What’s the point in owning a beautiful Ferrari if you never take it out of the garage?
Think about it. You spend all that time building up the talent necessary for earning a chunk of cash, then you toil for years until your bank account is plump, and finally, the day arrives when you walk into the showroom knowing you’ll drive off the lot in your dream car.
But then you keep it sitting in the garage, unused, like a $800,000 paperweight.
We’ve seen a lot of companies treat their intangible assets in the same way. Companies will spend huge quantities of energy accruing a robust constellation of a strong brand, deep data pools, wide relationship networks, layered patents, clever software, confidential information, amazing content and tough-to-get approvals. All these little bits of business pile up over time and become valuable intangible assets.
And then they sit there, unused, like an intangible paperweight (Ok, intangible assets have no density. But you get what we mean).
This kind of attitude violates the laws of business. What are these laws? Essentially, a good business should never waste energy. Every action is governed by the law of “return on investment” (ROI).
The law is simple. A good action is anything that generates a positive ROI (net return on investment / Cost of investment x 100%). In other words, everything a company does must produce more cash than it costs to create. Each intangible asset has an ROI. How long did it take to gather that precious data? What funds were spent on new software? How many lawyers did it take to file patents for that innovation?
How can you maximise the ROI of your intangible assets? You don’t wasn’t to get caught with the Ferrari gathering dust in the garage. It should be tearing up the streets, proving its value! You must be looking for ways to transform your intangible assets into cash flow.
From an economics perspective, there are only six ways to increase cash flow:
- increase prices
- increase sales volume
- reduce fixed costs
- reduce variable costs
- reduce inventory/WIP, or
- reduce the value of fixed assets
Let’s unpack how intangible assets can be put to work to improve cash flow.
- Increasing Prices: The Apple Advantage
Want more cash? Then add a few more percentage points to the price tag. That’s easier said than done, of course. Especially when your competitors are racing to the bottom.
This is where the power of brand recognition is such an important intangible asset. It can take years (and a whole lot of luck) to create a strong brand, but it’s worth the effort because brand allows a company to charge more for its products without losing customers.
Apple, for example, is known for its innovative technology and strong brand and it regularly charges premium prices for its gadgets. What’s amazing about the Apple brand is that its flagship product – the iPhone – hasn’t changed much over the last few years. Yet, despite this lack of innovation, Apple can still convince its loyal customers to pay higher prices thanks to the perceived quality and prestige associated with the Apple brand.
Lesson: Build a strong brand by focusing on consistent quality, marketing and exceptional customer experience. A well-recognised brand lets you charge higher prices, boosting your cash flow.
- Increasing Sales Volume: The Starbucks Strategy
Customer loyalty is a powerful driver of sales largely due to something called “switching costs.” This refers to the friction customers face when changing from one product or service to another and they hit things like termination fees, or the annoying time and effort required to learn a new system.
Starbucks has mastered the art of high switching costs by creating the intangible asset of a loyalty points programme. The coffee chain has cultivated strong customer loyalty by using huge amounts of customer data to create the programme, which has translated into greater amounts of repeat business and higher sales volume for Starbucks.
Lesson: Develop products with high switching costs and focus on customer satisfaction to foster repeat business and increase sales volume.
- Reducing Fixed Costs: The Netflix Model
Today, the most valuable companies in the world are almost entirely intangible. These are the digital behemoths: Netflix, Meta, Google, etc. If it wasn’t for their server rooms and human staff, these digital businesses would be 100% intangible.
The reason they are so valuable is low fixed costs. Netflix, for example, uses proprietary software and algorithms to send movies directly to your TV. This means it doesn’t need physical video stores or distribution centres, lowering fixed costs. Similarly, nearly all of Meta’s valuable content and data on Facebook is generated for free by users. The company barely needs to do anything except maintain the website and perhaps a little bit of content moderation.
Lesson: Automate processes where possible using software to reduce reliance on physical infrastructure and lower fixed costs.
- Reducing Variable Costs: The Coca-Cola Secret
The Vesty brothers started as small meat sellers in London. They quickly realised that their profit margins were dependent on the supply chain. So, they decided to buy the whole supply chain – from the retail stores, the container ships and the farms, even to the packaging companies.
Most companies don’t have the means to do this. But Coca-Cola did the next best thing. It knew that the intangible asset of owning proprietary methods for making its beverage would help reduce its overall production costs, leading to lower variable costs. Coca-Cola’s secret formula, for example, helps it maintain consistency, which is something Coke couldn’t guarantee if it had to rely on third parties.
Lesson: Protect and use your trade secrets to maintain consistency in your processes. Build strong, long-term relationships with suppliers (perhaps even buy them out) to negotiate better terms and reduce variable costs.
- Reducing Inventory/WIP: The Dragon’s Den Problem
A common refrain heard on the popular TV show Dragon’s Den is: “Sorry, I would be investing, but you’re holding too much stock. And that’s the reason I’m out.” Why does overstocking spook investors? Because of a dynamic known as “lock-up.”
Lock-up is what happens when a company has plenty of work to do, or stock in the warehouse, but the receivables on the invoices aren’t coming in fast enough to cover wages and supplier payments. Suddenly, the company “locks up” and collapse is imminent if nothing changes.
The only way out is to improve efficiency. To do that, you need to know where the bottlenecks are. And for that, you need the intangible asset of good data. Once these bumps are located, the next task is to apply inventory management software to help optimise inventory levels. Done well, this will reduce both holding costs and work-in-progress (WIP).
Lesson: Implement advanced inventory management systems to keep inventory levels optimized and reduce holding costs. Invest in advanced forecasting and analytics tools to align supply with demand more accurately, reducing excess inventory and WIP.
- Reducing Fixed Assets: The Airbnb Innovation
It’s a truism that if something can be digitised, it will be. Digital transformation is a great way to replace expensive physical assets and improve cash flow. Ideally, a company will have zero fixed assets and instead generate revenue by being the digital glue in a tangible asset world.
Airbnb is the poster boy for this business strategy. The company only really exists on paper, yet it appears to “own” the access to millions of homes around the world to offer lodging without owning any physical assets. As a result, Airbnb is worth about $84 billion without any fixed assets whatsoever.
Lesson: Consider digital transformation opportunities to offer your services or products without the need for substantial physical assets.
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