Cover Your A$$ets. John L. Ross
they need to have some level of cash reserves. The financial assets are often tied up in capital assets, and investments into other businesses.
Property Assets
I’ve done a considerable amount of facilities consulting in which the client is not a manufacturing operation, but rather a service or information organization. Not unlike your own location, their property asset value is dependent on the ‘real’ property that they own. It would not be unusual for companies to lease space rather than own it outright, or buy on terms.
Sometimes, and very interestingly, a property asset can become a liability. This can occur when the property the organization owns becomes unusable, dangerous, or just not desirable. Think of a location that is a superfund cleanup site. This would clearly be a liability for a company.
For property to continue to be an asset, it has to be cared for in such a manner that it maintains its value for service. It would not be beyond the pale for the land to be more valuable than any buildings that sit on it.
This might be urban legend, but in an interview, Ray Kroc (McDonald’s) was asked how he felt about being the hamburger king of America. He corrected the interviewer to say that he wasn’t the hamburger king, but he was the real estate king of the United States. He owned all the land under all the McDonald’s restaurants.
Trade Secrets and Proprietary Assets
The intellectual property of your company has a real value. Imagine the trade secrets and secret recipes that have built the enterprise that now employs you. Patents and trademarks have a shelf life, and companies work quickly to capitalize on the market and make a buck.
Trade secrets transcend the discussion of assets and work their way into the maintenance and safety realm through OSHA’s 29 CFR 1910.119, Process Safety Management. Trade secrets are one of the fourteen elements listed and explained in this federal regulation.
Not necessarily a trade secret, but as an interesting aside, I was awarded a patent in 2018 after having submitted the paperwork eight years prior. Look it up, patent #9,636,832; apparatus and method for spirally slicing meat. I made exactly one dollar off of it. It might be time to open a fifth bank account!
Inventory
Now we’re talking! Inventory can be a tremendously valuable asset, but it can also be a heartbreaking liability.
There are five major inventory categories in most operations:
1. Principal supplies
2. Work in Progress (WIP)
3. Finished goods
4. MRO (Maintenance Repair Operations or spare parts)
5. Office supplies
Principal supplies are the raw materials that we use to make, package, and ship our product. Work in Progress is self-evident and is literally the work that is on the floor in the process of being ‘made.’ Finished goods are the products that are packaged, and ready to go to the customer. MRO are the spare machinery parts. It may be that your company includes consumables in this category as well. Office supplies are the actual administrative supplies needed to keep the office and staff functions running.
The most highly coveted and most secure inventory is without a doubt the office supplies. If you need a box of staples, you usually have to see “Marge” up front and she will ask what you need an entire box of staples for. She will most likely give you one sleeve of staples and snap that one in half in front of you.
That might have been said in jest, but keep this in mind. Of all these types of inventory, the right inventory is an asset, mismanaged inventory is an expense, and the wrong 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