Assets and Liabilities the Balance Sheet Does Not Show (Part 2 of 2)

Assets and Liabilities the Balance Sheet Does Not Show (Part 2 of 2)

The following is the continuation of Part 1, written by David K. F. Brown, a veteran business broker. It is reprinted with permission from the newsletter of the Institute of Certified Business Counselors, The Certified Business Counselor

In Part 1, Brown discussed the missing “X-Factor” from reasonable market values derived from hard assets and goodwill using textbook approaches. He outlined the problem of placing a value on the “synergistic whole that includes the human elements.” Read on for his suggestions on how to take into consideration these human elements.

Although I have a high regard for those in the CPA discipline, perhaps we need annual audits by another equally qualified professional who can utilize the holistic approach to business health and, of course, value. This new professional would be one who, in addition to the usual MBA-type education, would be part industrial psychologist, part sociologist, and still have personal involvement in business management and operations. He should be caring, yet firm; analytical, yet maintaining a rooftop vantage point. His annual balance sheet might include some of these current and long-term assets (each scored on a point value of 1 to 10):

  • Good health and vigor
  • Long-term employees
  • Back-up management
  • Competitive price points
  • Active in Chamber of Commerce
  • Active in trade association
  • Lives balanced lifestyle
  • Creative/well-paid employees

Some of the liabilities (short & long term) might include:

  • Lack of delegation
  • Physical environment needing rehabilitation
  • No mission statement or business plan
  • High employee turn-over
  • Customers treated as strangers
  • Lack of job descriptions
  • Divorce pending

The list of assets and liabilities could go on, but I believe you get the idea. And, of course, the difference between the two would result in the shareholder’s human equity. Hopefully, it would be a plus difference.

Dollar figures aside, I believe one can see that the human factors spell boom or doom for the ongoing health and continuance of a business enterprise. A business may well be in good health by standard monetary yardsticks, yet be near death if the human factors disagree. It’s like my earlier analogy of the doctor’s report versus the self-knowledge of impending problems. This, then, is the X-Factor(s) that had been missing in my earlier investigations.

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