When is it not Capital? When it’s Human.

Every annual report talks about people being the company’s most important asset.. Except it isn’t.  A quick glance at the balance sheet reveals no line item for people.  The facilities are there.  The equipment is there. But nowhere do the people show up as an asset. 

Over the last few months I have been doing a bit of research into the historic effects of automation on the workforce.  Think elevator operators and bank tellers.  More on that at a later date. [spoiler alert: the robots are indeed coming for some of our jobs but that is a good thing] One thing that came from my research is that companies are incented to automate on multiple fronts.  It is on one of these fronts, accounting, that we may have a lever to incentivize upskilling.

A quick primer.  When companies buy a robot, or any piece of equipment, they pay for it but rather than have it simply take cash out of their account it does something else.  If they robot is estimated have a working life of 10 years the company places that “asset” on its balance sheet, reducing its value for every year of service.  This asset sits opposite the debt the company has, allowing it to borrow more. If I replace a human making $50K with a robot that costs $250K but is expected to last 10 years after the first year I have an asset worth $225K on my balance sheet (the cost spread over the lifespan less the first year).  If I spend $5K  to upskill the employee to perform at a higher level, equivalent to the robot, I have nothing but an expense that hits my bottom line.

Large publicly traded companies are evaluated quarterly by Wall Street.  The results reported often drive a short-term mindset but it also keeps key metrics front and center for these companies.  In addition to the asset to debt ratio, one of these measures is revenue per employee. This simple metric, top line revenue divided by the number of employees offers a clear way to see the benefit of automation. If a company can simply hold its revenue steady while reducing its headcount it looks better on paper than a company that might grow revenue modestly with the same, but upskilled, workforce.

So what if a company’s investment in  people could be truly treated as an asset.  Invest $1k in an employee and your average tenure for that role is 3 years. Why isn’t that a capital investment to be added to the balance sheet ($666). The switch is a case of accounting policy but what is more interesting to me is what the change in behaviors of companies might be.  If employee upskilling was treated as a true capital investment would L&D see more money, stricter reporting standards and a more respected seat at the table.?      

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s