I’ve been really busy with repairs to my house during the summer months so I have not been as active posting to the blog as I would have liked to be. Thankfully, the project is getting to the point where I am less at risk to weather and this couldn’t happen at a better time here in the Northwest. During my time running up and down ladders I have been thinking about a few things I wanted to write about so let me start sharing.
In the world of accounting, there is a report called a Balance Sheet. Its most basic function is to report a financial balance in the relationship between Assets, Liabilities, and Owner’s Equity. The following equation explains the balance this way:
Assets = Liabilities + Owner’s Equity
In the world of business or more correctly capitalism, for every increase in a liability there is a corresponding reduction in an asset and for every decrease in a liability there is a corresponding increase in some asset.
In a typical company balance sheet there are several subcategories in each of the basic sections of the report and sometimes the correspondence is more easily identifiable than it is on other occasions. That said, for every Liability there must be a corresponding Asset and or Owner’s Equity line item to balance (offset) any changes. Let me start to home in in my point here.
Somewhere in the Liability section of every balance sheet there will be at least one line item for payroll. There could be more than one line if the company distinguishes between direct and indirect employees as part of their cost accounting. Direct employee costs are included in the cost of goods sold for a particular product while indirect employee costs are distributed over the entire company. Someone working on an assembly line building a widget will have his or her labor cost included “directly” in the cost to build the widget while someone working in Human Resources will have their labor costs shared by the entire company “indirectly.”
So, where is the asset to offset the expenditure of labor? Payroll is a monetary transaction that takes place when labor is expended to produce the product or service that a company is selling in the marketplace, but where is the labor transaction?
It seems to me that a company with a solid labor contract has a quantifiable asset that might be used as evidence of company health for the future. The contract might be seen in some ways as collateral and, to the extent that is true, an asset that should somehow appear on the Balance Sheet, but where is it?
Assets are something to be nurtured and grown for the future benefit of the company so in terms of labor that would mean training and competitive benefits to improve the products and services delivered each day by the employees to the customers. That said, the only place we see training in the Balance Sheet is the cost associated with that training. Where is the asset?
When we think about it, the management of an asset is different from the management of a liability. Assets are maximized and liabilities are minimized. The growth of a labor force would involve hiring and there is no shortage of capitalists who would tell us that creating jobs is their mission in life, but what we see are layoffs and terminations which are the reduction of the liability on the other side of the Balance Sheet.
Maybe it is just me, but I think the whole business of capitalism would be conducted differently if we managed the asset rather than the liability. Better yet, we should be balancing the management of the liability with the management of the asset.
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