What is Intellectual Capital?

For publicly traded companies, capital is raised by issuing debt or equity which in turn is invested into assets. Hopefully these capital investments will earn a rate of return higher than your cost of capital. Capital assets are reported on the Balance Sheet. As the World becomes more and more competitive, the returns generated by assets not reported on the Balance Sheet becomes much more important. And for some organizations, this may represent the single biggest source of value-creation!

One of these hidden assets for creating value is so-called Intellectual Capital . Intellectual Capital (IC) is the intangible stuff that provides your organization with knowledge, strategy, customer service, etc. Internal sources of IC include your people who possess the knowledge and expertise to make your organization work. Internal IC also includes your management information systems, brand names, and copyrights. External IC would represent your loyal customers and suppliers.

IC received widespread attention when Thomas Stewart published his book: Intellectual Capital: The New Wealth of Organizations . As a result, many companies now recognize that value-creation goes outside traditional capital. This intense interest in IC has prompted some companies to create Managers of Intellectual Capital.

Finally, how do you measure IC? Well it's not easy since IC is such a new concept. Measurement of IC can include things like employee qualifications, customer retention rates, and registered copyrights. For now, most companies are focused on measuring the traditional sources of capital. However, in the future Intellectual Capital may become one of the most important components of value-creation.

matt evans photo Written by: Matt H. Evans, CPA, CMA, CFM | Email: matt@exinfm.com | Phone: 1-877-807-8756

Return to Listing of All Articles | Measuring Intellectual Capital | Share