If you’re reading this article, odds are you’re trying to grow your business and put more money on your bottom line.
And if you are trying to grow your bottom line, there’s one very important concept to get your head around: being purely rational at all times is not the best way to build your bottom line, despite what lots of people tell you.
There’s a place for rationality, of course. But if “rationality” appears above the title in the movie of your business, odds are you’re missing huge opportunities. It should appear somewhere alongside the list of this week’s guest stars in a long-running TV show.
All the very best ideas in any business are irrational, at least at first. Generally the role of rationality in business is to smother those ideas at birth just because overly-rational people don’t understand how the world’s greatest opportunities are created.
The other day, I was having a chat with a pal about the role of branding and how good branding built businesses better, and faster, than just about anything else.
That lead us onto a conversation about the role of intangible assets and the complexity surrounding brand valuation, which you’ll be relieved to hear I’m going to save for another day.
But it did lead to us having a chat about intangible assets.
Intangible assets
Intangible assets are not the most fascinating subject in the world for non-accountants (but really fascinating for accountants…).
Basically, “intangible assets” is an expression which covers the assets in a business you can’t touch.
Your office building, the machinery in your factory, the stock in your warehouse, the trucks you use to deliver to your customers…you can touch all of those. They are tangible assets.
Patents, trademarks, goodwill and so on are intangible assets. While you can’t touch them – apart, perhaps, from the bit of paper which certifies that you own the assets concerned – these are some of the most important assets in many businesses.
To illustrate, imagine you run a pharmaceutical business. Of course you need a factory, machinery, and trucks – tangible assets – to run your business. But without the original patent for whatever the medicined you developed, most pharmaceutical businesses wouldn’t be worth much.
However, when a pharmaceutical company starts the development work on a new treatment, the decision to press “go” is not rational.
Most new drug developments fail to make it through clinical trials for any one of hundreds of reasons. According to the National Institutes of Health, the success rate for drug development is just 10-15%, a number that has been broadly steady for many years.
Of course, in the early days of drug development, pharmaceutical companies aren’t spending billions of dollars.
Usually they start with an idea which might have some promise, a small team, and a small budget. As each part of the development process is completed successfully, a little bit more investment goes in, the team gets a little bit bigger, and the bet gets a little bit bigger.
But, however well-informed it might be, every penny spent in the development phase is a bet. Sure, an experienced, well-resourced pharmaceutical company might be able to tilt the odds in its favour a little by drawing on the combined expertise and experience of their staff.
It’s still a bet though.
The nearest equivalent is perhaps an expert card counter at a Las Vegas blackjack table. For them, no matter what they do, the odds are skewed in favour of the house, just as a new pharmaceutical product getting the OK for development is more likely not to work than to make it through clinical trials.
At the time the decision to go ahead with the development is made, there’s at least an 85% chance of it not being successful.
When you look at it in those terms, it’s not rational to develop anything with those odds of success. Yet businesses worth trillions of dollars have been created as a result of taking decisions which could not be considered rational at the time they were made.
Every one of those trillion dollar businesses got to be worth that much by navigating a series of leaps into the unknown, each with a high chance of failure, even though it’s not rational to bet against an expected 85% failure rate.
Balance sheets
Balance sheets are rational places too. They are a collection of assets and liabilities, all verified by the auditors as being valued correctly under the appropriate accounting standards.
Broadly speaking (and I’m wildly over-simplifying here) physical assets are valued at the lower of cost or net realisable value. Put another way, what you paid to buy it, or what it’s estimated to be worth now.
For example, a 10 year-old machine probably isn’t worth what you paid for it. With 10 years’ wear and tear, even excluding the possibility that a change in technology made the machine obsolete in the meantime, most machinery is worth pennies on the dollar against the original purchase price.
Because balance sheets are completely rational – the auditors can trace back every item on the balance sheet to proof of its original cost or evidence of a liability to a third party – you’d expect them to control how a business is run.
Yet, as non-accountants are often surprised to learn, almost no decisions about running a business are made based on its perfectly rational balance sheet.
A balance sheet serves some purposes for technical calculations like Return on Capital Employed (ROCE) which get accountants and investors excited, but for most day-to-day purposes a balance sheet is not a huge factor in company decision-making, despite it being incredibly rational.
That’s especially true when it comes to valuing a business, where scarcely any attention is given to the balance sheet even though, in theory, the value of the company’s assets, minus its liabilities, is what most non-accountants think a business ought to be worth.
To take an extreme case, Apple Inc had a balance sheet worth $330 billion at the end of June 2025, but at the same date it had a market capitalisation (what the total of all its shares were worth on the stock market) of $3.5 trillion.
Put another way, only 10% of Apple’s valuation was “rational” in the sense that it was represented by assets, less liabilities, on its balance sheet which the auditors could check back to source documentation.
The rest was “irrational” in the sense that it’s based on people’s guesses about what a unit of Apple stock might be worth.
There is a slightly technical answer to that difference which I won’t bore you with here, but the non-technical answer is that irrational thinking about Apple’s prospects was worth 90% or so of its stock market valuation at the end of June 2025, and only 10% of the valuation is rational, based on the value of assets and liabilities on its balance sheet.
Where do you focus?
That being the case, how much of your time would you spend on the “irrational” things in a business like Apple, and how much would you spend on the rational sort of things you find on a balance sheet?
Well, rationally (sorry, I couldn’t resist) you’d split your time 90/10 in favour of irrational things, wouldn’t you? After all, that’s where 90% of the value of the business is.
Of course, most businesses aren’t like Apple. I deliberately chose an extreme case. But on the US stock market, most businesses have just 25-30% of their valuation based on their tangible assts, and 70-75% is based on intangible (or irrational, you might say) asset valuations – assets like the value of the brand, their future product development cycle, and so on.
I don’t know what the split is for your business, but it might be worth taking a look.
Odds are somewhere between 50% and 75% of the value of your business, if not more, is based on outsiders’ view of the value of things they can’t see, feel, and touch (because if they could, those assets would appear on your balance sheet for an entirely rational valuation under accounting standards).
The question for you, though, is do you spend your time in proportion to the elements of your business which generate the most value?
If you ran a property company, which are largely based on the value of their physical assets, you would spend most of your time checking the properties are in good repair, the tenants are paying their rent on time, nearby planned developments are not going to impinge on the valuation of your properties, and so on.
It makes sense for people who run physical assets businesses, like property companies, to spend most of their time working with their physical assets because that’s where by far the majority of the company’s valuation comes from.
But if, say, 75% of your company’s valuation was based on “assets” like brand value, future product development pipeline, or distribution networks, how should your time be split?
Well, 75/25 in favour of things you can’t see, feel, or touch, right?
Do the maths. What’s your split?
And how does that compare to your diary?
Are you spending your time where the value is, or are you spending all your time on things that only account for 25% of your business valuation? (If it’s the latter, don’t worry. That’s what a lot of people do. Just make a start on redressing the balance right away and you’ll be fine.)
Branding
All of this really comes home to roost in areas like branding, which I’m using here in its very broadest sense to avoid having dozens of marketing strategy purists come after me.
Many people – in particular, accountants, engineers, and software developers who largely operate in “rational mode” – poo-poo the idea of brands having a value and are very reluctant to invest in building or maintaining a brand even though, done well, that might account for 75% or more of the value of the business.
While I’m not suggesting that the 90% of Apple’s stock market valuation which isn’t based on its balance sheet is all about Apple’s skill in branding their company and their products, equally I’m sure we can all agree it isn’t 0% either.
Apple is one of the world’s most powerful brands. It has a non-zero impact on what the business is worth.
But even if the brand was worth just 10% of the total valuation of Apple, which feels very conservative, that’s still an asset worth $330 billion.
I don’t know how much time, money, and resources you would spend to protect and build an asset worth $330 billion, but the answer probably isn’t “zero”.
On a smaller scale, getting a male model to remove his jeans and stick them in a washing machine was worth an 800% growth in sales of Levi’s in the mid-1980s. Even though that was a completely irrational idea which had almost nothing to do with jeans – Levi’s even degraded their signature patch on the back so you couldn’t tell, at the point Nick Kamen was throwing his jeans in the washing machine, that he was wearing Levi’s.
How much time would you spend developing assets which could generate an 800% increase in sales?
Well, rationally, not zero. Even though the activities you are working on when it comes to laundrettes and male models are entirely irrational.
And on an even smaller scale, very small businesses who do this well can make an impact far beyond anything they could achieve if they only ever took rational decisions.
My favourite current example of this is the wonderful Michelle J Raymond (not forgetting the equally wonderful Liliane Abboud) who have structured an entire chunk…pun intended…of content on LinkedIn around Australia’s national biscuit – the Tim Tam – with their Friday Tim Tam Tips.
Think about what Michelle and Lil have done here. They have taken a product they didn’t even invent (the Tim Tam) and structured an entire fun-packed narrative around the idea of being Australian and teaching people how to build their business on social media.
I don’t know what a packet of Tim Tams cost (personally I’m much more focused on the cost of Tunnock’s Caramel Wafers…ideally the plain chocolate ones). But just a few dollars in cost brings a boatload of fun, laughs, and learning which gets spread on social media and builds Michelle and Lil’s business.
The role of Tim Tams in building a business though? Completely irrational.
And yet, in this case, somehow perfect.
The moral of this story?
Often it’s the irrational factors which create the most value in a business, not the rational ones.
If you spend all your time on factual, rational, tangible things, your bottom line is probably suffering.
50% or more of the value of your business is likely to be based on the value outsiders place on the intangible, non-obvious, “irrational” aspects of your business.
Invest your time, money, and resources accordingly.