Just a short post today – I will get back to more regular posts soon.
I have written before about several aspects of cloud accounting – see here for example. But we can also think about what cloud accounting providers can do for their clients.
Simply, these providers have lots of data and insights on their clients. The Intuit group seem to have been quite clever in recent years with such data – mainly in the US market though as far as I am aware. Here is their latest offering, offering loans to small business. If we assume the potential market is users of Intuit’s Quckbooks, then I could easily surmise that data – even aggregated – from the software could be used to assess the ability to repay and so on. If you are thinking there may be privacy concerns on the data, well I think any bank or lender would ask for financial statements regardless.
In December 2014, the media (see here for example) noted how millions for euro were “off-balance” sheet. According to reports from the Vatican “some hundreds of millions of Euros were tucked away in particular sectional accounts and did not appear on the balance sheet”. So how can this happen, and what does off-balance sheet actually mean?
Let’s go back to basics first. A balance sheet shows assets, liabilities and equity. Assets are essentially something an organisation own’s or has use of like a owner; a liability is a claim against the business. Both must be measurable in monetary terms. So for example, many large firm’s brands have values in $billions put on them, but these are off-balance sheet assets which are off-balance sheet because the value cannot be measured accurately in money terms.
In other cases, such a the Vatican example, assets can be seemingly omitted from the balance sheet. This is of course not a recommended practice. How is this done? Well, it is a little bit more complex than this, but essentially something is omitted from the books of the organization. Remember, now matter how complex an organization is, underneath its accounting system is the good old double entry system of accounting. If a transaction (e.g. bank account) is omitted from the double entry accounts, that’s it, it does not appear on the balance sheet.
When I was in secondary school, I took a subject called Business Organisations (or biz org as we called it). It was a bit of law, general business and finance all rolled into one. At that time a lot of it did not make sense, but when I started to work I encountered many of the things I had learned about – shareholders, annual general meeting, debt financing and so on.
I recently read an article in CIMA’s Financial Management (Sept 2012, pp. 32-34) on a topic which I have never encountered in my working life in Ireland/UK – trade finance. I do remember learning about it biz org though – not bad after 25 years almost. So what is trade finance? It is simply using the materials/supplies as a security for finance. It works as follows.
- a company needs to buy materials to complete a sales order, but does not have the free cash to pay.
- a trade finance company (or bank) agrees to buy the goods, and issues a letter of credit to guarantee the payment to the supplier.
- The customers order (often from a large well-known business) is security for the trade finance provider.
According to the article, trade finance is becoming more popular as many firms are finding it difficult to obtain or maintain a bank overdraft. You can read the full article here
I read an interesting article in the November 2011 issue of Financial Management, CIMA’s monthly journal. The topic was peer-to-peer finance, which was something I had only heard a little about. Given the combination currently of low deposit interest rates and high lending rates for small business, peer networks have formed and are seemingly growing fast. The basic idea is relatively simple: some business have cash surpluses and others need finance – but not at 19% (which was a rate quoted to one business mentioned in the article). Those with spare cash can group together and lend to those that need it. The risk may be lower for the provider of finance as only a small amount can be contributed, and for the borrower the rate is lower (8.9% in the case of the business the bank wanted 19% from). Two peer-to-peer lending networks are mentioned in the article – Thincats and Funding Circle. In effect such networks are like mini-money markets. They do, of course, undetake some credit checks and crediting rating, but for small business this seems to be a very sensible way to bring borrowers and lenders together.