Bruce Stuart: Long-term liabilities with the cloud model

Cloud-based businesses are not likely to drive increases in the requirements for long term assets such as land, buildings, computer hardware, software or office furniture and fixtures except as they relate to the requirement of these assets to support company growth.  Increases in goodwill may occur as a cloud or SaaS based business acquires other businesses in the market.  Generally the long-term asset accounts of an on premise business are likely to look very similar.

Current liabilities in the cloud or SaaS based business will not include those liabilities driven by the purchase and resale of product.  In the basic model current liabilities will include the cost of paying for service delivered by the eventual service provider.  Payment of these liabilities will be due one quarter after the transaction is closed.  If the business is able to collect the account receivable in 30 days or less, and the business receives the equivalent of 90 days of credit from their vendors the operating cash cycle on the business is negative 60 days…a tremendous advantage to the business.  Other then the difference in accounts payable driven by the way “cost of good sold” differs from the “cost of services sold”, the structure of the current liabilities in the on premise business are going to be similar to the structure in the cloud or SaaS business.

Long term liabilities in an “on premise” business are generally comprised of long term debt either secured by corporate or personal assets.  The same will be true of the long-term liabilities of a cloud or SaaS based business.

Contemplation points

What would Channelcorp like you to be thinking about as a result of reading about the balance sheet impacts of your engagement in a cloud or SaaS based business?

The current asset accounts of the balance sheet are where the largest difference exists between the on premise and cloud or SaaS business.  The cloud or SaaS business clearly requires lower amounts of current asset investment to generate the same levels of revenue.    These amounts can be substantial and the differences can be accurately modeled on an individual business basis.

Differences in long-term assets are growth related.  Any difference in current liabilities is related to the difference between “costs of goods sold” and “cost of services sold” and the credit terms provided by vendors and distributors in their recurring revenue model.

Differences in long-term assets are driven by changes in capital required by the startup capital requirements of the cloud or SaaS business.  Once the cloud or SaaS business is 3-4 years old and any startup capital borrowed in the long term is paid back the differences in long term asset structures between the on premise and cloud or SaaS business will be negligible.

As your financial modeling will show the biggest difference between on premise and cloud or SaaS businesses is related to current assets.

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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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