Tuesday, October 15, 2013

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


Saturday, March 2, 2013

One Accountant's Perspective: Types of Investors

Dear Tran:
I recently came across a client that is in need of an investor(s).  The primary objective of the business is to provide digital media marketing, business social networking and information technology services for the Supplier Diversity community.  Any ideas as to how to go about and find these investors?

As an accountant, I get approached a lot to help with formulating business plans for potential investors. This also includes, introducing the business owners to new investors, potential investors, long-term investors, and angel investors (if I can find them).

When I approach any individual, I like to start within my own circle first -- high school friends, college classmates, and chamber of commerce. Once I have identified my initial roaming area, I then classify the "investors" into "New Investors", "Potential Investors", "Long-Term Investors", and "Angel Investors".

The reason for such categorizing -- so I know how to approach and what to approach them on.

New Investors
-- this is likely to be their first investment and they will range from terribly reserve/conservative to being very liberal with their investment. They are likely to care more about the infrastructure of the business and because this is their only investment right now, they are likely wanting to be a part of the business on a more active level (weekly financial reports opposed to monthly or quarterly).

-- I approach these investors according to my profession. I am an accountant and have an established reputation for careful money management and working on a tight budget to make a company successful. I also have a reputation for "not needing a large client. I will make your company into a large client". Thus, they have confidence that an accountant with such reputation is going to watch their investment.

Potential Investors
-- These investors already have other investments and are just looking to diversify their portfolio. They likely won't want an active role in their investment due to the quantity of their investment. They are also a slightly older crowd and have their own accountants & financial analyst on reserve somewhere on their phone.

-- Approaching these investors require more skills, but the payoff is bigger -- more money, more resources, and they're ok with being absent from their investment. However, they'll definitely want to see you polished up, suit and tie, and at least a good level of assurance that you're not an "upstart kid looking for money" as one of them had told me. Approach them as you would a new investor -- just expect to have all the questions answered, good responses, and a lot of projections.

Long-Term Investors
-- These investors are normally older and you will likely be dealing with their accountant(s) than you will with them. They are old money and have been investing a long time and thus, are highly experience and can smell a good business plan when they see one.

-- When you approach these type of investors, approach them with significant care. You are not only presenting to them, but also to their accountant/financial team. They will bring the idea back to their accountant and relay it, which means, anything and everything you say have to be extremely clear so not to be lost in translation. Also, copies of business plans, projections, investment amount, and so on is your best bet. Finally, if you know a friend or a family member who knows this type of investor, it is going to be your best approach.

Now that we have the type of investors out of the way, finding them is not that difficult. Chamber of Commerce is a great place to meet business owners and investors. Also, approach your local investor's organization -- there are about 10 big ones in St. Louis and I just did a quick search. Approach friends and inner circles. Failing all of this, go to a Financial Advisor or Accountant that you do business with frequently. They are the money handler and will know who is interested and who isn't.

Anyway, I hope this all helps!

Tran Nguyen

Monday, February 18, 2013

One Accountant's Perspective: Bulk Order

Dear Tran:
I have a small business that has been in operation for about 6 months. I have about $7,000 dollars in gross sales per month. I offer a product that currently costs me $24.00 and I sell it for $30.00. This price is pretty fixed due to other competition.

I found out I can purchase a crate of this product from China for $50,000. This amount equates to $18.00 per item (substantial savings). At my current rate it would take me about 1.5 years to sell the entire inventory. I do not know much about loans and getting capital (started the business with $300 ) so any suggestions you may have is appreciated. I did a few calculations and it looks like a 2 year loan even at 20% would save me $9,000 per year. But where do I get a loan from? Or maybe my calculations are wrong?

I applied for a business/personal loan from my local bank, but as I expected I was denied as I do not have any equity.

What are my options? Should I go with this plan?

To be honest, your options are limited by several factors. First, being that it takes roughly 1.5 years for you to move the entire shipment, while the bank has to wait 2 years for full repayment -- that is assuming everything goes according to plan.

So the turnover rate is not in your favor. But do not be disheartened just yet. A small business loan is possible if you have a working and fully written business plan. Most bankers will listen to your idea and make a personal judgment on whether your ideas are feasible or not. A written business plan will always help that along.

Another thing you can try and do is to go through a third party. An accountant who knows your businesses would be a great person to approach. They are likely to have contacts with banks and bankers that trust their judgment and thinking. Thus, you are using their credibility to get a loan.

One more possibility is to approach the company selling these items directly. See if they would extend to you a credit line as long as you moved the items and sold it for them. Most companies will agree to extend this courtesy if you are able to sell the products and pay them on time -- just do not ever miss a payment or that trust will disappear.

On a personal note, I would recommend finding investors. At a 10% per year return, you can find some decent investors who are willing to go into the business with you. Plus, a short-term investment is great for those just wanting to get their feet wet so that gives you a wider range of investors to pick from.

As an accountant, I would advise against such an idea. While it is true that you would go from a gross profit margin of $6.00 to $12.00 if you made the switch; you would also be incurring a large risk to your business. There are several factors to consider when looking at such a bulk order and one from a different supplier.

The first of which, is it the same quality material. It is possible that your $24 product is built more reliably than the $18 product item. Thus, a switch might cause more faults and defects to occur. Which would ultimately result in higher warranty costs -- if you offer warranties -- and lower customer satisfaction.

Second, if the items are comparable then, you are faced with having a huge amount of your money invested into your inventory that is staying on your shelves for nearly two years. That is money you can be spending on advertising, customer service, expansion, investing, and the list goes on -- the opportunity cost could potentially be too high.

For example:
  1. $50,000 for the bulk order at $18 per unit equates to 2,778 units
  2. 18 months (or 1.5 years) to move all 2,778 units, means you must sell 154 units per month to stay on schedule
  3. (2,778 units on hand - 154 units sold) = 2,624 units on hand
  4.  (2,624 units on hand x $18 per unit) = $47,232 inventory costs
  5. If interest is at 0.0083% (10% per year), your opportunity cost is at: $47,232 x 0.0083% =$393.60 per month (or $6,691.20)

This means you would lose roughly a month worth of sale by purchasing this bulk order -- despite the more appealing pricing.

Lastly, you are potentially facing another problems with obsolescence. The product could be replaced with a better product or you could have issues liquidating the items in the event you need cash. Overall, I would recommend against such an idea.

I hope this helps!

Tran Nguyen - Accountant