People really are an asset after all

The financial definition of staff as an expense rather than an asset fails to reflect the reality of business, writes Phil Young

When I introduce non-financial managers to the metric Return on Assets (net profit divided by total assets), I find that most people are very familiar with ‘net profit’. But many are unclear about the definition of ‘assets’, particularly in the context of finance and accounting. When we go through the list of typical current and non-current assets, it is not uncommon for someone in the audience to ask, “What about people? Aren’t people assets, too?”

In anticipation of such a question, my standard retort is, “People are assets only in motivational talks. In finance and accounting, people are expenses!”

It generally draws a good laugh, particularly from those who have no doubt heard such talks before. But it is not a question so easily dismissed.

I suspect a major reason for the association of ‘people’ and ‘asset’ is because ‘asset’ has multiple meanings to different people. To the non-financial manager who asks the question, ‘asset’ refers to a useful and desirable thing or quality. If their employee is told they are an ‘asset’ to the company, this is a compliment. And if an employee is considered a ‘liability’, it is another story altogether. In accounting, an asset is on the left side of the balance sheet, equally important as the right side of the balance sheet’s liabilities and equity. In finance, an asset is a resource a company invests in to generate future revenue, profit and cash flow. In this context, assets are only as good as their ability to generate appropriate return on a company’s investment.

High return on assets is achieved one of two ways: earn more net profit relative to the investment in assets, or own and use fewer assets to generate whatever net profit possible. The latter is the so-called ‘asset-light’ approach.

The revolution in digital technology has produced numerous asset-light companies with this strategy, and on a recent vacation to Florida I decided to rely on two of them. Through Airbnb, I rented a two-bedroom unit owned and managed by a local company. I also signed up for an account with Uber, figuring that it would cost me less to call Uber than to rent a car, not even counting the hassle and cost of driving
and parking.

From a financial perspective, the business model of these two asset-light giants is beautiful. They don’t need to invest in hospitality infrastructure or fleets of vehicles. They also don’t have to carry the added expenses of HR costs, such as benefits and training, for the people who provide the actual service to the customer. The marketing perspective, and how or why these services are made possible, however, gets less attention.

What we customers want from an Uber or an Airbnb are awesome user experiences.  During my stay, I used Uber roughly 20 times. Every driver was careful, courteous, and friendly.

The Airbnb experience, however, was less than satisfactory. On several occasions, when I requested help with certain issues pertaining to the apartment, the company’s service team was either slow or unhelpful. I should also add that as a way of compensating for this, I was refunded 15% of the cost of the stay.

My experience with these two asset-light companies demonstrates an important business lesson: regardless of a company’s business model, its people truly are an important asset, in both the financial and non-financial sense. So, it behooves all asset-light companies in particular to remember the non-financial meaning of the term, as well as the financial one.

— Phil Young PhD is an MBA professor and corporate education consultant and instructor