small business it adoption – Cooper Mann Consulting

Lease Accounting Rules, Small Business Financing and the Cloud

Cloud Service Financing There are changes in lease accounting rules that may have broader implications than expected. Lease accounting, or accounting in general, isn’t exactly an exciting topic and generally doesn’t come up in conversation. But the changes to how business equipment and other leases are accounted for and reported could become additional fuel for cloud adoption by businesses – small business looking for financing, in particular (= lots).

First, what does accounting for leases have to do with small business financing? Quite a bit, actually. The balance sheet is one of the things a lender will look at when considering a small business for a loan, and if lease obligations and leased assets are on the balance sheet, they’re going to want to talk about them. They’ll also possibly look at asset turnover – trying to understand exactly how much in assets it takes for the business to make “x” amount of money. Banks and other lenders like to know they’re loaning money to a business that is going to pay it back, and in a reasonable amount of time. They will limit their risk potential as much as possible, and they do it by looking through the financials and related information.

Business value is generating sustainable cash flow. If you run a highly efficient business, the more top-line growth you deliver, the more cash flow you enjoy. For capital-intensive businesses (either through the need for capital equipment or working capital), growth can actually lower your cash flow and diminish your business value. To understand which side of the equation your business resides, accounting professionals will often look at the return on total assets calculated over time, dividing the operating income for each period from the P&L by the appropriate period values of total assets from the balance sheet. The resulting metric describes how efficiently assets are applied to creating earnings.

https://coopermann.com/2013/01/22/why-is-asset-management-important-to-a-business/

This can be a difficult conversation with the banker for new businesses, as they have little to go on in terms of historic data to show the bank. The P&L (profit & loss, or Income Statement) only reflects current business performance, not what it can do in a few months or years. By putting leases on the balance sheet, businesses are now reflecting a more realistic view of things, but are also introducing additional items for scrutiny and question by the lender; things which are often described more in terms of business strategy than in proveable numbers. That makes getting the loan just that much tougher.

Previous rules relating to business leases didn’t necessarily require that the business recognize operating leases (leased items and lease obligations) as assets and liabilities on the balance sheet. This is among the reasons why businesses lease equipment – they are able to obtain the item without having to record a single large capital expenditure.

The FASB changes demand that accounting for leases should be standardized, forcing the lesees to report all leases on the balance sheet, reflecting both the benefit (asset) and the cost (liability) associated with the lease. Stated in a press release on the subject: “The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” stated FASB Chair Russell G. Golden. “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.”

“a capital lease creates a tangible right where you own the equipment; the liability in a capital lease is true debt…”

http://www3.cfo.com/article/2013/9/gaap-ifrs_lease-accounting-elfa-fasb-iasb-global-convergence

By understanding how these changes in accounting for leases impact businesses, cloud solutions providers now have an additional lever to use with prospective customers: leasing equipment isn’t necessarily the way to keep capex off the balance sheet any longer.

One of the big value propositions offered by many cloud solution providers is that their service is paid for as a monthly business expense rather than a large up-front capital expenditure and investment. Businesses are able to use the solution and benefit from it without actually “buying” anything, it’s just subscribed instead. All of this is really a fancy way of saying “renting but not owning”, but the result to financial reporting is the same: it’s not on the balance sheet, it’s on the P&L in chewy chunks. This used to be a preferred treatment for leases, too, allowing businesses to reflect the usage and payment in little parts rather than a big one. It was “gentler” on the balance sheet. But leasing equipment and software for on-premises use won’t be competing with the cloud and subscription service any longer, closing off the “impact to the balance sheet” conversation entirely and making cloud IT just that much more important to small businesses who need cash to fuel business growth.

Make Sense?

In a previous article entitled The Psychology of Small Business IT Adoption, I discussed Icek Ajzen’s Theory of Planned Behavior and how a number of researchers applied it to the process of small business IT adoption. The concept, which ended up proving to be true, was that IT adoption by small businesses is a function of a number of fairly well-defined elements, and is not so much defined by specific types of businesses or the business leaders. The elements which lead to the act of business IT adoption (as well as adoption of other services, I’ll bet) can be identified and addressed by the potential provider of the product or solution ahead of time, making the possibility of actual adoption much greater.

Knowing how your prospective customer will approach the decision-making process is important, and getting a little insight ahead of time never hurts. Particularly when a lot of customers don’t actually reveal their thinking, it can be tough to know where to begin. You’ve been there before – you’re making your pitch and asking questions, but are getting nothing in return. Sometimes it’s “deer in headlights”, and they are simply overwhelmed. Other times they’re thinking about things you’re not telling them… but they’re not letting you know you’re not telling them. Dead air, and then a lost opportunity.

Boiling it all down to a fairly simple explanation, businesses adopt IT because there is a conscious plan to do so, and that plan is supported by a belief that the solution will do good things for the business, the solution is a recognized (if not expected) approach, and the business believes it has adequate resources and capability to effectively handle it. It’s all about:

Intent,
the attitude towards adoption,
belief of expected outcomes and their value,
expectations and the motivation to comply with them, and
evaluating barriers and the adequacy of resources to overcome them.

Intent

The first and most important element is intent, a conscious plan to get or do whatever it is. If the customer has no plan to get the item and sees no need for it, then the barrier is pretty high. However, if the need can be created, and the customer can be driven to believe they need to get the item, then there is intent. Now they’re looking for you and not vice versa. Consider that the Snuggie wasn’t “something” until folks were told that blankets simply weren’t good enough any more for lounging around (they don’t have sleeves!). Once people believed there was a problem, they pursued finding the solution.

The attitude towards adoption

Next, what’s their attitude towards getting the item? Sometimes people go looking for things they don’t think they can actually get, and often they know they need something but don’t think the solution is even out there, so they have a jaded viewpoint from the start. A prospect with a positive attitude and who wants to actually find a solution is far better to work with than one who has already determined that you can’t help them. Sometimes all it takes is a good listener to help create a positive attitude and make someone willing to tell you how you can help them.

Belief of expected outcomes and their value

Now, what does the customer think they will get from the deal? Will the solution actually solve problems or create new ones, and are the perceived problems to be solved big enough to really worry about in the first place? Small businesses tend to be very cash conscious, wanting as much value as possible for any expenditure. Further, most small businesses don’t let go of their cash easily and certainly not for frivolous purposes, so a successful sale is often supported by the customer’s belief that they will get a real solution and benefit – something of value which will be realized, and that is important enough to deal with sooner rather than later.

Expectations and the motivation to comply with them

It is interesting how many small businesses go shopping for products or solutions that they don’t actually intend to purchase or adopt. Sometimes they just want to be able to say “we’re looking in to it”, even if they aren’t and don’t plan to, and sometimes they have a business requirement that they don’t want to have to meet due to cost or complexity or whatever. Let’s say a business has customers complaining about unresponsive or bad support, and how they should have a ticketing system to help track issues better. Maybe the customers have the right idea: maybe the business should have a ticketing system (the business provides support and ticketing systems are considered a support service industry norm). This is the expectation. Let’s also say the business uses a CRM solution to handle support, and they believe it handles things just as well as a separate “ticketing” solution. Just because there is an expectation (customers want ticketing system), it doesn’t mean the business is motivated to comply (CRM does just fine). Expectations come in many forms and from many sources – customers, vendors, employees, contractors, the government and regulatory… on and on. Expectation and motivation to comply are both high when it comes to legal and regulatory issues, as these things can be tied directly to money and cash and risk. In other areas, it may not be as easy to identify or address. The best way to look at this issue is to try to understand what the business is doing now, whether the approach works or may be materially improved in servicing their business and model, and whether or not the business recognizes an immediate need to make the change.

Evaluating barriers and the adequacy of resources to overcome them

The final and perhaps most important factor in SMB adoption of IT is the simple belief that it can be done. Done at all, I mean, not just done “affordably”. My dad taught me that it’s not a bargain if you can’t afford it. Now, this doesn’t mean that there aren’t times when a business needs to bite the bullet and extend itself to become better. But any small business in this position is a tough sell, simply due to real resources and capability. No matter how much a business may know it needs something, if it really can’t do it, or believes it can’t – it won’t.

Make sense?