Businesses require assets, both tangible and intangible, for their operation. The tangible assets they are the ones with physical or financial substance. Among the most common tangible assets we have cash, real estate, machinery, and transportation equipment. Intangible assets are those that do not have physical substance. Among the most common intangible assets are brands, relationships with our customers, softwarethe technology.
Among the various assets on the balance sheet of companies, tangible assets are relatively easy to value. They are goods that are exchanged in more or less transparent and active markets. They are typically physical objects with finite monetary values, which depreciate and lose value with the passage of time and use. On the other hand, intangible assets are often more difficult to compare with other assets on the market; they are “unique” in many ways. Some, instead of depreciating, can increase in value with use. Although others may be subject to an accelerated loss of value due to obsolescence. The rapid change in technologies and the demand for novelties by the consumer can cause an intangible asset to lose its value from one moment to the next, when it is replaced by a new version.
The digital transformation either digitization refers to the ability of digital technology to collect data, set trends and make better business decisions. The speed with which innovations are taking place, by facilitating the integration of new technologies and higher processing speed, is making operations more complex. Who would have imagined that the big data and business analytics market would hit $193 billion in 2019, expected to double in less than a decade?
The value of intangibles continues to grow as companies increasingly rely on technology and innovation to compete. This is recognized by the entrepreneurship committee of the IMEF when talking about the relevance of intrapreneurship. Investment in intangible assets has become an increasingly relevant driver of productivity growth in the countries of the Organization for Economic Co-operation and Development. The unprecedented development of new technologies is increasingly perceived as the source of future growth.
Today, these assets are often the differentiator that gives the greatest competitive advantage. How much is your brand worth? How much is your reputation worth? Can you replace them? How much time, money, effort would it take to do so? How do you protect them?
Like any other asset, the economic value of intangibles is directly related to their ability to generate cash flows for their owner or whoever uses them. Ideas are valuable, but an idea without a good execution plan is probably not going to make a profit. So how we exploit the intangible and what synergies we can generate with other assets, become key in its valuation.
And it is not only how much it generates for us, it is also important to identify how much it costs us. It is not in vain that maximizing the delivery of value is part of the vision of the IMEF and of many other organizations. The information contained in databases, for example, represents a cost to store, maintain and protect, and also represents a risk in case we lose control of it. If the risk exceeds the associated return, it is an asset that is not contributing to the generation of value.
They say you can only manage what you can measure, and if you can’t measure it, you can’t improve it. This is the relevance of identifying and knowing the value of intangible assets: they can be the differentiator that exploits the potential of the business without the limitation of physical assets. The pandemic has shown us.
The author is former National President of the IMEF.