity level, but require substantial internal information to find all the appropriate adjustments.
The Profitability Analytics approach supports evaluating nearly any outflow of cash intended to produce longer term benefits as an investment. The question arises: How should I amortize/depreciate such investments? Well, someone decided to depreciate physical assets based on the earth rotating around the sun for most purposes…..I feel confident that some creative, professional thought will come up with a more causal, relevant solution than that. For internal decision making, there are no rules. What matters is creating the right information and metrics to drive your business toward its strategic goals.
Share your thoughts, experiences, and ideas about how to improve “investment” spending and management. The PACE group is beginning work on Investment guidance to support the Profitability Analytics approach, and we’d love to have your input.