Accounting Advice for 2018

With the 2017 year coming to a close, many business owners have approached me with questions about getting a good start to their 2018. While there is no one-stop solution for businesses, there are quite a few good practices and simple approaches that can be the determining factor between a running start versus a steady jog into the new fiscal year.

                

In staying with simplicity, here are a few simple tips to making sure you will have a good strong start into 2018:    

• Knowing Your Margin: Plainly put, your margin is where you make your money. It is the dollar amount above and beyond the cost of your goods/services that you need to stay in business and grow. Hence, determining if you have Sustainable Margin will give you a good boost going into 2018.
• Check Your Pricing: A simple price check will determine if you are charging enough for your goods/services with your desired margin in place. Like all things, costs tends to sneak up on business owners over time, which results in margins decreasing and immediate loss in profit. By Getting Your Pricing Right, you are making sure you are not letting any potential profit get away from you.
• Have a Budget: Having a budget in place does several things for a business – first, it gives you a measurement of how your business is doing versus how you want it to be doing. Secondly, it instills a sense of self-discipline over you and other decision makers to keep within a set range to ensure profitability.
• Proactively Review Your Financials: It sounds simple, but the above would be absolutely pointless if you don’t at least review your financials on a regular basis. Not only is looking at your financials on a regular basis a recommended best practice, it is also essential if you want to ensure you are going in the right direction. The points I made above are all milestones for your company; comparing it against actual monthly financials will help you track your progress.

I hope this short checklist and explanation was helpful to you all. As always, please feel free to reach out to me if you are needing help, have questions, and/or needing an Outsource CFO.

Community Question - Understanding Capital Expenditures

Explaining capital expenditures, and how to book them     

         

A common theme I have been seeing is a request to explain how to book “capital expenditures” – both by business owners and bankers. But before we dive too far in, let’s answer the big question. “What are capital expenditures?"

By definition, capital expenditure is the money your business spends on fixed (large) assets – with fixed assets being anything from land, properties, equipment, vehicles, and so on. But from my experience, a lot of business owners run into trouble when they have to decide which equipment is capital expenditure versus an everyday expense. 

The confusion comes from having to scale the rule down to meet your business size. If we look at the rule for capital expenditure – it appears straight forward and pretty clean cut (if you're a multi-million dollar company). However, look deeper and it’s apparent that it wasn’t written for small to mid-size business owners. The everyday business owner isn’t going to be in a position to buy a $1 mil building or a $70,000 piece of machinery. Those kinds of acquisitions are pretty black-and-white when it comes applying capital expenditure. But what do these grey areas look like for most small business owners? 

• A dentist buys an x-ray machine during a liquidation sale for $500.
• A freight company buys five used trucks for $2,000 apiece.
• A carpenter buys $6,000 in small tools/equipment
• A manufacturer rebuilds a motor for $6,000 so it can operate a machine worth $12,000

Right off the bat, we can see that these meet the qualifications for capital expenditures. It is the purchase of land, properties, and equipment. But how should you book these expenditures so your financials are accurate?

 “A dentist buys an x-ray machine during a liquidation sale for $500.”  

This meets the capital expenditure definition as it is a piece of equipment. However, it is a very small dollar amount and one has to ask, “Is it worth holding onto the balance sheet to be depreciated?” The standard accounting answer to this is “probably not worth the extra effort to depreciate over the next 10 years."

So this is an example that, although it is a capital expenditure by definition – it can easily be expensed on your Profit & Loss without too much of a second thought.

“A freight company buys five used trucks for $2,000 apiece.”

On the surface, this appears to be a situation that could also be expensed on the Profit & Loss just like the dentist example. It is only $2,000 where a new truck would normally run around $25,000. But there is a catch on this one – the company bought five trucks. This brings the total purchase to $10,000.

In this scenario, the truck acquisition should definitely go onto the Balance Sheet under Fixed Assets. The reason being, those trucks have a useful life of several years and booking them onto your Profit & Loss would not only make a month look bad – but it would also give an understated view of your financials. Which could be bad if you are going before a bank for lending purposes.

“A carpenter buys $6,000 in small tools/equipment.”

This scenario is a bit trickier, as it does not tell us what makes up the “small tools/equipment”.  This is where having an accountant is handy – if these happen to be small power tools; then they definitely should be on your balance sheet as those also have a useful life.

However, if these happened to be screwdrivers, plugs, hammers, and such – then it is debatable. The question then boils down to, how closely do we want to track these particular items? The last possible way for this to turn out is if these tools/equipment are perishable or be depleted.

If the answer is “yes” then they are definitely not fixed assets. But this is a situation where an accountant or Outsource CFO would be ideal. As it is up to them to make that judgment call and keep your financials consistent with the decision.

(To those accounting savvy people out there – if it is perishable/becomes depleted; it could be considered inventory. So, A+ if you knew that.)

“A manufacturer rebuilds a motor for $6,000 so it can operate a machine worth $12,000.”

This one is definitely a capital expenditure but not because it is a piece of equipment – but, more due to accounting regulation. When it comes to fixed assets and depreciation, the IRS recognizes that if you spend enough money on a piece of equipment; it can be considered a new capital expenditure.

So in this situation, you have already bought the machine and booked it on your balance sheet as a fixed asset. During the time that you have owned this machine, the motor broke and you had to spend an additional $6,000 to fix the motor.

That $6,000 makes the motor a new piece of equipment because the IRS states that any repairs done to a fixed asset that exceeds 50% of its current worth, is considered a new capital expenditure. Thus, in this case, you should add $6,000 to your fixed assets on your balance sheet.

Lastly, while few business owners find themselves in this situation – it definitely pays to have an accountant who can interpret the regulations to your benefit. Otherwise, the $6,000 can easily find its way onto your Profit & Loss and ruin an otherwise good month or even hamper your borrowing ability.

To conclude this, capital expenditure is definitely something all business owners have to contend with at some point in their career – and it pays to have an accountant help you through these moments. An incorrect booking of capital expenditure can lead to inaccurate financials, however, it can also lead to an inability to borrow from a bank which can make all the difference for a small business.

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Community Question: Understanding Cost

Many business owners (and even some accountants) struggle with the concept of cost – and rightly so. A simple Google search on ‘cost’ yields thousands of results, and all of them growing increasingly technical.

My intention with this blog is to provide clarity on these matters, with a focus on some of the most common questions I have received from the community regarding costing.

What does it mean when an accountant refers to “Cost”?

When an accountant refers to “cost” or “cost of goods sold” – they are referring to the direct-variable cost of providing goods and services. Now, the keyword to this is direct and variable.

For example:

Suppose you’ve manufactured a door - the wood materials, the labor, and the machinery used are all directly related because they are used in the process of manufacturing the door. Furthermore, these costs are considered variable because you could do it faster or slower depending upon your operation.

More stable (fixed) costs - rent, utilities, and insurance - typically don’t fluctuate and you incur these costs regardless of if you are making a product or providing a service. Since they are not variable, they are not considered a cost. That being said, keep in mind this is just one example and rent/utilities can easily be considered a cost in a service industry.

Moving forward, let me break it down even more so it’s easier to understand. When you are confronted with determining what to consider cost versus overhead – apply this simple rule:

If you are willing to calculate it and it is relevant to your industry - it is a cost

Why do accountants make a distinction between my expenses? Aren’t all my expenses considered the cost of doing business?

Yes, all of your expenses (hopefully) are for the sake of your business. However, a distinction between “costs” and “expenses/overhead” has to be made for the sake of managerial purposes. Not only is it easier to identify areas that could use improvements – it also allows you to compare the financial side of your business against your competitors and see how you stack up.

The other reason why this distinction is needed is because cost can be managed (note that I use the word managed, not cut – read further to know why). This management process can be done by finding better suppliers, improving processes, better technology, automation, and so on.

Suffice to say, a distinction has to be made in order to identify areas that can benefit from better management. Keep in mind, these areas will vary from industry to industry, and is almost solely dependent upon your willingness to track certain expenses separately.

How do I determine my cost?

The easiest way to determine what items to consider as costs is to use established industry standards.  Keep in mind, those are more guidelines than actual standards.

In my opinion, the best way to determine your cost is to ask yourself - “What does it take for me to provide this particular goods/service?”

It’s tempting to lump everything into this question, but think of it objectively: you want to provide a good/service – what are the additional expenses associated with it?

That, would be your cost.

Why is understanding my cost important?

Cost is by far, the most underappreciated and important subject any business owner needs to master. By understanding your cost, you can determine your pricing, which, in turn determines your competitiveness in the industry and ultimately – the value you provide your customers.

It is also important to understand cost because it is an ever-changing picture. What was cost last year, could go up or down this year. So, it is important to stay on top of your costs and to always have a good handle on any changes in the industry you’re in.

The last reason to understand cost is because many business owners forget that cost is the cornerstone to profit margin. If your costs are not revisited on a regular basis and changes to pricing are not done regularly – you could end up in a situation where you compete yourself out of business.

What do you mean when you say “Competing yourself out of business”? That seems like a paradox.

When I refer to a company as competing itself out of business, I am referring to a very gradual and seemingly innocent process that, could and will often take years to occur. It is also absolutely irreversible if caught too late.

Competing yourself out of business means, to have a lot of customers, orders, and demands, but not the cash flow to reflect your success.

Now, how is that even possible? Simple, it happens all the time and in most cases, companies don’t even realize it.

For example:

Suppose a restaurant creates a menu price when it opens, and for three years its popularity soars, attracting more customers. This is a great situation to be in – but say they forget to look at their food costs, or they never revise their menu prices… this leads to a lower profit margin and less cash flow. The ultimate predicament created then, is that the popularity of the restaurant is based solely on them never raising their prices – which means, when this mistake is caught and corrected, the popularity of the restaurant will likely suffer with it.

On a manufacturing/retail side, it could be that the cost of labor has increased over the years. This increase in labor has a direct impact on the profit margin of the products – which, if left unevaluated, would ultimately reduce the cash flow of the company (on every item/product that you sell).

This reduction in cash flow can lead to a number of problems – some of the worst being lack of innovations, inability to replace inefficient machinery, lower employee morale, and lack of quality control.

However, during this period, production would be skyrocketing because unchanged prices would make the company’s product the lowest priced in the industry. This deceptive illusion is difficult to catch without a trained eye, but can be easily avoided with proper cost management and tracking.

In conclusion, cost is a difficult subject to comprehend because it changes from industry to industry. That is why it is always recommended to hire an expert, like Tran Nguyen, who can work directly with you and your business to analyze and manage your cost.

Thank you for reading, and as always, your questions are appreciated.
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Community Questions: Understanding Cash Flow

Many business owners struggle when it comes to cash flow management – and rightly so. The concept is a hard one to understand and some accountants even struggle with comprehending the concept – so you’re not alone.

In this blog, I will address several questions submitted to me by the community in regards to their business cash flow.

Why does my net income not match my cash?

In most instances, cash flow will never equal your net income. Even on “cash method” there will always be some delay between the information recorded and what your bank is showing. But if you are on the “accrual method” your net income will never equal your cash.

The recording method for accrual accounting dictates that you recognize your sales and expenses the instant you incur them; not when the cash leaves your bank. Then you have to take into account that some of these customers and vendors will have terms (when their bills are due) – which will always have a direct impact on your cash flow.

Because of this, managing cash flow is a very difficult process if you do not have a proactive approach to your bookkeeping and accounting. Lastly, the longer you wait to input your information, the harder it is to manage the cash.

My company is cash struggling – what can I do to fix the situation before it gets worst?

When it comes to cash shortages, there isn’t a one fix solution; but rather, it is a series of changes coupled with financial discipline. Most cash shortages are a culmination of issues – it is important to identify if your cash shortage is a symptom or a cause.

To do this, you need to evaluate your company’s culture, management style, worker efficiency, and so on to see where the issue is stemming from. Example: Poor management that create a lot of waste will definitely impact your cash flow – but the cash shortage is, in this case, is only a symptom of the overall problem. So it is important to diagnose it correctly.

If, like many small business owners, you draw from your company in order to support your standard of living – then the draw is the cause of your cash shortage. These, sometimes are much harder to fix as it requires financial discipline from the owner.

Often times, I require small to mid-size business owners to have both a personal and business budgets. These budgets help in ensuring the owners and the business stay in sync with one another – setting a definitive spending point for both. But the hardest part is not using the company credit card for coffee, snacks, sodas, and so on. It’s the small charges that adds up quick.

What is “Organic Cash Flow” and why is it different from normal cash flow?

Organic Cash Flow is a relatively new word. In essence, it is your normal cash flow. But when it comes to managerial purposes, organic cash flow refers to the cash flow that the company currently generates without any additional changes.

When it comes to increasing organic cash flow, you are not looking at increasing working capital as stated above. Instead, you are looking at ways to free up the cash flow so it can be put to better use.

Things that impact organic cash flow are usually liability related – loan payments being the biggest one in America. If you generate $1,000 and pay $600 to a loan; your cash flow is $1,000, but your organic cash flow is only $400.

Generally, accountants will assess a company’s cash flow then determine its organic cash flow. Decisions are then based off of that organic cash flow – can a new piece of equipment be added? Should the loans be refinanced to free up the cash? Can other companies provide a better quote? And so on.

In short, Normal Cash Flow is often your total cash flow (how much your company brings in during a week/month/quarter/year). Organic Cash Flow is the cash left over after paying vendors, lenders, and such – and is it enough to accomplish future growth or will the company plateau out because it doesn’t generate enough cash? These are questions you need to ask yourself. 

Limitation of Imitation

Business Tip:
 

With 2014 coming to a close, I would like to share a very important business dilemma that I encountered this year with several new clients that came to me for accounting and financial help.

This year alone, I had ten new clients who all attempted to imitate a competitor in price matching and customer service. While some imitation cannot be avoided due to industry, products, and services; it is important to remember that to be in business is to be unique and original.

Often time, business owners fail to distinguish between imitating and templating their competition. The key difference being that templating is the process of taking a competitor's model and adapting it to your business plan to create a unique, competitive, and proactive environment in which to grow a company.
 

Below, is a story of a client who imitated a competitor and the steps taken to make him profitable.

Breaking Free of the Limitations

Recently, I came across a business owner who attempted to imitate a competitor in price matching. The individual owned a manufacturing business that made saw blades and was competing with KASCO. 

The business owner had done his research and found that KASCO sold saw blades for example at $25 per blade. The owner then decided to outbid the competition by being lower in pricing and sold his saw blades at $20 per blade. The decision had an immediate effect on his company -- almost overnight, the business owner saw huge amount of orders coming in. He had new customers, a surplus of orders, and he even purchased a second assembly line to meet the demand.

However, after nine months, my client began to see a shortage in cash flow. His sales were way up but his revenue was nearly depleted. It was at this time, that he approached several banks seeking working capital and was denied due to the unexplained cash shortage. 

It was suggested by the bank that he worked with an accountant to see if the issues could be rectified. At this time, I entered the company as an accountant-consultant with aim at making the company eligible for bank loans. I performed several analysis (cash flow, break-even, margin analysis, etc) and found that KASCO bulk ordering meant their costs were $15 per blade, they sold at $25 and were netting $10 for every blade. 

My client had attempted to imitate this process with bulk ordering and had the same cost as KASCO. However, because my client was a smaller manufacturer and was also selling the blades at a cheaper price, he soon found out that he had been compounding his financial woes.

While KASCO netted $10 per blade, my client only netted $5 per blade and had to spend the much needed cash to keep his bulk ordering high to maintain the lower material costs. In short, cash was tied up in inventory and bulk ordering.

To fix the situation, the client and I implemented several new procedures -- the three most critical changes were:

• Follow-up phone calls to see if the customers were happy with the products
• Accepting returns of unused saw blades
• Customization of saw blades to worker's specification for unique jobs

These changes were followed by a price increase to $55 per blade. To my client's surprise, he only lost three clients who wanted the lower prices, but he gained over twenty new clients and $450,000 in new business from the changes that were made.
 

It's now been four years and my client has become self-sustaining and appreciates the value of being unique. I am happy to say, he is still in business and continues to be one of my best client.

For more information on what I have done for other companies, visit my website at www.TAAccounting.com

One Accountant's Perspective: Line of Credit

Many businesses and owners have been talking to me recently about line of credit. In this article, I will address the major points of possessing a line of credit and also explain when it is necessary.  So, let's start with the basics.

What is a Line of Credit?

A line of credit or LOC, is n cash reserve extended to you by a bank or lender. It usually has a yearly fee depending on how much is extended to you. It is meant to work when your cash reserve dips into the negative -- instead of bouncing checks or defaulting on payments; the line kicks in and covers the additional charges to a set amount.

There is interest on the LOC, and it is charged according to how much is used, how long before you pay it back, and the type of interest rate (fixed or floating). For many, this may sound like "overdraft protection." It is exactly that -- just one term is used for home and individual, while the other exists for businesses.

What are the pros and cons of a Line of Credit?

Thankfully, this is one program that I have found to have more pros than cons -- when used correctly. Beyond acting as a reserve line of cash, a line of credit gives businesses the ability to have more flexibility in the event that a payment is late or unforeseen expenses occur.

It also acts as a way to establish a reputation with a bank or lender without the scare of applying for a credit card. Most banks will extend a line of credit to start-up businesses that simply open an account and have matching capital. That means  if you open an account with two thousand dollars, you can get a two thousand dollars LOC at the same time.

It is also something that does not expire,  so it acts as a great reserve cash source later down the road.

The con of this is the same as having a credit card. It has to be spent responsibly or it can quickly spiral into another interest heavy debt that you have to contend with. Also, if you default on a credit line, it is much worse than defaulting on a loan or credit card. Loans and credit cards are backed up on collateral, lines of credit are not. Defaulting on a credit line essentially means you destroyed any semblance of reputable conduct with that bank and all other. So be careful

Is a Line of Credit like a Loan?

Absolutely not.  A loan is a set amount given to you by a bank for the singular purpose of accomplishing whatever you asked the loan for, like for a house, expansion, cash flow, etc. The loan has to be paid back and once it is, it is gone. Another difference is that a loan starts with a low principal payment and slowly increases over time, which decreases the interest payment.  In technical term, this is called "amortizing.”

A line of credit is much more flexible and does not have the same amortizing affect as a loan. You can choose to pay back the entire amount at any given time and not deal with the interest at all. You also have the option to let it amortize and pay it off like a standard loan (not a preferable route in my professional opinion).

One distinctive feature of a line of credit is that  it is perpetual. Once it is paid off, it continues to exist in order to be used again. In short, it can be replenished and used over and over. This is the singular most important point of a line of credit.

Another distinguishing feature of a line of credit is its withdrawal pattern. Unlike a loan where you get lump sums, a line of credit can be used in bite size bits or on an as needed basis. This mean you can withdraw what is needed in the moment and leaving the rest in reserve.

When should I get a line of credit?

In my professional opinion, all businesses,  even successful ones, should have a line of credit. Many businesses make the mistake of looking for a loan when the time comes. A line of credit gives you the option to always be prepared for when the time comes (when you need capital). It is both operating and emergency funding rolled into one.

I often advise my clients to have a line of credit that is enough to cover three months of operation just in case time gets hard. Other larger companies have lines that will cover a year or so of operation. In short, it is better to have it and not need it, than need it and not have it.

Most small businesses can get a line of credit of at least three thousand to start, without collateral. However, this is an emergency lifeline not to be used as spending money.

How should I properly use my line of credit?

The best way I can say it is "Break in event of cash shortage"

As I have emphasized, a line of credit is a double edged sword. If used properly and carefully, it presents no danger to the wielder. While presenting a host of options and operational abilities to you and your business. However, if abused, it can cut both ways.

A line of credit is best used a supplement to your Account Receivable. If you have business or clients that takes a long time to pay off,  a line of credit is a great supplement to see you through to your pay day. Just be sure to have the discipline to pay it back for usage next time.

Conclusion:

A line of credit is a great tool to have and I know from personal experience how helpful it can be. It is one of the few tools that I highly recommend to my clients, even those who are not cash struggling and have thriving businesses.

It's a great supplement and a great reserve resource to have. However, it requires discipline and planning. Be careful when using it and if possible, give it to your accountant to approve any usage of the funds.

I hope this has been enlightening and enjoyable to read , it was definitely fun to write. As always,  your comments and suggestions are welcome.

Accounting for Your Success: Cloud Accounting & Business Models

As the concept of cloud accounting and cloud business models begin to take roots --I am asked more and more by my clients and professionals to elaborate on its usage, benefits, and incorporation into existing business models. In this article, I will touch on broad topics of:

• What is a cloud
• How is a cloud utilized
• What are the benefits of the cloud
• What is a "Cloud Business Model"

There will be a second article going into more technical details on actual incorporation and usage.

What is a cloud?

A "cloud" is a seat/subscription to a server that is hosted & maintained by an outside party -- normally an expert/specialist company. A cloud system possesses one unique feature that separates it from the traditional "remote server" -- it has no static presence.

By that, I mean a cloud server only generates a desktop & workspace when the user login. When not being used, the resource and processing power are recycled to boost overall performance of other users.

How is a cloud utilized?

A cloud is utilized in numerous ways with almost unlimited applications. Most often, a cloud is used to increase efficiency and decrease costs. Many businesses find that moving their accounting, marketing, and management onto a cloud system often boosts productivity and allows for better decision making.

This is possible because the cloud allows a company to take advantage of the global market -- rather than just the local market. The best example is in comparing the standard of living between Missouri and New York. Where it would cost $96,000 for a senior level accountant in New York, a cloud allows the same company to hire a senior level accountant in Missouri for $70,000. This translates to an immediate cost saving of $26,000 per year.

One key concept to distinguish is -- moving to a cloud is not "utilizing" the cloud. Rather, full utilization requires a company to embrace its ability to be flexible and adaptable. With the ability to access needed information from anywhere, a company is no longer restrained by proximity to offices, time differences, or even a set schedule (explained in details in the next article).

This means, full utilization of a cloud will allow a small local store in the Midwest, to compete on a national (and even global scale) for a fraction of the costs.

 What are the benefits of the cloud

There are several benefits to switching to a cloud business model; global presence, global hiring, better collaboration, better security, reduction in overhead, and a great competitive edge to name a few.

Global Presence - The creation of the internet gave companies the ability to communicate globally; the usage of cloud allows for businesses to expand and compete globally. With the usage of the cloud, businesses that were once too small to compete globally can now even the playing fields against their larger counter-parts.

Up until 2006, only large companies were able to expand globally and compete internationally. Many small to medium size businesses were left to compete on a local to national level -- sometimes taking several generations to become a global business.

With the advent of the cloud business model, business growth and evolution stepped on the accelerator. 

The cloud removes traditional boundaries such as the need for large sums of initial capital, physical offices abroad, IT personnel for networking & communication between multiple locations, personnel training, and communication lag time.

Because the cloud and its information can be accessed virtually anywhere via internet, companies are now setting setup "satellite" locations rather than full-blown offices abroad. Because they are smaller in scale, they are much more inexpensive to setup, with little to no downtime. 

There is also no longer a need to move computer mainframes and servers oversea to setup these new locations -- thus cutting costs. Personnel do not require as much training as the core of the business can be operated from its headquarter, via cloud access. 

Finally, the satellite offices can communicate and access important documentations via cloud as soon as login & internet access is established -- a matter of minutes.

Global Hiring - Many businesses, ranging from micro to gargantuan, are normally restricted to proximity hiring (also known as "local hiring"). This is because it never made sense to hire personnel and professional outside of a certain travel range as it becomes inefficient and inconvenient for both the business and the worker.

However, with the advent of the cloud, businesses now have the ability to hire globally. Since all the information and departments are situated on the cloud, there is no longer a need for employees to be in-house to perform their work. This is an astronomical break-through for businesses as it allows many companies to take advantage of professionals that are usually not available to them due to proximity. This also has one further additional advantage -- companies can now take advantage of lower standards of living in certain areas of the world in order to cut costs.

One key point to take away from this is that, a cloud cannot completely remove the need for in-house employees nor should it ever. Rather, it is meant to build a competitive edge and allow for companies to better allocate their resources and workers to become more efficient.

Better Collaboration - The cloud has one key function and that is to share information. Because information is now much easier to access and communication is more reliable, business owners and managers can now have better collaboration.

This is always key to making decisions, planning financial goals, and problem solving. The cloud also has further benefits as it can be used to help sales team make better selling points by having live information at their finger tip. As the information can be accessed from anywhere and at anytime, we go back to the idea of a "global presence" -- thus, giving us a "global sales team".

Better Security - While many still cannot believe that a cloud with anywhere & anytime access can have better security -- it does. This is because it is not a "static" presence on the internet. Many hackers are able to target their victims because they have a presence that does not change.

It is like walking to your mailbox in the snow -- there is a clear trail of footprints to and from the mailbox. Any passerby can deduce that somebody walked to the mailbox and back. The same idea with using a static-desktop computer; it leaves an unmistakable "footprint" on the world wide web.

Now, picture the ability to "float" from your doorway to the mailbox, and back. As you are floating, you leave no traceable footprints, but you are still able to reach your mailbox and back to your doorway. While slightly farfetched, that is the concept of the cloud. It leaves no presence behind for any hacker to trace or deduce either way.

Finally, the cloud has one last level of security that servers and desktop computers lack -- the ability to dissipate after usage. By that, I mean a cloud is only generated when the user login. Afterward, it is recycled and reused to boost overall performance. That means, nothing to hack.

Reduction of Overhead - As discussed above, the reduction of overhead is the ability to hire globally, reduce waste & inefficiency, and increase collaboration. However, those were all "long-term" cost savings. There are immediate cost savings as well for businesses that switch to a cloud.

The first being the most obvious, reduction of IT personnel, system upkeep, server/mainframe security, and such. These simple reductions can cut a company overhead by nearly 35% -- giving an immediate competitive advantage.

Competitive Advantage - With all the reasons listed above, the competitive advantage is clear. Money saved on a monthly & yearly basis can translate to more competitive pricing, larger marketing/R&D investment, or simply more money for your investor (and you).

The idea of "Pennies make dollars - and dollars make profit" has never been truer than with the cloud business model.

What is a "Cloud Business Model"

A cloud business model embodies all the areas listed above, coupled with the purpose of competing locally, nationally, and internally. This concept means that a business understands that it has the ability to compete globally -- and thus, recognizes opportunity costs that were once unavailable due to size & proximity -- and begins expanding and growing with the concept of "greater efficiency" as the core of the business concept.

Notice that I said, "a business understands that it has the ability..." This is a key point to understand for any user of cloud business models. The importance lies in the fact that many businesses will choose to not exploit its ability to go global -- either out of convenience, fear, or true limiting factors (covered in next article).

These businesses, in a cloud business model view, are considered "indirect cloud users". As businesses from around the world use the cloud to go global, these small businesses will inadvertently use the cloud through their business contact.

This is best represented by the example of a small hardware store that has no intention to go global. However, a salesman comes in one day to sell the owner new products. This salesman's company utilizes a cloud in order to reach small hardware stores worldwide. Thus, the owner of the small hardware store becomes an "indirect user" of the cloud business model.

Hence, the cloud business models are not "superior" to pre-existing models, but instead, are adaptable and can be integrated into almost all existing business models. This means, a cloud business model is both a "stand alone model" or a "supplemental model".

Tran Nguyen ,Accountant

Tran'sActions Accounting, LLC

10/15/13