Why do companies fail?
Historically the typical company was a manufacturer whose greatest asset was the equipment that produced the products that made the sales. Today we are in a different age, an information age, where our products are innovations produced by our people.
Today’s equipment, such as phones and computers, has very little to do with company value. Instead, they are simply tools for our team to use to generate the real value of ideas. But while equipment is recorded in the accounting books as an asset, people are expensed as wages overhead, a burden to the company profits. Was Steven Jobs a burden to Apple profits? The accounting books say he was.
When equipment is upgraded and enhanced with new features, the costs are treated as a betterment, an asset on the balance sheet. When people are trained so that their capabilities are enhanced, the costs are expensed, a detriment on the income statement. Clearly the system of accounting has not kept up with the times.
Companies that are “profit driven” and “bottom line focused” don’t spend money on developing staff because the accounting system punishes profits when they do. Machines are reviewed to ensure they are running properly and have routine maintenance and upgrades to keep them in top working condition. How many companies do the same with their staff?
And yet companies depend on their staff to make sound decisions to direct the company towards a viable future.
In 1975 Kodak invented the first true digital camera. But its competitors embraced the technology innovation and by 2010 sales of digital cameras were $7.2 billion in the US alone. As of January 2012, Kodak is near bankruptcy - stuck in the film processing age.
Our special thanks to Mary Mershein CA for this insightful thought. It takes an accountant to point out the truth - the value is in the people!