Bruce Stuart: How Cloud business impacts the balance sheet

The discussion of income statement impacts begs for a discussion of the impact on company balance sheets of the decision to develop a cloud or recurring revenue driven business.   The most material difference between the balance sheet of the on premise business and the balance sheet of the cloud or SaaS-based business appears to be in the structural make-up of the current assets accounts.

Current assets

The average on premise business has current asset accounts that include cash and cash equivalents, accounts receivable, inventory (in some cases) and pre paid expenses.  Accounts receivable are usually responsible for the largest account balances (more then the cash balances) with investments that range from 30 to 90 days worth of revenue.  In a ten million dollar business this could amount to an investment in accounts receivable of approximately $800,000 to $2,500,000.  This amount would depend on credit policies, levels of client satisfaction and the use of leasing by the business to replace accounts receivables.  Not only are these investments large in relation to the credit capacity of the business, they are potentially risky.   It is very possible that these investments in accounts receivable are in fact made in a very few number of accounts.  This situation would result in a very few number of accounts that owe the credit granting business a relatively large amount of money per account.

In addition to the investment in accounts receivable the business may also have small to moderate investment in inventory.  In the same ten million dollar business the inventory investment could be in the range of 10-15 days revenue or approximately $270,000 to $410,000.  The low/low range of the combined accounts receivable and inventory investment is approximately $1,000,000 whereas the high/high range is nearly $3,000,000.

Contrast this picture with the structural make-up of the current asset accounts in the cloud or SaaS driven business.  The contracts that have been signed to make up the recurring revenue are payable on a monthly basis, and in many cases, like many household annuity type bills, are paid a month in advance.  Best case the investment in accounts receivable is equal to 10 days of revenues with the worst-case investment in accounts receivables equal to 30 days of revenue.

In a ten million dollar business this would indicate an investment in accounts receivable of $275.000 to $800,000.  There would not be a requirement for any inventory investment in the cloud or SaaS based business. The low/low difference between the current asset investment required to drive a 10 million on promise business and a cloud or SaaS based business of the same revenue is $725,000.  The high/high difference is 2,200,000.

The cloud and SaaS based businesses are less current asset investment intensive then the equivalently sized on premise business.

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About Channelcorp

Margaret and Bruce Stuart founded Channelcorp in 1989.  The firm is a global leader in the assistance of reseller, distributor and vendor clients. Channelcorp specializes in the business model transformation that is required in the face of the structural changes to recurring revenue driven business models in the worldwide IT business (www.channelcorp.com/services.php).  Channelcorp publishes and sells four industry- leading books and 12 white papers (www.channelcorp.com/publications.php).  

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Jim Love, Chief Content Officer, IT World Canada

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