The current economic crisis demonstrates the need to manage capital as part of the business
We hear a lot about capital these days be it capital asset values, capital scarcity, new capital products and instruments, and so on. You can see that no one is too sure what all this talk of capital means and how capital relates to actual corporate businesses. The confusion arises because the future worth of capital assets or solutions and the historic return on investments in capital solutions has never been managed properly in 20th century management used today.
The problems that caused the financial crisis are actually symptoms of one problem; the failure to manage the business. Financial institutions crashed because they could not manage asset value in the capital worth as an ongoing part of the business. Corporations are unable to manage the individual businesses within corporation as a part of the managed corporate business. Enterprises are not able to capture actual business data and do not have the information to manage the business.
The only answer to the confusion and the causes of the financial crisis is to learn what capital really is and how capital must be managed as part of the business. Result-performance Management (R-pM) eliminates the problems by organizing capital solution investments as part of the business, by managing capital solutions utilized in performance to incur costs and create value in actual business results to provide return, and by managing solution sale or disposal after use by the business.
What is the business and capital as part of the business?
The business is defined as “investments in capital as solutions of worth utilized for costs and effectiveness of performance to produce value and quality in results”. Every business in the world invests in capital to utilize as solutions in performance in order to produce output results. The capital must have a worth that justifies the investment costs for acquisition or development and implementation as capital solutions and the continuing utilization over the useful life of the solution. Capital solutions are utilized to produce result value, be it in business results produced or in income or growth result value for solutions purchased as investments. Past result value-added attributed to the solution provides the return on the solution investment. Planned attributed result value-added in utilization over the remaining life and disposal is the current solution worth. The solution may have a disposal worth in the result value produced from liquidation of the solution at the end of the useful life or in the sale of solutions purchased as investments. Solution worth declines as solutions are consumed or deteriorate or become outdated. Reductions in solution utilization or disposal worth generate current performance costs.
Capital is the investments in the business to have the capability to produce results
The only reason to invest in capital is to provide the capability to produce results. Capital is all the tangible and intangible assets available to be utilized by the business. Capital includes the business organization, processes and systems, humans and their capabilities, facility equipment and supplies, management plans and tactics, and information capital. Capital has a worth in the capability to create result value-added attributable to the capital over the capital life. Some capital solutions in loans received, credit facilities utilized, supplier amounts payable, etc have negative worth and are called liability solutions.
20th century management fails to organize and manage capital as part of the business
Today, people think of capital as items in an asset register, on the payroll, or listed on a balance sheet; rather than as one set of individually-identified capital items to be managed and utilized as part of the business. Corporations invest enormous sums of money in capital and then fail to identify the specific capital solutions developed, the costs of developing the capital, the worth of the capital as developed, the utilization of the capital to create value, the cost of capital utilization or consumption as capital worth deteriorates, the value created by the capital, and the return the original investment from this value. Some tangible assets are recorded as fixed assets and the acquisition costs recorded as asset worth and depreciated over the life of the asset. But even this capital is not managed as part of the business. Depreciation costs are charged to objects, centers, and activities; but not to the result produced. Much other capital is developed, but never recorded as capital. Much capital is simply labeled as “intangible assets”, so that it can be ignored. Capital as a lump sum, as names for a collection of items, or as intangible assets has little manageable worth.
Capital is organized as solutions that can be utilized to produce specific results
The definition of capital is “the set of assets and capabilities in specific solutions of positive (asset) or negative (liability) worth invested in the business and supported for utilization to produce specific business results”. Capital investments are made to have specific items of capital available to be able to produce business results. Therefore, capital must be sub-defined into specific items called capital solutions that can be utilized, measured, and managed to produce specific results. All capital must be organized as one data set that manages all capital solutions. Related subsidiary records are maintained as is done today for capital files on fixed assets, employees, supply inventory, cash, etc.
The capital worth of a solution must be known and managed over the life of the solution
The capital worth of each solution is the capability to produce attributable result value-added over a payback period or the remaining useful life and sale or disposal at the cost of capital. This capital worth must be more than the investment costs to acquire, develop, and implement the solution to justify the investment and provide a planned gain. The capital worth is periodically assessed over the life of the solution against the actual and expected capability to create result value. The capital worth deteriorates as the solution loses the capability to produce results. Reductions in solution worth must be accounted for as performance costs. Performance costs amortize the solution investment and decrease the unamortized balance. The investment amount and unamortized balance is increased through improvement or replenishment of the solution. Capital worth may be increased as well by increasing the capability to produce result value-added. The deterioration in capital worth over the life of the solution or utilization of a solution as a service produces performance costs that are charged to the result produced, and amortize the investment balance until reaching zero. A zero balance solution may still have worth, but should be nearing the point that replacement is needed.
The exception is human personnel capital, where the worth in future result value-added covers future personnel costs rather than past acquisition or development costs. Facility supply solution worth and the unamortized balance is continually consumed and replenished at cost. Liability solutions incur negative solution worth and investment balance as amounts are received and incur negative performance costs as repaid to lessen the negative balances. Reduction in the disposal result value for capital solutions for investment or business use, cause a corresponding deterioration in solution worth, producing performance costs that must be charged to the income or other result produced.
Capital solutions have common attributes that must be managed as a set
Capital is not a collection of isolated items. Capital is a set of solutions that have common attributes that must be managed as a set of capital. All capital solutions have descriptors including investment costs incurred to acquire or develop the capital, capital worth, unamortized investment cost balance, cost object, performance costs in the amortization of solution investment and for the utilization of human personnel capital or solutions provided as a service, capacity in the number or volume of results that can be produced, level of capacity utilization, qualifications that provide a level of effectiveness in producing result quality, potential in the expectations for the level of utilization and effectiveness to meet result goals, reliability to perform as needed giving uncertainty of performance in the business creating a level of result risk, causes of performance problems that limit or introduce defects or other symptoms in result produced, expected future utilization result value-added, planned disposal result value-added, planned capital cost result value, a performance manager responsible for providing qualified solutions, outsource partners to provide the solution, service providers responsible for support, support contracts, and other capital descriptors. The invested capital utilized by the business cannot be managed unless organized and recorded as a set.
Capital worth is the planned result value-added attributable to the solution over the remaining solution life, plus the disposal result value less the cost of capital incurred over the solution life. Capital worth deteriorates in the performance costs charged to each result produced, and increases with added result value-added from investments to improve or replenish the solution. Capital solution worth less the unamortized balance at any point in time is the gain or loss on the solution investment. Managing capital worth and returns is unfamiliar and seems complicated. But once experience is gained with the business, it becomes the clear routine. A professional or small group is responsible for facility records management for capital solutions.
Capital is organized to be professionally supported by those with the capability needed
Tangible and intangible capital require specific capabilities and experience to manage. Generally there are four distinct categories of capital that require specific management and support capabilities
- Business capital is the organization, process, and data utilized directly to produce a result or set of results and cannot be used for results in general. Business capital requires business knowledge and analysis capabilities
- Human capital is the internal and external personnel employed in the business, specific capabilities that can be applied to produce difficult high-value results, and knowledge to assist human capital utilize specific solutions and produce specific results. Human capital requires human handling and development capabilities
- Facility capital is the traditional tangible assets of the enterprise in the reusable infrastructure and equipment, investments in financial facilities, consumable money and supplies, and tangible information in records of the business. Facility capital requires administration capability and expertise with the specific capital
- Management capital is the aids that help manage the business in the business strategy and plans, business and competitive tactics and result evaluations and capital assessments to keep operations on track, and analyzed data and records and external intelligence to provide management information. Management capital requires management analysis and research capabilities
The four categories of capital are managed by capital result units that are responsible for developing and maintaining capital and providing qualified solutions to produce results. Capital that may be administered today as organization and methods, information technology, finances, corporate plans, legal items, etc are incorporated under the appropriate category for professional management of the specific capital solution.
Capital is organized to be integrated and utilized together to produce specific results
Capital must be organized differently in order to be integrated and utilized seamlessly to produce results. Each category of capital is organized into three class of capital to be integrated and utilized to produce results:
- Readiness capital must be in place to provide the capital for an organization unit responsible for a set of results. Readiness capital includes the business organization, human personnel, facility equipment, and management strategy
- Production capital is utilized directly when producing a specific result. Production capital includes business process, human capability, facility supply, and management tactics
- Information capital provides the information to be accessed together to utilize solutions and produce results and the means to document and record results. Information capital includes business data, human knowledge, facility records, and management intelligence
Capital is organized by capital class in order to be integrated and utilized by the result manager to produce results effectively. There are twelve capital solution types that can be organized by capital category or capital class in the business structure.
Capital is managed to know the cost and effectiveness of the business
So, in summary, all capital must be managed to ensure that effective solutions are in place, to acquire or develop new capital needed for planned future results, to provide new solutions to produce new results, and to handle performance problems. Each capital solution is measured to know the volume of results produced, capacity or time utilization, the development investment costs, planned or assessed worth, unamortized investment cost balance, total performance costs, performance effectiveness, incidents of performance uncertainty, performance problems encountered, performance against expectations, etc.
Capital decreases in worth as it is consumed or deteriorates, which is reflected in performance costs and reduction in the unamortized balance. The amount invested in the capital and the unamortized balance increases as solutions are replenished or improved. The capital worth may increase as well if the improvement increases future result value-added for solution utilization and disposal or extends the expected life of the solution. Capital worth and the unamortized balance are managed period by period over the life of the solution to know the current and disposal gain or loss on solution investments to manage the potential for losses or write-offs, and to make business changes to prevent or minimize capital management causes of performance problems.
Capital is summarized by capital category and class and other descriptors. The performance of capital is reported for capital management improvement and capital optimization. Capital is managed in order to manage the business, manage capital and enterprise business worth, manage performance costs to produce results, manage result value-added, manage total capital costs, and manage the return on capital investments. Financial institutions, corporations, and other enterprises are prevented from managing capital as described above today due the failure of 20th century management to manage capital as part of the managed business.
The R-pM Solution to the Economic Crisis is explained in free downloads
Three free white papers explain the dead-end 20th century management problems that caused the economic crisis, the way R-pM eliminates the problems, and a government program to address the crisis by stimulating the economy, solving the problems, building an architecture for financial and economic management, and organizing local businesses to flourish in the eventual recovery.
- How to Eliminate Problems that caused the Economic Crisis explains the major unsolvable 20th century management problems and the R-pM solution
- The Only Solution to the Economic Crisis explains how R-pM manages the business to capture actual business data and provide management the information needed for actual business management
- A Government Business Management Program to Answer the Economic Crisis outlines a government program to encourage business management and manage economic cycles to prevent future crisis
These three white paper downloads are available to R-pM Community Members at Result-performance Management.com. There is no cost or obligation to join the R-pM Community. Join by entering your email and password. Your email address is protected and used only for download problems and occasional R-pM Member news and white papers.
