In financial accounting, a balance sheet or statement of financial position is a summary of the operational infrastructure of a business. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition.
Until recently, corporate financial condition was directly tied to the health of a company’s tangible assets. You could read a balance sheet and understand where the value was: equipment, building, land, inventory. It was all there. Until the introduction of the personal computer, the internet and social technologies, the tangible net worth of a business (tangible assets minus liabilities) averaged roughly 85% of a company’s corporate value.
This traditional balance sheet was useful for getting a holistic view of the entire productive capacity of a company. You could see whether the company was continuing to invest in its production facilities. You could see whether inventory was moving. You could see whether the company had enough assets to cover its liabilities. You could see what those assets were.
As information technology created more and more opportunities for automation, a new class of productive assets arose. They include knowledge, data, processes, know-how, networks, relationships, brands and much more. Most of these “assets” never make it to the financial balance sheet and are described as “intangible.” In an intangible economy, the core assets of a company are NOT on its balance sheet. They are invisible and usually go unmeasured.
Since no one is keeping track of these new assets, there is no easy way to see whether a company is continuing to invest in its productive assets. You can’t see whether knowledge is growing. You can’t see whether the company has enough intangibles to meet current obligations and fuel future growth. You can’t see what these intangible assets are. BUT just because you can’t see them doesn’t mean they aren’t there. Companies invest million in intangibles--their accounting isn’t capturing the value.
What’s the alternative? Smarter-Companies has a modest proposition: let’s create a new kind of balance sheet. One that accomplishes the same goals as the original one but one that fits the new reality of today’s economy. It would show all the productive assets of a company. At this stage, it won’t show cost/value data. Rather, the arbiter of value will be the company’s stakeholders. Their feedback will determine whether an intangible is an “asset” (those intangibles that are strongest) or a “liability” (those intangibles that are weakest) in reports prepared by an ICountant.
The illustration in this post shows an example of what the proposed “Alternative Balance Sheet” might look like if you displayed the stakeholder ratings as assets and liabilities.
This example was based on a recent ICounts Graph Report for Smarter-Companies. Our IP and business model are our greatest strengths. Our marketing and branding still haven’t caught up with our potential. There’s lots more detail behind this in our report.
It’s not exactly like the balance sheet you’re used to seeing. But we think that it begins to fill in the information gaps on the traditional balance sheet and focus on what’s important in today’s businesses.
What do you think? Does this fill in some gaps? Is it an analysis worth doing? How else can we get at the intangibles? What would your alternative balance sheet look like?
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