Advance Financial Accounting: Salesforce.com Business and Financials

This case study provides an in-depth analysis of Salesforce.com's business model, focusing on its innovative approach to cloud computing and customer relationship management (CRM). It examines the company's key success factors, including its subscription-based service and multitenancy architecture, and its financial performance, such as revenue growth, profitability, and shareholder equity. The assignment delves into Salesforce.com's revenue recognition practices, specifically how it recognizes subscription revenue over the contract term and its compliance with IFRS. The analysis highlights the impact of deferred revenue on the company's financial statements and cash flow, providing a comprehensive understanding of Salesforce.com's financial accounting and strategic decisions.

ADVANCE FINANCIAL
ACCOUNTING

Advance Financial Accounting
Contents
Answer1................................................................................................................................................2
Answer2................................................................................................................................................3
Answer3................................................................................................................................................4
References............................................................................................................................................6
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Advance Financial Accounting
Answer1.
Business Model of Salesforce.com
Ten years back when the idea of cloud was almost abstract and unwieldy then it was
Salesforce who made their vision to take all the software to cloud. This idea of the company
was really innovative and revolutionary at the same time.
Salesforce.com is primarily indulged in providing enterprise software. This enterprise
software is distributed through cloud keeping customer relationship management (CRM) in
mind. In the year 2000, Salesforce.com came up with the very first Customer Relationship
Management (CRM) solution.
Back in the year 2000, when technology was not so advanced Salesforce.com managed to
offer a type of service which could be easily installed, configured and integrate with different
platforms and enterprise applications. Earlier, it was difficult to run the CRM services
because it involved a high upfront cost. Along with the high upfront cost, it involved a very
high expensive services which were really tough to run and continue. All these difficulties
were abolished by Salesforce.com.
Now those CRM services are being delivered by Salesforce.com in the following ways:
1. Using highly recognised Internet browsers
2. Using top mobile devices
3. Direct sales
4. Through partners but indirectly
Salesforce.com followed multitenancy technology architecture and subscription service
business model. Now, customers can pay the amount in instalments over the period of
contract instead of paying high upfront cost in traditional software. It offers cloud
applications which helps the businesses to gain access to variety of applications services.
These are delivered by Salesforce to the businesses over the Internet on as-needed basis.
These applications either require little or no implementation services.
Key Success Factors and Financial Performance of Salesforce.com
The key success factors of Salesforce.com include:
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Advance Financial Accounting
1. As depicted by consolidated balance sheet of Salesforce.com, deferred commission
has increased from $57.1 million on January 31, 2009 to $75.5 million on January 31,
2010
2. As per income statement, company is generating around 93% of revenue from
subscription and support revenue model
Answer2.
Salesforce.com has witnessed success in recent past and therefore, company’s stock price
rose from $41 to $110 from 2005 to 2010. It also outperformed NASDAQ stock index.
Apart from this, the operating cash flows of the company has remained positive. As shown by
the balance sheet it is visible that company has maintained a good amount of cash and cash
equivalents which shows it enjoys a good liquidity position.
Over the years, company’s gross profit has also increased from $577109 thousand in 2008 to
$1047658 thousand in 2010.
Salesforce.com has spent 65% (2010) and 67% (2009 & 2008) of total operating expenses on
marketing and sales and therefore is able to compete its competitors like Oracle, Microsoft
etc.
Salesforce.com has also witnessed a rise in shareholders’ equity. It has increased by
approximately 55% from 2009 to 2010 which points towards the rising interest and trust of
investors towards the company.
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Advance Financial Accounting
Answer3.
The subscription revenue recognised by Salesforce.com is estimated over the terms of
contract starting on the commencement date of each and every contract and these terms are
typically 12 to 24 montths. Except in case company fails to perform its service, subscription
and support contracts are noncancelable. The customers are invoiced in advance, annual
instalments or quarterly instalments and the customers have to pay within 30 days. The
invoiced amounts are recorded in accounts receivable and revenue or deferred revenue on the
basis whether criteria of revenue recognition are met by customers or not. However, in
general entire subscription amount is collected in advance that is before the subscription
service period.
Yes, it is consistent with IFRS as company defers revenue over time instead of recognising it
at the time of signing the contract.
If the revenues were recognised at the time of signing contract then it would have increased
the net income of the company. It is because company would have recorded the whole
revenue amount at the start instead of deferring it to the coming years. It would have affected
the company’s balance sheet too. Under “Asset” head the amount of cash/bank would have
gone up by the amount of revenue received at the time of signing contract and so the amount
under the head “Equity” as per accounting equation. Cash flow from operating activities
would have also shown a higher figure than what it shows when revenues are deferred over
time.
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Advance Financial Accounting
References
Rankine, G. (n.d.). REVENUE AND EXPENSE RECOGNITION AT SALESFORCE.COM.
Ivey ID: TB0305. Thunderbird School of Global Management.
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