By Ash Noah, CPA, CGMA, VP of CGMA External Relations, American Institute of CPAs

Originally published by American City Business Journals

Businesses have long relied on finance professionals to measure value and provide input on business decisions.

At its core, the role of finance and accounting is about measurement, transactions and expressing value in hard numbers. For many years this system has worked well, since business models have centered around tangible issues, transactions and goods.

However, more and more business models are being born out of tech disruption, and are converging towards something that is more futuristic, value-based and intangible. In this climate — the value and knowledge economy — traditional measurements no longer apply.

There’s a disconnect

There is a fundamental shift taking place between where finance and accounting has been and where it’s going. Today’s business models are based on value creation with intangible assets. In the knowledge economy, organizations are using their unique abilities to meet the needs of their customers — that is where their value lies. The disconnect occurs when finance continues trying to measure value and success in a traditional way. The shoe no longer fits.

So how do CEOs make business decisions when they cannot rely on the traditional metrics that finance and accounting have always used? And how do finance executives come up with new ways of measuring value in order to make better decisions? In essence, how do businesses navigate the new normal of the value economy?

Creating a new toolkit

Finance and accounting need to make some adjustments to better support organizations operating in the value-based economy. These businesses need a new toolkit: a new way to measure value and success, and make decisions. There are three key steps to building this new toolkit in your organization:

1. Identify New KPIs

To understand and manage the value of your intangible assets, it’s important to measure them. This means identifying a new set of key performance indicators (KPIs). Even if the KPIs need to evolve, putting them in place provides an important starting point to tracking the business and its progress.

KPIs for intangibles should take into consideration a few key things: they should be measurable, impact the business, and be tied to accurate data. According to recent research by the American Institute of CPAs (AICPA) and The Chartered Institute of Management Accountants (CIMA), the top KPIs being monitored by businesses measuring intangibles are:

  • Data quality
  • Return on invested capital (ROIC)
  • Employee productivity
  • Customer experience and satisfaction
  • Employee engagement and retention
  • Competitor activity
  • Customer pipeline and retention
  • Brand awareness and equity

However, other KPIs to consider include:

  • Talent sourcing pipeline
  • Social engagement
  • Social sentiment
  • Digital marketing effectiveness

2. Relate KPIs to value drivers

It’s important to also understand the value drivers behind the KPIs you’re measuring. In other words, how does that KPI actually influence the business?

Today’s organizations need to show the market how they’re different, and the customer is usually at the beginning and the end of the value chain. Thus, most value drivers should relate back to the customer somehow. Hence, according to the same research noted above, the top five value drivers to consider include:

• Customer satisfaction • Quality of business processes • Customer relationships • Quality of people (human capital) • Reputation of brand

3. Measure, measure, measure

To measure intangibles, businesses must make connections between financial outcomes and pre-financial measures that they can use as leading indicators, usually based on a causal relationship or correlation. Going back to step one, this means your KPIs must be tied to data, and you must be able to gather and analyze that data accurately in order to measure the value of your intangibles. With advances in big data, there are now many more tools available to assemble, track and analyze intangibles than ever before.

For example, companies can use social analytics tools as one way to measure their brand equity or customer sentiment, or leverage HR analytics software to measure KPIs around employee productivity, engagement and retention. Even if you don’t have access to high-end data collection and tracking tools, you can still gather and analyze data to measure KPIs by conducting surveys and questionnaires, in-depth interviews, focus groups, peer evaluations or other methods.

Creating long-term value while simultaneously meeting the organization’s current operational goals requires a new toolkit, and more advanced performance management than can be achieved using traditional financial measures alone. Developing new metrics to better understand your performance and make the most-informed business decisions will help your organization thrive in the value economy.

*Note to State Societies: If you use this article in your publications, please include the below attribution:

Originally published by American City Business Journals

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