Why financial is the least relevant of capitals: CFO’s prepare your IT systems for a switch to a multi capital business administration!

18 November, 2016

Within the <IR> Framework six capitals are set out and the one with the most management focus happens to represent just a minor portion of the total value of a company. Financial capital is only an intermediate form of the other capitals and as such very much needed but not the most important of the capitals. Financial capital is actually the only capital which is fairly easy to acquire or to dispose of.

The other capitals can be best described as pre-financial or post-financial. Pre-financial when they are needed and used for daily value creation like skilled employees, a warehouse full of seasonal produce stock, a new release of a software solution ready for deployment or a new way to reduce CO2 emissions; post-financial when they are no longer useful and are listed for disinvestment like stranded assets.

When looking at the birth of a company everything starts with a business idea to generate new value using input capitals provided by stakeholders i.e. suppliers, employees, customers, shareholders, earth and society. Great effort is made to transform financial seed capital into pre-financial capitals : find and equip an office building, hire and train employees, prepare marketing materials and sales campaigns, develop and fine tune product features, setup a smooth administrative process, etc. When everything is ready for execution the intended capital transformation can start: prospects are found and converted into customers, products are delivered and invoiced, money starts to flow in after a long time of investing.

Once the pre-financials are fully on stream the seed capital is no longer needed and the joint integrated capitals are generating a sustainable financial dividend stream while at the same time sustaining and improving the pre-financial capitals: human capital grows (experience, innovation), social & relational capital grows (new clients, reliable suppliers), intellectual capitals grows (R&D becomes more mature, standard operating procedures come into shape), natural capital remains level (zero emission equipment works out fine). The company is generating multi capital value and is able to sustain this over longer periods of time.

Now what should the chief of administration focus on? On the money streams and the ability to upkeep them? Absolutely but also on the status and perspective of the transformational capacity of the other capitals i.e. a healthy value creation capability. Will the workforce be able to maintain this excellent job or do we need to invest in them either in knowledge or in flexible schedules to support a healthy work/private balance. What can we expect to be the return on a specialist training for R&D? Should we invest in a total new corporate identity or will the current one be sufficient for some more time? Is there a correlation between marketing spending and sales? Should we temper gross profit to enable R&D making major product improvements?

Now what if you have your financials in order but don’t know the status of your other capitals let alone their future perspective and resilience? Should you prepare your IT architecture to enable a multi capital administration?

In the CFO guide for driving multi capital thinking you will find some of the initial directions the IIRC Technology Initiative working group has outlined.

I would recommend CFO’s that are serious about developing technology capabilities that support and enable next-generation business management and reporting practice to read it.