The Cloud Part 2: SaaS and Cloud Accounting

In the previous article I explained the cloud phenomenon and discussed most of the usual reasons for and against using it. The Cloud is a relatively new name for something that has been around for the last decade or more. However in recent years this has become mainstream, with new sub-types and acronyms like IaaS and SaaS. The latter is what I will discuss further in this article – Software as a Service, also known as ‘on-demand software’.

It has become increasing possible and even common for business not to buy and install their own software to run programs. Many software (program or application) providers now make their product available in the cloud, usually with access via a web browser. In some cases this will look like the desktop version or it may be a totally new or different product.

The advantages of SaaS (in addition to those of just using the cloud) are:

·      No up-front software investment – payment is usually by ongoing subscription

·      Updates (security and other improvements) can be done instantaneously, behind the scenes and simultaneously for all users – which also allows and encourages further innovation and development

·      Help and support can be better integrated and even offered on a ‘live’ basis

·      Products can be easily accessed from multiple devices and locations (subscriptions are generally on the basis of logins, not sites or computers)

Disadvantages include:

·      Loss (or perceived loss) of control – your programs as well as data, are being outsourced

·      Ownership or access will only continue while the subscription is maintained

·      Internet connection is required – not necessarily all the time as offline access is sometimes possible

·      Products may not be available for certain disciplines or industries which are particularly prone to non-standard systems or variables

The disadvantages may be more perceived than real as many businesses do not manage their IT systems, data, updates and even physical security to the levels recommended or offered by their software suppliers. In addition the risks can be significantly reduced by thorough due diligence and using reputable providers.

Cloud solutions are available in many disciplines such as sales and marketing (CRM), retail, point of sale and accounting. The more standardised systems and process are, the more likely there is to be a product – and the more competitive the market will be. Accounting in the cloud has really taken off in recent years as is ideally suited to this (once the appropriate risk strategies and mitigations are in place). New providers have emerged and have now become major contenders in the overall accounting marketplace – these include companies like Netsuite, Saasu and Xero who now compete directly with more established players like MYOB and Quicken.

Each has it’s own advantages and suitability to particular businesses or industries and as with any software purchase or subscription) the business needs to do it’s own research and due diligence.

In summary Cloud Computing can be, and is, an evolution (if not revolution) and growth opportunity for small and medium businesses in particular.  After all, the sky’s the limit!

The Cloud: Part 1 What is it and why go there?

The Cloud is the latest ‘must have’ technology around today. There are a lot of arguments both for and against, each of which is perfectly valid but with varying degrees of relevance to any particular circumstances.  You may be aware of the conversation or debate but if you’re not, or have been too busy with your own business to take much notice, then please read on.

First of all what is it? The Cloud really just means that your data (and increasingly programs or software) is hosted elsewhere, not on your own computers or servers. The term ‘Cloud’ is actually a bit misleading as nothing is up in the air or in cyberspace – the data is all being stored, or hosted, on remote servers which are usually very large and powerful servers often located in vast data warehouses. These can be anywhere in the world (but for most users these will commonly be in the USA – for the moment at least).

Many of us have been using cloud applications or storage for some time without being overtly aware – or before the term was coined. Hotmail and Yahoo have been around since the mid 90’s, followed by Gmail and a multitude of Google products – all are hosted in the Cloud. Online banking is another frequently used service as well as others you can’t help but be aware (if not a user) of such as Facebook and Twitter.

The advantages of hosting your data remotely, in the Cloud, include:

• Cost effective – payment is normally by ongoing subscription but there is no upfront investment in IT infrastructure.
• Applications (rather than just data storage) will always be up to date and using the latest versions. Patches and updates/upgrades are automatic.
• Backups are done seamlessly ‘behind the scenes’ – and the Cloud hosts will normally have backup servers and IT support teams on site.
• Data and applications can be shared amongst multiple users without having to swap files and worry about version control or conflicts (who has the most up to date copy?). This sharing is done in ‘real-time’ which is a big saving in efficiency and productivity.
• Access is 24/7 – although this would probably also apply to your own servers!
• Security – there are generally very high levels of data encryption and security levels (both physical and digital) used.

On the other hand there are downsides and risks that need to be addressed and either accepted or mitigated:

• Remote storage – as your data is not stored on site, or often even in the same country, several factors must be considered:
• If hosted in another legal jurisdiction a different set of rules may apply (e.g. under the Patriot Act the US government may access any data in the interest of ‘national security’).
• The internet may be regulated which may affect access to your own information
• Loss of control – you need to rely on the Cloud provider’s policies on security, privacy, accessibility and reliability. Can you live with the possibility (however remote) of someone else seeing your sensitive data or of not being able to access it on demand, or at all!?
• Total reliance on the internet, which means you are also vulnerable with regards to your Internet Service Provider (ISP) and modem etc.

It is more likely that small and medium businesses (or SME’s) have the most to gain from using the Cloud but as with adopting any system or technology you need to do your own research or due diligence. The risks need to be weighed up against the advantages and either accepted or reduced or eliminated.

The what and why of financial management

There are many statistics thrown around as to the failure rates of small and medium enterprises (SME’s) but whatever the actual percentage or number, entrepreneurs and business owners don’t expect to become a statistic.  Failure is what happens to other people – who don’t have a solid business plan and good ongoing financial management.

Financial management is recording the business performance (i.e. bookkeeping) and doing something with that data. Every business in Australia does this but the ‘something’ ranges widely and has a huge effect on the success and longevity of that business.

I have broken down into a number of broad categories the various levels of financial management – at least one of which will apply to every legitimate business in Australia.

Tax and compliance

The basic legal minimum of financial management is the requirement to maintain adequate financial records in order to prepare and support a tax return (whether income or company tax, BAS or FBT return). Depending on the type and size of business there may be compliance requirements for other reasons (e.g. Work Cover, State Revenue, ASIC or APRA). This minimum can range from giving a shoebox of receipts to your accountant up to a complete and consistent accounting system.

For some small businesses this may be sufficient. However it means your accounting system is for other parties and you are gaining little for yourself. How does your business productivity and efficiency stack up against previous performance, expectations or other similar businesses? If your plans and goals are to improve and grow the business how will you go about it?

Management Reporting

This is an extension to the above with the focus being more on the business operations and performance rather than just reporting on results. It is as much (or more) for internal management as for third parties such as investors or banks who may only need or want to see selected information that is suitable for their purposes. Management reporting with insightful commentary and analysis is an essential tool for a dynamic and successful business (or one that wants to be).

The frequency of reporting should allow you to see current and up-to-date information so you can change and react to conditions as early as possible while being practical and fitting in with operation of the business. This can range from weekly (or even daily) in the case of sales (or other selected areas such as payroll) to monthly (or quarterly at most) in reporting on the business as a whole.

Forecasting

Taking financial management to the next level, good reports and records can be extrapolated into the future, taking into account expected growth and other foreseen changes.  This will show a picture or roadmap of where the business is headed and the process will also encompass how to get there – this should show what and when additional resources are needed (such as capital, assets or staff) or indeed when or even whether the business can achieve it’s goals.

Business Plan

A good plan is not just done when a business is set-up and then filed in a drawer. It should be a living document to be regularly revisited and revised to reflect changing conditions, goals and performance. Even if things don’t change significantly, going through the planning process may prompt you to address issues (or even new opportunities) that you may not have otherwise done.

There is a multitude of templates and information available on business planning. All are useful but the main questions your plan should address are:

·      Who? This is a description of your business

·      What? What do you do or want to do?

·      Why? Why are you in this market and why would you be successful? What is your niche or unique selling proposition (USP) and how do you stack up against the competition?

·      How? How are you going to run your business and market your product or service?

·      How much? Are the financials consistent with the words of the plan? Is the bottom line an acceptable and supportable outcome? If not the rest of the plan may be redundant?  [I actually often suggest doing draft financials first to see if you’re even in the ballpark]

A by-product of good regular ongoing financial management is that your annual tax return will become more of a formality – which will save your tax accountant time and save your business money! You can do it all yourself  (it’s not rocket science!) or outsource to a professional (what is the best use of your limited time?).

Do you want your accounting to work for you (not just the ATO)? Do you want to maximise your chance of not becoming a business failure statistic?

So what level of financial management is best for your business? The more the better is not always the case – as with most things what counts is quality, not quantity.

The small business diet

Losing weight is not easy but we all know it can reap amazing rewards. Calorie counting is boring but the basic equation is that calories out must be greater than calories in to actually lose weight (allowing for what is needed just to exist or stay as you are).

However, achieving a longer lifespan, being fitter, feeling and looking better (both physically and mentally) etc etc makes us all more productive - and it would take a very brave (or overweight and unfit) person to dispute that. 

With a few exceptions (medical or genetic) there are many ways to improve your health and well-being by altering diet and/or exercise in various proportions to suit your lifestyle and goals.

Your attitude towards your business should be no different. In order to achieve longevity the business needs to be lean and streamlined (i.e. efficient). This is even more important if you want it to become bigger and stronger (i.e. more profitable). Just as with weight loss or diet and exercise strategies there are books, TV shows and self-help programs for small business management – yes, even TV shows (see the excellent Kochie's Business Builders). Most of these offer great advice and what works best for you is probably a selection or combination of ideas.

Among the many strategies we have available are:

1. Lose weight, trim the fat or cut costs. Ideally costs and overheads should be at the optimum level for efficiency – not as low as possible as this is often a short term strategy which can be devastating in the longer term. Instead consider the marginal impact of a cost item – does it positively contribute to the business or would business suffer if it were cut.
2. Alter your diet – manage the revenue.  After analysing your business by product or service, consider whether you should be changing your sales mix or marketing strategies to focus on more profitable lines.
3. Do more exercise – increase or improve your marketing strategy. Be more aggressive or active in your market – or enter another market. Become seen as an expert or authority in your field drawing attention to yourself – and by inference to your business.
4. Use a nutritionist or personal trainer – or both. Outsource parts of your business to someone who specialises in that area and can do it better or more efficiently – allowing you to concentrate on what you do best (and make money!).

You have probably already got a plan for a long healthy life and a rough idea of what you will be doing in 5, 10, 20 or even 50 years! By no means is this set in concrete as you want to be adaptable and take advantage of opportunities as they come along.  You business is no different. Do you have a plan? What is your exit strategy? Do you just want to continue as you have and shut the doors at some point in the future or do you want to build as asset that can later be sold to fund your retirement?

So how are you going to approach the New Year? Lose weight, bulk up, get fit or do a combination thereof?

However you celebrate, remember to enjoy life and have fun in business - but always in moderation and consider the consequences!

Measure by numbers....but not just dollars

Congratulations if you've read past the title because it might seem a contradiction. Of course you measure in dollars - it's called bookkeeping. But how far does that get you? 

Raw data

As well as being a legal requirement you can't plan and manage your business if you can't see or measure what is happening. It is essential that the data is being recorded consistently and accurately and in enough detail for you to be able to use it - but not so much so that it becomes a chore and is not useful for anything! Many small businesses use the data to populate their tax return...and leave it at that. 

Accounts 

A step up in terms of managing your business is to prepare accounts, whether on an annual or more regular basis. Comparison against prior year figures makes the exercise more meaningful and you can start to draw some conclusions. However doing that often raises more questions than it answers. For instance you can see your sales have increased in a particular category (as you have recorded sufficient detail) - this is great but is it due to increased productivity, more or better marketing, better inventory management or something else? And how has this affected your cash flow, eg higher sales can translate to less cash if you had to offer longer payment terms.

Timely

So producing accounts has given you some more information, but this is historic and may have little relevance to current or future business decisions. Ok, all measurement will be historic but by producing it regularly and timely, accounting data will become much more useful. Carrying out regular forecasts is also invaluable - these will usually be based on current, up-to-date business data taking into account known or expected changes to your market or business model. Measuring your current data against a previous forecast will also help you draw conclusions, both about current performance and efficiency.....and your forecasting assumptions and techniques.

Analysis

Businesses exist to produce profit, but the key to good management is how that profit is produced. You are selling goods or services and the efficient ability of the business to do that is what determines the profit. Therefore it makes sense to measure in terms of those good or services. Each business is of course very different but objective analysis vastly improves the relevance and applicability of your management information. What I mean by this is analysis by:

•    Product that could be per litre, carton, case, room or whatever unit is most applicable (just don't overcomplicate it!)

•    Services are a bit harder but can still be done e.g. billable hours, hours paid, staff numbers, floor space or whatever is most appropriate for you

•    Combinations such as measuring sales by unit but perhaps overheads by week if they are relatively fixed in nature

By just adding this extra layer into your analysis your accounting data becomes much more valuable. Instantly you can see if an increase in sales revenue over budget or last year is due to item price or volume or a combination thereof. You could measure by unit by market to give even more useful information and so on.

Once you have all this valuable analysis you can start to draw meaningful conclusions and make any changes necessary. Of course you need to be aware of paralysis by analysis so only be as specific or detailed as is practical, either to draw conclusions, take action or to measure and record data in the first place.

Get fit for business with the Retail Doctor

I have just attended a business breakfast that was hosted jointly by the Balmain/Rozelle and Leichhardt/Annandale Chambers of Commerce. There was a very interesting speaker, Brian Walker (aka the Retail Doctor) and I thought what he had to say would be of interest to many of my followers, as well as to local retail precincts in general.

There was a lot of information that I won’t (or can’t) attempt to convey in totality – merely to comment on what stood out most to me, and my interpretation of it. For more information from the source please go to www.retaildoctor.com.au.

Multi-channelling

The whole retail landscape has changed dramatically over the last decade. However, and despite the protestations of Gerry Harvey and others, online sales account for only 7% of retail sales. Brian estimates that in five years this will have gone up to 12-15% - hardly signalling the demise of the bricks and mortar store.  Shopping online has had a lot of media attention but that doesn’t mean online-only retailers are sitting pretty – one of the biggest, Amazon, has only recently started to turn a profit.

There are multiple facets or channels in the whole shopping experience. These range from the more traditional high street shopping strip, large shopping malls, catalogues and mail order to websites, e-commerce, blogs, or social media. These are constantly evolving and changing – for instance there is a move in Australia from malls back to a community ethos of high street shopping.

Each method appeals to different demographics in different ways and there are not many retail businesses that can just stick to one or even two channels – unless perhaps they are in some sort of monopolistic position.

Cross-channelling

The proportion of customers who research before buying is very high, particularly for high ticket items – whether this is online before buying in-store, in-store before buying online or any permutation thereof, not forgetting the research (or sale) may be done with the competition.

Research will also be done with other customers, past and present. This can be face to face or increasingly through online reviews and social media. The latter cannot be underestimated, as previously word of mouth was one-to-one, now it is to the whole world and sometimes can make or break a business.

So not only should a retailer use multiple channels, but these channels must be complementary and guide an existing, new or potential customer to the ultimate goal of a sale.

Shopping experience

Good customer service, pricing and good staff are not really unique selling points – not many retailers would admit to falling short on any of these. Rather they are just expected and are prerequisites to being fit for business and growth. What businesses can compete on successfully is providing an experience.

Customers are people who have five senses to which you can appeal. Online you can (currently) only appeal to two, sight and sound. Of course there are many other ways to attract a customer such as having a unique product, appealing to vanity or fashion, or just good marketing (“you can’t afford not to have this product!”).

Whatever the strategies or channels used the experience needs to be about the customer – but keep it real!

How do you put together a financial model?

The quick answer is anyway you want - there are no rules but there is best practice, and following that will make the process more efficient and increase the credibility and shareability of the results. A forecast (or budget or other projection) in its simplest format is plotting values against time periods (generally weeks or months). However if you want more than a one-off exercise or for the forecast to have some level of credibility (either to you or another party) you will need a financial model.

A financial model is a theoretical representation of a financial decision-making process or project. It is a mathematical model designed to represent financial performance.

There are a number of elements that make up a good model:

Variables

To give credibility to the model each line of the model should be supported by calculations and showing the assumptions and methodology used e.g. $x per unit sold or per week/month. This also allows for scalability and can be backed up by evidence e.g. invoices or sales projections.

Sensitivity

Variables or input fields should allow changes to be easily made (to values or methodology) so as to instantly flow through the model and show the effect on the final result. This is sensitivity or what-if analysis.

Rolling periods

The model should allow for future use to add on additional, or roll forward to later periods. This should be able to be done in a relatively straightforward manner without having to rewrite the model.  This keeps it dynamic and the process continual and consistent.

Format

The outputs of the financial model (whether Profit & Loss, Cashflow or other Statement) should be relatively easy for another user to read and understand and be in a familiar format such as the regular management accounts. In addition the assumptions and inputs must also be straightforward to read and update. The backend, or calculations, of the model should also be logically laid out and be consistent to allow for possible future changes or updates.

Integration

Ideally the model should produce both a Profit & Loss (P&L) and Cashflow statement to give a more complete and thorough picture of the business or project. A Balance Sheet (BS) should also be included to act as a check as well as provide information. The opening BS plus P&L and Cashflow movements will give a closing or current Balance Sheet.

Not all of these elements are essential and some may be omitted depending on desired outcomes, audience and time or other resource constraints.

There are templates, programs and other tools available (many free of charge) for business owners or managers to utilise. An Excel spreadsheet is the most widely used tool for reasons including flexibility, ease of use, cost and portability or sharing.

 However the process will usually be far more efficient if it can be delegated to a qualified staff member, or outsourced to a professional, to manage the completeness and integrity and allow you to stay focussed on the business inputs and outputs.