“It looks like I am getting a financial crash course!” Jerry says with a smile.
“Yes, indeed. It is very important that you understand all the aspects of assets in organizations before you think about asset management,” Darren adds. He explains: “Current assets have a lifespan of one year or less, meaning they can be converted easily into cash. Such asset classes include cash and cash equivalents, accounts receivable, and inventory. Inventory represents the raw materials, work-in-progress goods, and the company’s finished goods. Fixed assets are assets that are not turned into cash easily, are not expected to be turned into cash within a year, and/or have a lifespan of more than a year. They can refer to tangible assets or physical assets such as property, plant, and equipment. Fixed assets also can be intangible assets such as goodwill, patents, or copyrights. While these assets are not physical in nature, they are often the resources that can make or break a company—the value of a brand name, for instance, should not be underestimated.”
“Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.”
Darren sighs and continues: “Now let’s talk a little about liabilities and shareholders’ equity. Liabilities are the financial obligations an organization owes to outside parties. They can be in the form of debts and other non-debt financial obligations, as well as short-term or long-term borrowings such as debentures.”
“How about employee salaries?” Jerry asks.
“Good question. Organizations invest in skilled human resources that are critical to operations. Human capital is regarded as the most important asset of an organization. On the balance sheet, salaries and wages that have yet to be paid are considered a liability. That is because it is money owed to a party outside of the organization. For salaries already paid, they can be treated as direct or indirect labor in the accounting system and even sometimes included in the asset section of the balance sheet if they’re considered capital expenditures. The bottom line is that investment in human assets has to be accounted for in the financial reporting whether as a cost item or as an investment, which is another big debate in itself.” Jerry does not look quite content with the statement, but Darren continues with his explanation.
“Shareholders’ equity,” Darren says,“is the initial amount of money invested in a business. It is also referred to as the owner’s residual claim after debts have been paid and is equal to an organization’s total assets minus its total liabilities. Shareholders’ equity represents the net or book value of a company.”
Darren bends over toward Jerry and says in a measured tone: “To be financially sustainable, an organization needs to be able to maintain its financial capital, its fixed assets capital, and its human resources capital over the long term. If any of those go awry, it means the organization is not performing at its best.”
“It is imperative for organizations to manage those assets diligently and realize maximum value in order to remain competitive and profitable. To effectively manage those assets, organizations are structured in such a way as to provide the required governance, leadership, and support to achieve their strategic objectives.”
“Research that was conducted on over a hundred organizations globally shows that large municipalities manage an average 35 billion dollars of assets, while major companies manage an average of 100 billion dollars of assets.”
Darren looks at Jerry with an air of confidence and resumes: “You walk into any organization and you can see that those assets are closely managed by a team of experienced and skilled staff. In many cases, you will even find that those teams are led by C-suite executives to provide better direction, planning, and execution, as well as compliance with industry regulations. Modern organizations have realized how important strong leadership, governance, and accountability are, because the executive team is a reflection of the organizational structure. It is the governing body that sets firm strategy, coordinates activities, and allocates resources across business units. Studies have shown that more and more organizations are increasing their number of corporate functional managers. This phenomenon is called ‘functional centralization.’ Functional centralization refers to the process to increase centralization of activities in organizations to realize synergies.”
Darren starts making some gestures with his hands, a sign that he is getting excited by the conversation. Waving his hands around, he continues his explanation. He tells Jerry: “To exploit the synergies in organizations, activities from different business units have to be harmonized. An example of how corporate-level functional managers are used to capture synergies is Procter & Gamble’s shift in 1989 toward a matrix organization. Functional senior vice presidents were engaged to manage functions across business units in order to promote ‘the pooling of knowledge, transfer of best practices, elimination of redundancies, and standardization of activities.’” [Guadalupe, M, Li, H, Wulf, J, “Who Lives in the C-Suite? Organizational Structure and Division of Labor in Top Management,” Management Science 60, 4(2013).]
“Since then, more and more organizations have increased the number of corporate-level functional managers to exploit potential synergies as part of their strategy. Corporate-level functional managers perform different activities that vary by function, such as the inherent primary (directly related to asset operations) and secondary (supporting operations) functions.”
“Some of the common corporate-level functional roles found in organizations are:
• Chief Financial Officer (CFO)
• Chief Operating Officer (COO)
• Chief Human Resources Officer (CHRO)
• Chief Information Officer (CIO)
• Chief Marketing Officer (CMO)
All the above functional managers report to the Chief Executive Officer (CEO) or the Chief Administration Officer (CAO), who is responsible for the overall management of operations and resources of an organization and acts as the main point of communication between the board of directors or council and corporate operations.”
Jerry looks at Darren with an inquisitive face, trying to figure out where this conversation is going to lead.
“Let us look at an example,” Darren says with a change of tone. “A CMO is a relatively new role in many organizations, whose responsibilities include leading the company’s marketing strategy, coordinating marketing activities, uniting and strengthening various departments’ own marketing plans, directing global marketing efforts, and managing customer relationships. Historically, all marketing activities had been performed within the individual departments, which led to marketing campaigns all over the place, duplication of efforts, and inefficiencies. Similarly, the other corporate-level functional management roles are crucial to coordinating activities and leveraging synergies across different departments and the whole organization.”
Darren starts describing the main duties of some of the C-suite positions:
• “Chief Financial Officer—Accountable for managing the processes for financial forecasting and budgets, and overseeing the preparation of financial plans and all financial reporting. Any organization will have a finance department to ensure that the finances of the organization are in order over the whole lifecycle of financial transactions. This applies to transactions ranging from accounts payable to accounts receivable, from operating expenditures to capital expenditures, through banking and investment.
• Chief Operating Officer—Accountable for the organization’s business operations and ensures effective implementation of operational and