Is ROI obsolete?

This is how the speakers of the last session I attended at Digital Accountancy Show opened their presentation. Quite a statement, but I am inclined to agree that it has changed beyond recognition.

Every accountant has been trained to calculate the Return on Investment (ROI) of an asset, by measuring future cashflows, and this is (and will remain) a common request of directors: "How long before we get our money back and start generating profits from this asset?" It is also crucial to obtaining funding, so no, it's not obsolete.

The point that they were making however, is that business has moved on substantially, particularly in the UK where we don't "make stuff" as much these days.

Huge investments are being made by strategic boards to future-proof their businesses, and it's no longer a case of "cash is king" nor indeed are other material assets, for we are well-entrenched in the digital age, where knowledge is power.

The speakers suggested an update to ROI, for accountants and their clients to consider, and proposed the following:

• Return on INTANGIBLES
• Return on INFORMATION
• Return on IMPACT
• Return on INNOVATION

Which one do you like the best? I am going for the fourth.

So if we are going to start measuring our return on something we can't touch, we might make rather than buy, or have simply created in our genius brains, we had better understand what these assets are and why they are so important to the future of our businesses.

What is an intangible asset?

An intangible asset is defined under International Financial Reporting Standards (IFRS?) as ‘an identifiable, non-monetary asset without physical substance’.

So now you know!

Let's break that down into simpler English

1. Identifiable: can be separated from the entity as a whole, or arise from legal/contractual rights such as a franchise agreement.
2. Non-monetary asset: something of value that doesn't provide the right to receive (or the obligation to deliver) units of currency.
3. Without physical substance: items that can not be touched, their existence is only known by a legal document.

Better?

No, I thought not, so here are a few common examples to provide context.

1. Brand Names, trade marks etc
2. Intellectual property, such as copyrights and patents.
3. Goodwill (the value of a business over and above its assets) and databases of consumer behaviour.

The challenge is both in valuing these assets and the way they are recorded in the accounts of an organisation. Generally this is dependent on whether the asset is purchased (in which case there will be a clear, historic cost) or internally generated.

Further criteria are given to the recognition of research and development costs (that have been categorised as assets rather than an overhead of the business)

As a result, it is not often that you will find intangible assets on the balance sheet of a small company, but that doesn't mean they don't exist.

Probably more important however, is to consider your strategy for building a business with strongly valued and highly desired intangibles, as they have huge potential for your profit, your ability to attract great talent and to seize opportunities - but are also likely to be a major element of your exit strategy.

If you would like to better understand the value of your "whole" business or that of a business you are considering acquiring, let's have a chat. Similarly, if you are looking at building an investment strategy, let's start with how you might afford it and what your ROI of those plans might be.....