Maroof HS CPA Professional Corporation, Toronto

Information Systems – Small Businesses need to stop overinvesting!

In recent years, all of us have seen how technology has revolutionized the world; a tremendous level of efficiency and effectiveness is achieved in performance along with a dramatic increase in accuracy and reliability of the information. Todays’ decision-makers have quick access to high-quality information related to business processes unlocking endless possibilities of making critical decisions in a timely manner; thanks to technological advancements in Information systems!

A few months back, an investor approached me to seek advice on the information systems for his startup composed of two restaurants and a catering operation. Business plan revealed that the budget for IT equipment and infrastructure was allocated almost ten percent of total CAPEX of around one and half million dollars; there was an excessive emphasis on the information systems. Information systems – a critical element of modern business – involve key investment decisions and it is equally important like any other investment decision to do a careful evaluation of all alternatives to avoid any under or over-investment in the same. Is heavy investment in Information systems a key to success to small businesses helping them to achieve their goals? The answer is No!

In the situation mentioned above, ten percent of capital expenditure dedicated to IT is a sunk cost as soon as it is outlaid. To see it as an example, let’s see how it was supposed to be spent. It was consisting of a Point of sale and a Materials Control software (names blacked out) – these are two independent applications which use their own Oracle databases which can be interfaced together – which should need a highly sophisticated IT infrastructure to work as advertised by a renowned vendor claiming to be the market leader. Moreover, the popularity of these two applications makes the Licensor appoint only one authorized distributor of the product in the region.

Continuing with the above example, Let’s see what is most importantly required from an information system in the Restaurant business or any similar retail hospitality business. To run the operations smoothly by managing reservations and tables, point of the sales function, inventory and purchases management, employees time management, accounting and reporting, and most importantly a system equipped with controls. Like any other business regardless of its scale, to make better decisions easy and timely access to accurate and reliable information. No doubt, applications are chosen by the client were the market leaders in the hospitality business and suitable for large enterprises. For a small business, one doesn’t need to overinvest!

In recent years, the balance of the Opex approach and Capex approach has tilted more towards to Opex side when it comes to IT expenses and the reason is appropriately understandable in today’s rapidly changing technological environment. Capital expenditures on IT are sunk costs for risky long-term projects. In the restaurant business, this is even riskier and chances of recovering costs from investment in IT are virtually negligible. In the above case, eventually, the client opted for the Opex model due to multiple reasons.

Being in the restaurant business, precious capital can be utilized better if diverted towards the assets which will result in value addition activities. Building a fancy restaurant is not a problem – anyone with capital can open it, what matters most is running it as a profit-making enterprise. Value-added activities are those activities that directly increase customer experience whereas all other activities, no matter how critical and important, are non-value added. A typical example of non-value-added activity in the restaurant business is the accounting function which is no doubt one of most critical function but still it is a non-value added one since it does not contribute to improving customer experience; an accountant while posting journal voucher or writing a check will not improve the taste of a cup of coffee!

In our reference case, POS and Materials Control was substituted with a subscription-based, cloud-based, application that was beautifully integrated with accounting modules and can produce all those “right” reports which are needed to run a restaurant business. While doing so we minimized the initial outlay on CAPEX to the fraction of what was initially. It even helped in reducing OPEX. After the operations started, accounting and software application costs were just a few thousand per annum which was even lower than the depreciation and amortization expense that would have resulted by opting for the CAPEX approach. An added benefit was more focused on value-added activities rather than managing expensive non-value-added activities like IT systems and specialized human resources associated with them. Yes, there were some controls missing but don’t we remember that the cost-benefit relationship of controls should also be considered. Another set of controls can always be implemented! So small businesses should let their obsession with high tech expensive processes and information automation. Trust, savings in both CAPEX and recurring heavy opex will help in achieving long term goals.

For any small-scale business including the food and beverage business, it is wise to outsource accounting functions and get cloud-based subscription software in the beginning. It depends on the managers how efficiently they can use the information they get from a reporting system, the key to which lies under an important function which is proper planning of any accounting and reporting system regardless whether it is an expensive software using local IT infrastructure or an application hosted on the cloud. It all comes down to the human resources which helped in planning and setting them up.

In the case of medium to large businesses, due to the scale of business, a strong Management Information system is critically needed to make both strategical and tactical decisions. Here, the same CAPEX will become a fraction of total investment as opposed to one for small businesses. These CAPEX decisions should still consider subscription-based services rather than buying one-time expensive licenses since developments in the tech world are unexpectedly fast. Always emphasize on quality resources for consulting activities to get maximum out of your investment.

While making software selection, always go for an Enterprise Resource Planning level solution rather than multiple fancy applications since it is cheaper to get support packages from one vendor rather than multiple vendors. Moreover, avoid going for any application (like I mentioned two popular F&B applications above) which is controlled by only one or a few regional vendors since they are going to exploit with both upselling and cross-selling of critical associated products, and expensive support contracts.

Whatever decision is taken, Capex or Opex approach gives it a thorough consideration else bad decisions will keep on haunting in the future and the cost of corrective actions will be much higher.

Need help deciding on an accounting system or information system for your business, get in touch with us!

 
Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from North Dakota in the United States. He lives in Toronto.

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Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from North Dakota in the United States. He lives in Toronto.

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