Is the concept of innovation accounting new to you? In simple terms, innovation accounting aligns old financial models with innovative ideas. By using this concept of lean management, you can turn qualitative findings into quantitative reports and insightful business models.
Hop on board because we are going to look at the importance of tracking the progress of innovative ideas in business management. We will also discuss how you can train your staff to do business accounting of innovation investments.
Table of Contents
What is Innovation Accounting in the Business World?
In a business model, introducing an innovation means changing the whole model. The new model should make the core business principles applicable to innovative ideas. You will see the backbone of your business model when all business KPIs (market share, revenue, ROI, etc.) are effectively nonexistent.
Thus, we define innovation accounting as the process of collecting core business KPIs without marketing KPIs to measure capacity for innovation. These core KPIs are quantifiable financial and market data that can measure the capacity of a business to handle innovations. Through this process, you can recognize the growth points of your business model and take advantage of them.
The term “innovation accounting” was first coined by Eric Ries, the author of the famous “The Lean Startup” book. His idea of monitoring the progress of a lean startup business paved the way for the groundbreaking idea of accounting for innovation. You can use this idea to create a framework of innovation factors to take advantage of in your business process.
Do You Need Innovation Accounting Training for Your Team?
Yes. You need proper innovation accounting training to familiarize your team with new innovation KPIs to account for. Let’s look at an example to help visualize the situation.
Let’s say you are starting a lemonade business. You have small tables set up outside your juice bar. But the innovative idea that you have is to deliver the take-out lemonades using a remote-controlled toy car.
Because of this innovation, you need new metrics to measure its success. I have made a sample of innovation metrics for our case.
Image alt text: Sample innovation KPIs for a lemonade bar with new take-out order delivery methods.
Some of these KPIs are regularly measured because they are important sales KPIs. But you have to introduce new KPIs to measure how the innovation affects your business. Identifying innovation KPIs and including them in your metrics is the first level of this process.
Teams that are not familiar with these new metrics should undergo training in tracking new KPIs. And to scale your training throughout the entire organization, you have to train your staff to be future coaches as well. You need an endless stream of consultants to oversee the innovation accounting training.
Three Levels of Innovation Accounting Training in Business Management
Level 1: Make Metrics for Customer Needs
As we have mentioned before, the first level allows you to make a simple dashboard for innovation metrics and KPIs. And since a lean strategy depends on giving customers what they need, the metrics should reflect that. The metrics and KPIs depend on how well you satisfy the customer’s needs.
The first level allows you to see how innovation affects your business model. It gives a basic sense of which gimmicks are working and which ones are not.
Level 2: Make Value and Growth Assumptions
To make innovations, you have to make bold assumptions. But you have to base your assumptions on existing market data. The second level measures the truth of these assumptions.
To move forward, you have to assume the value and growth of your innovation. Value assumption gives you an idea of how users will find your product valuable. Growth assumptions, on the other hand, deal with how your product can reach new users.
Recommended value metrics: retention rate, number of repeat purchases, referral purchases.
Recommended growth metrics: word-of-mouth referrals, number of new buyers, indicators of sustainable growth.
Level 3: Get the Net Present Value (NPV) of Your Innovation
The net present value gives an estimate of the new product’s price in today’s market. By knowing the net present value, you can see if your innovation fits your financial model. The NPV should be based on growth factors that determine your product’s future performance.
- Number of website visitors
- Visitors that convert to website users
- Website users that pay for your products
The third level shows how your new product will affect your company’s finances.
Make Innovative Market Decisions Based on Data
After you go through the training, you will get different market data that is useful in decision-making. Innovation requires money, and you don’t want either innovation or money to go to waste. Thus, you need data-driven decisions to propel your innovative ideas to the market.
To be fair, making innovative market decisions is hard because it requires you to go into uncharted territory. Everything is new in innovation projects, and the data are always changing. Innovation accounting gives a more precise approach than traditional accounting because of data-based assumptions.
If the data from accounting innovation leads to a subjective decision, then you are doing it wrong. It must lead to an objective decision after analyzing the innovation metrics from level 1. Ask yourself these questions:
- Did my sales go up after using a remote-controlled toy car for take-outs?
- Did we gain returning customers?
- How does changing the price of the lemonade affect the overall sales for the day?
Accounting for innovation serves as a way to communicate how innovative ideas affect your business framework. It bridges the gap between innovation and finance. It allows you to see the innovation strategy’s key risk factors, leverage points, and growth potentials.
Innovation is a risky play. It requires you to make bold assumptions with little to no market data. The key role of accounting for innovation is to provide new and measurable metrics and KPIs that dictate future market behavior. You can see how well your new product or service will perform by tracking innovation metrics.
Accounting for innovation is different from traditional accounting and financial techniques. Training your team makes them familiar with gauging innovation metrics. It also allows them to make informed decisions based on actual data. This way, you won’t need to blindly invest in innovative ideas.