Salesforce as a Service

Salesforce.com is currently using the software as a service business model. Through software as a service model, the company delivers internet-based products to customers throughout the world through monthly subscription fees. The business plan allowed enterprises to access software via the internet. Therefore, it maximizes value by allowing customers to monitor interactions with existing and potential clients (Trimble, 2015). The Software as a service eliminated the needed for business and other clients to install and maintain their own technology infrastructure. Business and consumers can deploy software rapidly at a reduced cost. The business model allows Saleforce.com customers to subscribe and use the program for within a short time compared to other Customer relationship management (CRM) software (Columbus, 2016). The model also provides integration option where business enterprises and other users can integrate the software with other application.

The software as a service model has a multitenant architecture where enterprises and consumers’ share one centrally maintained common infrastructure and code base. The vendors can innovate faster and save valuable time for development because all clients share one infrastructure and code base. The model eliminates a lot of time that would be used to develop and maintain several versions of out-of-date codes (Trimble, 2015). Software as a service allows clients to customize the application to suit their business needs without affecting the shared infrastructure. The software as a service is architected such that each customized application is unique to each individual customer (Columbus, 2016). The customized applications for each customer is preserved when an update is carried out. Therefore, the salesforce can make the upgrade frequently without affecting the clients sharing the infrastructure and with less cost of adoption.

Saleforce.com offers digital commerce, automation of marketing, customer service, and support, collaboration, automation of sale force, salesforce platform and management of the community. The company uses different salesforce to market it these services to potential customers under its software as a service platform. Salesforce.com price it salesforce CRM products through indirect price discrimination approach. The standard products cost $25/user/month. However, the next three product tiers that are professional, enterprise and Unlimited product tier are priced higher than the standard one because they provide a large number of features, customizability as well as functionality. The lowest version of the product tiers is restricted to 5 users (Trimble, 2015).

Ratio Analysis: Salesforce.com

Liquidity Ratios

The working capital ratio measures capacity of Salesforce to pay off its short-term liabilities using its short-term assets. Working capital ratio is similar to the current ratio that measures the company capacity to pay off short-term obligation using its short-term assets (Stickney, 2010). However, Quick ratio measures the capacity of Salesforce to pay its current liabilities using its quick assets. The company liquidity ratio is calculated in Table 1 and 2.

Working Capital Ratio (current asset/ Current Liabilities)

2016

2017

2018

Current Assets

5,731,323

5,996,827

9,290,371

Current Liabilities

5617005

7,295,466

10,129,518

Current ratio

1.02

0.82

0.92

Table 1: Current & Working Capital Ratio (Annual Report, 2018)

Current Ratio (current asset/ Current Liabilities)

2016

2017

2018

Current asset

5,731,323

5,996,827

9,290,371

Current liability

5617005

7,295,466

10,129,518

Quick ratio

1.02

0.82

0.92

Table 2: Current Ration (Annual Report, 2018)

Table 1 and 2 indicate that Salesforce.com was only capable of paying off its current liabilities with its current assets in 2016 with2016 having the highest current/ working capital ratio and 2017 having the lowest. In 2016, the company could pay 102% of its current obligation using its short-term assets. In the fiscal year 2017, the company quick assets increased by 4.6% while the debt increased by 30%. Therefore, Salesforce.com could only pay off only 82% of the obligation incurred during the years using its short-term assets. In the fiscal year 2018, the current asset increased by 55% while debts grew by 39%. However, the company could only clear 92% of the obligations with the available current assets. The result shows that the salesforce.com is riskier to potential creditors in 2017 and 2018 because its current ratio and working capital ratio were less than one.

Quick Ratio

2016

2017

2018

Cash and cash equivalents

1,158,363

1,606,549

2,543,484

Marketable securities

1,567,014

602,338

1,978,221

Account Receivables

2,496,165

3,196,643

3,917,401

Current Liabilities

5,617,005

7,295,466

10,129,518

Quick ratio

0.93

0.74

0.83

Table 3: Quick Ratio (Annual Report, 2018)

Table 3 shows that Salesforce.com could not pay all its current debt using it quick assets because it had a quick ratio of less than 1 in both three years. In 2016, Salesforce.com would only pay 93% of its short-term debt using its quick assets. In 2017 there was a significant increase in debt without an adequate increase in quick assets and the company could only pay off 74% of the current obligations. In 2018, Salesforce experiences and improvement in quick assets by 56%. However, the debt during that year increased by 39%. The increase in assets was not enough to cover all obligations during the year. Therefore, Salesforce could only pay off 83% of the debt in 2018. The analysis of these ratios shows that salesforce.com was less liquid in 2017 and 2018 and risky for creditors.

Profitability Ratio

Return on assets determines the net income generated by total assets in a fiscal year comparing the total assets and net profits of a company (Stickney, 2010).

Return on Assets (Net income/total asset)

2016

2017

2018

Net income

-47,426

179,632

127,478

Total assets

12,762,920

17,584,923

21,009,802

Return on Assets

-0.37%

1.02%

0.61%

Table 4: Return on Assets (Annual Report, 2018)

Table 4 shows that in 2016 Salesforce.com made a loss of 0.0037 cents for every dollar that it invested in assets. In 2017, the company net income and total assets increased by 47.9% and 37.8% respectively. Since the net income increases more than the total assets, Salesforce.com made an income of $1.02 for every dollar invested in assets. In fiscal years 2018, the net income decline by 29% while total assets increased by 19.5%. As a result, the asset turnover decreased to 0.61%. The company managed to make only $0.61 net income from every dollar it invested in assets.

Efficiency/ Activity Ratios

The company recorded no inventory for the fiscal year endings 2016, 2017 and 2018 because of its software for service model that ensures it holds no inventory. Therefore, it was not possible to determine Salesforce.com inventory turnover and number of days’ sales inventory (Stickney, 2010). Accounts receivable turnover measures the number of times in a year when a company can turn its receivable into cash. A higher ratio is preferred

Account Receivable turnover (net sales/account receivable)

2016

2017

2018

Net sales

6,667,216

8,391,984

10,480,012

Account Receivable

2,496,165

3,196,643

3,917,401

Account Receivable turnover

2.67

2.63

2.68

Table 5: Account Receivable Ratio (Annual Report, 2018)

Table 5 shows Salesforce was better placed to collect receivables from debtors in 2017 compared to 2016 and 2017. In 2016, Sales force.com could collect its receivables 2.67 times in 2016, 2.63 times in 2017 and 2.68 times in 2018. The result indicates that Salesforce is doing well in terms of the collection of receives with an average of twice a year. The decline in account receivable indicates that the company is not doing well in managing its debts. The decline in the ratio also shows a higher probability of bad debts.

Net sales to total assets ratio estimate the capacity of Salesforce.com to use its asset to generate sales by comparing total assets and net sales within a given fiscal year.

Asset turnover (net sales/total assets)

2016

2017

2018

Net sales

6,667,216

8,391,984

10,480,012

Total assets

12,762,920

17,584,923

21,009,802

Asset turnover

0.52

0.48

0.50

Table 6: Asset turnover (Annual Report, 2018)

` The result in table 6 shows that the company generated 0.52 cents, 0.48 cents and 0.50 cents in sales for every dollar of an asset for 2016, 2017 and 2018 respectively. The net sales increases by 25.87% in 2017 and 24.88% in 2018. The total assets increased by 37.78% and 19.48% in 2017 and 2018 respectively. Since the total assets increased more than the net sales in 2017, the asset turnover declined to 0.48. in 2018, the asset turnover increased to 0.50 due to a high increase in net sales in 2018 compared to total assets. The ratio shows that Salesforce.com used its assets efficiently to generate revenues in the three years with the highest efficiency attained in 2016 and lowest in 2017.

A number of Days Sales in Receivables is a duration (in days) required by a firm collect cash from debtors. A company that has reduced the number of days are more efficient in managing receivables.

Number of days sales (account receivable/net sales)*365

2016

2017

2018

Net sales

6,667,216

8,391,984

10,480,012

Account receivables

2,496,165

3,196,643

3,917,401

Number of days sales

136.65

139.03

136.44

Table 7: Number of Days Sales (Annual Report, 2018)

The result from Table 7 indicates that Salesforce.com took longer time (139 days) in 2016 to collect cash from the customer. In 2016, the company took the 136 days to collect cash from customers while in 2017 it took 139 days. The data shows that Salesforce.com did poorly in collecting credit sales in 2017 compared to 2017 and 2018.

Leverage Ratio

Debt to equity ratio measures the proportion of a firms funding generated by shareholders and bondholders (Stickney, 2010). A high ratio indicates that the company is financed by many creditors more than investors.

Debt to Equity Ratio (Total Liabilities/Total Assets)

2016

2017

2018

Total liabilities

5,617,005

7,295,466

10,129,518

Total equity

5,002,869

7,500,127

9,388,496

Debt to Equity Ratio

1.12

0.97

1.08

Table 7: Debt to Equity Ratio (Annual Report, 2018)

Table 7 indicates that the in both three years Salesforce.com was less risky to investors and creditors because the debt ratio was more than one. However, the company is experiencing decline trend in the return on assets. Salesforce.com total liabilities increased by 29.9% and 38.9% in 2017 and 2018 respectively. Similarly, the total assets increased by 49.92% in 2016 before dropping to 25.18% in 2018. The low return on assets in 2017 indicates that Salesforce.com was less risky to an investor in 2017 than in 2017 and 2018. In general, the company was less risky to investors and creditors in 2017 and riskier in 2017 and 2018.

Shareholders equity measures how much investors would get in the event of liquidation (Albrecht, 2007). A high Shareholders equity is preferred by investors.

Shareholders’ Equity (shareholders equity/total assets)

2016

2017

2018

Total shareholders’ Equity

5,002,869

7,500,127

9,388,496

Total assets

12,762,920

17,584,923

21,009,802

Shareholders’ Equity

0.39

0.43

0.45

Table 8: Shareholders Equity ratio (Annual Report, 2018)

Table 8 shows that an increasing amount of shareholder’s assets for every dollar invested in the company should it decide to liquidate. The investors would receive 0.39 cents, 0.43 cents and 0.45 cents in 2016, 2017 and 2018 for every dollar invested in the company. The result shows that shareholders would not be worse off should the company decide to liquidate.

Financial Ratio

Return on Capital employed measures how profitable a firm is in investing the shareholders’ funds (Stickney, 2010). Return on capital measures the capacity of a company to manage bondholder and shareholders’ funds invested in the firm to generate profits.

Return on Invested Capital (net income-divided)/total equity

2016

2017

2018

Net income

-47,426

179,632

127,478

Dividend

0

0

0

Total equity

5,002,869

7,500,127

9,388,496

Return on Invested Capital

-0.009

0.024

0.014

Table 9: Return on Invested Capital (Annual Report, 2018)

Table 9 shows that in 2016 the company made a loss of 0.009 cents for every dollar invested in the company. In 2017 the net income and total equity grew by 478. 76% and 49.92%. as a result, Salesforce.com made a profit of 0.024 cents for every dollar invested by investors in the company. In 2018 the company net income per dollar invested fell to 0.014 cents due to decline in net income by 29.03%. the result indicates that the Salesforce has a low return on invested and should seek more profitable opportunities.

Fixed charge estimates the capacity Salesforce.com to cover all its fixed expenses with its Income before Interest and Tax (EBIT).

Fixed Charge Coverage (EBIT+F.C)/F.C +Interest

2016

2017

2018

EBIT+ Fixed Charges before tax

169,619

155,402

343,414

Fixed charges before tax +interest

105,464

129,462

137,962

Fixed Charge Coverage

1.61

1.20

2.49

Table 10: Fixed-charge Coverage (Annual Report, 2018)

Table 10 shows that the company earnings before interest and taxes were capable of paying all the fixed expenses or charges. In 2016, the EBIT was enough to cover $105 464 of the expenses (the EBIT was 1.61 times more than the fixed charges) while in 2017 the EBIT was 1.20 times the fixed expenses. The 2018 financials show that the company EBIT was adequate to cover the fixed charges by $343,414 (EBIT was 2.49 times higher than the fixed cost). The result shows that Salesforce was healthier in 2017 than the other period and would get a loan from banks.

Interest charge coverage measures the capacity of a firm to make payment on its debt in a timely manner (Albrecht, 2007).

Interest charge Coverage (EBIT/interest Expense)

2016

2017

2018

EBIT

114,923

64,228

235,768

Interest expense

86,943

88,988

72,485

Interest charge Coverage

1.32

0.72

3.25

Table 11: Interest Charge coverage

Table 11 shows that in 2017 the company made 1.32 times more earnings than its interest payment, thus could pay interest on the debt together with the principle. In 2016, Salesforce.com had made 0.72 fewer profits to cover than its interest payment. Therefore, it could not afford to pay the interest and principal payment to creditors. In the fiscal year 2018, Salesforce.com made 3.25 times more earnings than the interest payment. Therefore, the firm was better placed in 2018 to pay the interest than any of the three periods.

Proposed Business Model

Salesforce.com should focus on a business model that reduces it expenditure and maximize its market share in the domestic and global arena. As shown in the 10-k annual report the company has high revenues but reduced profits due to a higher level of expenditure (Annual Report, 2018). The company should focus on developing markets in Africa and South American countries such as Brazil. These economies are growing fast and can offer the company an opportunity to increase revenues as well as expand its market shares. Salesforce could also increase its revenues by increasing its annual number of pay subscriptions through promotional and discounts deals with business and consumers. The company has the opportunity to increase subscription through providing upgrades to its clients to full features versions such as an Enterprise License Agreement. Similarly, Salesforce should focus on providing its clients with high-quality technical support and encourage third parties to develop applications on its platforms.

However, increasing revenues without looking into expenditures would be meaningless. The company earns considerable revenues but these are reduced by a high cost of operation. The company can manage its cost effectively taking into account that the company does not incur a lot of cost in providing services to customers. The company had $10.48 billion in revenues and yet its net income was $127.48 million (Annual Report, 2018). Such considerable disparity shows how high cost affect the company profits. Salesforce needs to manage its marketing and sales cost. The company can shift to alternative cost-effective methods of creating brand awareness such as through uses of social media networks instead of using significant manpower to advertise and create awareness. Similarly, Salesforce needs to reduce its debts financing because of the high debt result in increased fixed charges. Such charges lead to reduced profits. Salesforce should increase the proportion of equity and reduce debt used to reduce the high expenditures. Current debt to equity of 1.08 is also not safe for the company (Annual Report, 2018). The improvement in the debt to equity ratio can make the company attractive to investors.

References

Albrecht, W. S. (2007). Accounting, concepts & applications. Mason, Ohio, Thomson/South-Western.

Annual Report (2018). Salesforce Com Inc. (CRM) Sec Filing 10-K Annual Report for The Fiscal Year Ending Wednesday, January 31, 2018. Retrieved from https://www.last10k.com/sec-filings/crm#

Columbus, L. (2016, October 1). The State of Salesforce, 2016 – 2017. Retrieved from https://www.forbes.com/sites/louiscolumbus/2016/10/01/the-state-of-salesforce-2016-2017/#41c98b96455a

Stickney, C. P. (2010). Financial accounting: an introduction to concepts, methods, and uses. Mason, OH, South-Western/Cengage Learning

Trimble, E. (2015, March 7). Salesforce.com: From SaaS Pioneer to Platform Play. Retrieved http://www.hbs.edu/openforum/openforum.hbs.org/goto/challenge/understand-digital-transformation-of-business/salesforce-com-from-saas-pioneer-to-platform-play.1.htmlfrom