inventory is a liability.
Years ago I was the general foreman for a mini-steel mill in the Tulsa, Oklahoma area. My boss, the gentleman that ran the melt shop, told me that we (the plant) made three thousand grades of steel at that plant. Get your head around that number. Our mini-mill made three thousand different chemical compositions of steel. Three thousand, my boss said. And some of those on purpose! My boss went on to tell me that we only sold ten grades of steel at that location, but we had produced 2,990 off-spec grades of steel. Most of that was ‘out back’ being chopped up by a contractor for us to re-melt again. That is an example of an inventory that is a definite liability.
Accounts Receivable
When putting a valuation on a business, one of the elements you might consider is the business they have on the books. This would include con-tracted work, possibly proposals out for work (but not typically), but would definitely include the outstanding accounts receivable.
A small business owner once described a client to me like this, “They are our best client. They owe us two million dollars.” I suggested that he find a different definition for ‘best client.’ This is a tentative measure for sure, but it could be argued that money projected to come in is in fact a kind of asset.
Your Company Brand
Consider how much your company brand and branding have to do with the overall fiscal success of your company. What’s in a name? Turns out it is everything. A name, a signature, or easily recognized logo can set a company head and shoulders above its competition.
Early in my consulting work I had occasion to speak with a company executive who was new to the organization I was consulting with. He had recently been hired away from Nike. For years he had been an executive vice president. He asked if I could name any of the top three most recognized brands in the world. I thought this was a trick question, and answered, “Nike?” Nope. “McDonald’s?” Nope. “Starbucks?” Nope and nope. Not even close. Amazon, Facebook, and Twitter. Turns out, as he remarked, the top three most recognized brands in the world don’t make anything. That should be a sobering thought to everyone.
The following letter appeared in the January 2019 in-flight magazine, Southwest: The Magazine (Southwest Airlines’ [SWA] magazine). This heartwarming story is from the section devoted to highlighting SWA associates performing great customer service. I want you to notice how the story, sincere to be sure, helps to bolster the brand that Southwest Airlines wants to keep strong as they market to business and family travelers with a touch of humanity:
I always get a little nervous traveling with my 5-year-old daughter, Mi-kaela, who has autism. She’s been doing much better on airplanes, but I always ask to preboard because walking onto a full flight can be overwhelming. I did this for my recent flight out of Burbank, California, and was helped by Customer Service Agent Christopher Ulrich. As we were boarding, he quickly handed me a little booklet that I assumed was something for my daughter to draw on during the flight. After we settled in our seats, I realized it was not just a plain booklet, but the most amazing present I’ve ever received from a stranger. He had illustrated a story called "Mikaela’s Flight.” Needless to say, I cried tears of joy the entire flight. Part of my daily struggle is never knowing what may cause my child to break down. To know that someone cared and understood really put me at ease. Christopher’s actions perfectly illustrate why Southwest considers their People [s/c] their "single greatest strength.”
—Brenda Yeh, Southwest Customer
A company’s brand takes a long time to become iconic but can be lost in an instant by bad or corrupt activities. The brand is an asset that must truly be nurtured and protected.
It would be reasonable to ask why so much time and work was devoted at the start of this book on asset management to lay out some groundwork on common forms of ‘assets.’ It is important for the purpose of developing an intuitive desire to properly manage assets. Take, for example, the last section on the Southwest Airlines agent, Christopher Ulrich. Did the personal touch that Mr. Ulrich displayed on that flight indicate that SWA is a company that values its brand and its associates? So much so that it’s almost as if their associates are their brand.
How Do Assets Contribute to the Success of the Company?
Taking into account the conversation we just had regarding the different kinds of assets, let’s create some specificity and begin to tailor our focus on the capital assets of business. There are a multitude of books and resources on financial success, property management, and human resource advancements. But the core idea behind the asset management movement is the attention given to the capital assets, or as defined earlier, “the stuff that makes the stuff.”
In his perennial best seller Rich Dad, Poor Dad, Robert Kiyosaki made his rule one very clear: “You must know the difference between an asset and a liability, and buy assets.” (p. 58)
Mr. Kiyosaki’s book is not a maintenance or reliability book, but it perfectly illustrates the relationship between assets versus liabilities; and income versus expenses. Consider the next series of figures shown to animate the flow of ‘money’ through an organization, your organization.
Figure 1-4 Assets make income
Figure 1-5 Income is used to pay the expenses
Figure 1-6 After expenses, liabilities are serviced
Figure 1-7 The result is profit
Using information gathered from Figures 1-4 through 1-7, complete the following sentences:
| Only make income |
| Companies take that income and pay their |
| After that is paid, they service their |
| The result is |
I’m extending an author’s prerogative and letting you know that the answer to the last fill-in-the-blank sentence is ‘profit.’ Companies take that profit and reinvest it back into the company. They buy more assets (to quote Kiyosaki, “buy assets”) to make more income. Remember this: only assets make income. Highlight, circle, and cast that last sentence in stone.
Aside from the clear circular reasoning that it is only the assets that can contribute to the fiscal health of the company, it bears mentioning that rolled into the definition of the ‘success of a company’ is the idea that it is through the assets that we also move in the direction of satisfying the corporate goals and objectives. The presumption is that some of these high ideas are fiscal in nature.
Keep that in mind and consider that in the ISO 55000 standards, an asset is any item that has potential or actual value to an organization. The value will vary based on the organization and, what you will come to appreciate later, the organization’s stakeholders. An asset doesn’t necessarily have to be tangible or financial in order to have value or potential value.
A colleague of mine once
