Financial Measures Are Insufficient

While financial accounting is
suited to the tracking of physical
assets such as manufacturing
equipment and inventory, it is
less capable of providing useful
reports in environments with a
large intangible asset base. As
intangible assets constitute an
ever-increasing proportion of a
company's market value, there is
an increase in the need for
measures that better report such
assets as loyal customers,
proprietary processes, and
highly-skilled staff.
Consider the case of a company
that is not profitable but that has
a very large customer base. Such
a firm could be an attractive
takeover target simply because
the acquiring firm wants access
to those customers. It is not
uncommon for a company to
take over a competitor with the
plan to discontinue the
competing product line and
convert the customer base to its
own products and services. The
balance sheets of such takeover
targets do not reflect the value
of the customers who
nonetheless are worth something
to the acquiring firm. Clearly,
additional measures are needed
for such intangibles