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

One Accountant's Perspective: Types of Investors

Question:

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?

Answer: 

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

Accountant

One Accountant's Perspective: Bulk Order

Question:

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?

Answer:

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

One Accountant's Perspective: Audit Questions

In recent conversations with several business owners, I was asked the same questions in varying forms. I have decided to address this in my blog since I believe it will help both new and current business owners.

How do I get out of an audit?

The truth is, there is no way out of an audit once you are in. Though it is easy to find the IRS intimidating once you discover you are being audited -- it’s one of the worst feelings to have in the world!   Here are three ways to go about addressing the issue.  Know what kind of audit it is -- there are three types of audits routinely performed by the IRS, and each has a different resolution:  letter, office, and “on-site”.

The least of these audits is the "Letter Audit" -- the IRS mails a letter to your home or business informing you that an audit is taking place. 

The Solution:  bring all of your records for verification by cross-referencing with other supporting documents. An example would be proving that you own the house by showing property taxes were paid on time and a mortgage payment stubs as supporting records.

The second type of audit is the "Office Audit" -- you are summoned to the IRS office to answer questions, review your financials, and anything else that might interest the IRS agent.  

The Solution:  hire an accountant (preferably with a Law Degree), but notice, I did not say Lawyer.  A CPA or good accountant would be your best defense in a situation such as this since they understand financial laws and can tell you what to divulge and what is not pertinent.  An accountant will be able to tie in evidence with supporting documents in a financial light. They will also have a much better understanding of the financial situation that the IRS agent is trying to dig into.

(The reason why you do not want a lawyer in this case is because a lawyer has knowledge in common and criminal laws, not financial laws. They can tell you when not to speak, but they cannot tell you which financial portion to omit. Thus, this is a situation where less is more.)

The last and most severe, is the "On-Site Audit" -- the IRS sends agents to your office to audit your financial information.

The Solution:  cooperate and hire an outside auditing firm to lend credibility to your financial information. An outside accounting firm has both its reputation, a list of clients, and dealing with the IRS. If they put their name after your financials, it will usually be sufficient to show that an audit is no longer necessary. Furthermore, you should consider hiring an Accountant to verify the IRS agent's numbers to ensure they are not tacking on more than they should -- just be sure to not use the same accounting firm that performed the audit to avoid any counter-argument of "conflict of interests".  Overall, the best way to avoid an audit by the IRS is to ensure you have accurate and supporting documentation. A paper trail, audit trail, invoices & receipts, and finally a good accountant are your best defense against an audit.  Which leads into the next question...

“What makes a good accountant?

There are many variables that go toward an accountant being "good" at their job.  Obviously,  knowledge, work ethics, and abilities to manage your financials accurately.  However, this does not make an accountant "good" it simply makes him/her "an accountant".

The trademark of a "good" accountant is their willingness to be your friend, consultant, and advisor. A good accountant will always volunteer their vast network of professionals for their clients to use to grow their business. An example would be an acquisition of a bank loan --the accountant should be able to give you a list of good bankers that they know and research a few more for you to pick from.

What separates individual accountants is their ability and willingness to not only work with you, but for you. An accountant that has a network but reserves it for themselves is as good as any other accountant. However, the instant they invite you to lunch to meet another professional that can help grow your business, you found yourself a good accountant.

Finally, the true mark of a good accountant is their selflessness in helping you, not themselves. An accountant that does not take your business because you cannot afford them is not good, they are just practical. But an accountant that tailors their service to meet your need with the confidence that they can be paid later -- because they can generate better cash flow and advise you in the right way -- are the ones you want to be with. The reason being, they are confident, willing to work with you, and have a vested interest in growing your business so they can grow their practice.

This leads me to the final question...

I've had my accountants for years.  (Why) Should I change accountants?

Yes, you should consider it. There is no such thing as a "stagnant" accountant, but there are such things an "overly-comfortable" accountants.  By that, I mean the accountant is more focused on maintaining their practices instead of growing your business. The accountant may become comfortable with an outdated system, no longer expanding their professional network, or miss out on a new cost saving technique being used in the industry by another accountant.

Thus, you should always entertain the notion of switching accountants for the pure reason that the younger accountants are ambitious, possess the latest knowledge, and willing to work to prove their worth.

Second, as a business owner, you should always be shopping for a better deal. Accounting is a black and white profession. That means an accountant's worth is purely in their ability to service you at the right price range, how extensive is their network, and how experience they are in your industry.

An accountant with forty years experience, but no network is worth less than an inexperienced accountant with a vast network. The reason being, the inexperienced accountant can gain the experience, with time, but they have the energy to maintain and grow their professional network -- which means, you as the business owner, have an unlimited source of professional talents to tap into for every sector of your business.

I would like to point out that, I am not encouraging you to go find the youngest accountant out there, but simply to be smart about it and keep an eye open. I would interview an accountant who is handing out business cards on the hottest summer day purely because he/she is determined and knows that the other accountants are most likely indoors with air conditioning. 

I hope this eases your audit anxiety and assists you in making the decision and finding the right accountant.

I wish you all the best.

Tran Nguyen, Accountant

The Missing Edge of Business

   In recent years, the idea of "outsourcing" has taken on a very bad connotation -we tend to associate it with unemployment, joblessness, and the destruction of our economy. However, we miss the entire side of the coin of "onshore outsourcing" or better known as "domestic outsourcing".

   "Domestic outsourcing" is the act of outsourcing a department but keeping it within the same country. In missing this idea, a lot of small businesses are experience additional growing pains, technological obsolesces, tighter cash flows, and inability to take advantage of opportunities due to all of these issues. Furthering the issue for business owners, is the mentality of "self-sufficiency is self-security".

   While this mentality had held true for some businesses and have worked well for the past twenty years, it does not address the fact that technology has allowed for domestic outsourcing to a level never seen before. Thus, resulting in higher saving, better efficiency, more accurate decision making just to list a few of the benefits. This is also not to mention that failure to adapt to technology causes more businesses to close than any other factors currently on the market - a sad, yet true realization.

   So where is the good news in all of this? Well, it comes in the form of technology and its evolution. A few years ago, we can still remember iPod breaking on a drop of a hat - now we see them going for jogs and being banged against sidewalks, yet works fine. The point here is, technology has evolved to the point that it is reliable, safe, and secured to the point that it allows for dependable virtualization.

   Being that I am an accountant, let us examine a small business that decides the traditional route of in-housing a bookkeeper at thirty hours a week at $10.00 an hour. That equates to $300 a week, $1,200 a month, $14,400 a year. This, of course, is if the bookkeeper is working every minute of every day that he or she is being paid for.

   The stark reality is, the employee we hire seldom work the hours we pay them. There are time when systems might be down. Other moments where they are lost in a harmless conversation that goes for too long. Then there are time when they are good enough at their work that they finish early and are sitting around doing nothing - if that is hard to believe, check the browser history for how many time they access facebooks, youtube, or craigslist. So while the business is paying for $14,400 worth of yearly work, they really are only getting half of that if they're lucky. To add to this situation, the company also has to provide their own accounting software, IT department to manage their systems, provide the computer systems to operate their software, and the yearly upkeep, maintenance, and upgrades that just adds to the overhead costs.

   In the same situation, we can examine what happens if the company decides to domestically outsource their department. The first cost saving comes in the form of vested interest - a firm that takes on the outsourced department will want to keep you happy and will ensure their workers do everything they can to keep you happy. The second cost savings come into play of not having lost opportunity costs. A firm will likely have multiple clients to visit on a given day. They will come in, accurately manage your books, and then leave to visit their next client. While this seems "touch-and-go" it is actually beneficial because it works both ways. If a firm has to stay later to manage a situation on your books, those additional hours are already factored into their fees. There are no additional hourly charges that comes into play.

   The third benefit is that the overhead is reduced drastically - without in-housing the department, there is no need for IT, upgraded computer systems, yearly maintenance/upgrade/upkeep, or any support infrastructures that goes with keep that department afloat. Thus, the cost savings would be astronomical.

   The final benefit is of course, the yearly payout. Because a firm can arrive, work, and leave to see other clients they can keep their cost lows due to their far reaching client based. Where it might cost a bookkeeper whose sole income is the $1,200 a month, a firm's income might come from ten clients a month. Essentially, a firm can charge you the same as a bookkeeper, but by reducing all of your overhead, it will be putting money back into your pocket on a scale that is unprecedented to date.

   In conclusion, domestic outsourcing is a very useful tool when applied properly. It can save a company thousands - even millions - in overhead which makes them more competitive. It is more efficient in that firms that can manage it have the technology and skills to do it better. Finally, it alleviates the additional growing pain of "keeping up with the Jones" in the idea of technology. A firm that has these technology, will keep it up to date on such a scale that it would be cheap for them, but expensive for anybody else.