Intangible costs are any costs that have some sort of negative impact on the performance of a business, but cannot necessarily be applied to a specific line item or expense with the accounting books. Instead, these costs occur in a manner that has an impact on the overall function of the company. An intangible cost can be expenses that occur while making upgrades to a production line, the implementation of changes in employee benefits, or any factor that has impacts the relationships developed with customers.
One of the easiest ways to understand intangible costs is to consider the issue of employee productivity. When employees are happy and feel valued by the business, their rate of productivity is usually near peak efficiency. Should some event have a negative impact on the relationship between the employee and the employer, there is a good chance that the productivity rate will drop. That change in production can be termed as an intangible cost, brought about by this shift in goodwill between employees and the employer.
Changes in employee benefits can often lead to intangible costs. For example, if a company chooses to do away with the group health insurance coverage as part of a cost-cutting strategy, the business will save a significant sum over the course of a year. At the same time, this loss of insurance will have an adverse effect on employees, who will tend to be less dedicated. As a result, production drops and the business is not able to produce at the same level as before. While the company saved money by dropping the health coverage, the savings is less than originally projected, since production decreased as a result of the action.
The same general idea can lead to intangible costs that involve customers of the firm. Should some issue, such as delayed delivery on a crucial order, or a problem with a customer care representative, alter the client’s perception of the business in a negative manner, there is the possibility that the client will begin to look for another supplier. After securing a new vendor, the client begins to migrate his or her business to the new supplier. The intangible cost to the original supplier is a loss of revenue and the loss of a valued client.
Intangible costs tend to come from some factor or set of factors that has diminished or weakened the company in some manner. The costs may be in the form of cutbacks in the labor force that require the remaining employees to take on additional responsibilities, cutbacks on employee benefits, or making changes to a product line that are not welcomed by customers. In each case, the potential for the business to be adversely impacted, and thus become less productive, is greatly increased.