Marc’s Lemonade Stand 2017

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This year, I will reprise a blast from the past. Microsoft’s Lemonade stand. Possibly the only place where you will see screenshots of those early versions of Microsoft CRM.

For those unfamiliar with my annual review of Salesforce’s cash flow (here is last year’s), I take their cash flow, scaling all line entries relative to their revenue, which I set to $1 (the price of a glass of lemonade). To make the financials readable, I also convert the line entries to lemonade stand analogies.

Why is this interesting? Because while you can fake revenue and do non-GAAP acrobatics, cash flow never lies. If you want to see how a business runs, look at the cash flow.

The Numbers

2013

2014

2015

2016

2017

Sales of a Cup of Lemonade

$1.00

$1.00

$1.00

$1.00

$1.00

Cost of Ingredients From Corner Store

-$0.22

-$0.24

-$0.24

-$0.25

-$0.27

Taste Testing

-$0.14

-$0.15

-$0.15

-$0.14

-$0.14

Posters

-$0.53

-$0.53

-$0.51

-$0.49

-$0.47

Paying Sister to Make Lemonade and Sit on Stand

-$0.01

$0.00

$0.01

$0.02

$0.01

Bank Account Interest (minus fees)

$0.00

-$0.02

-$0.01

-$0.01

-$0.01

Overcharging/Undercharging

$0.00

$0.00

-$0.01

$0.00

$0.00

Uncle Sam Subsidizing/Taking a Free Lemonade

-$0.05

$0.03

-$0.01

-$0.02

$0.02

Selling sister a share of the business

$0.24

$0.19

$0.16

$0.16

$0.15

Lending Dad Money for Lemonades

-$0.06

-$0.10

-$0.10

-$0.09

-$0.07

Profit Share Paid to Sister

-$0.08

-$0.07

-$0.06

-$0.06

-$0.06

Money Put in Bank

$0.00

$0.03

$0.01

$0.01

$0.00

Money Owed to Corner Store

$0.06

-$0.01

$0.03

$0.04

$0.01

Loyalty Program

$0.16

$0.15

$0.15

$0.15

$0.14

Net Cash From Operating Activities

$0.36

$0.29

$0.27

$0.32

$0.30

Buying Out and Taking Over Other Lemonade Stands

-$0.19

-$0.65

-$0.03

-$0.11

-$0.38

Fixing up the Lemonade Stand

-$0.07

-$0.08

-$0.03

-$0.04

-$0.07

Comic Purchases and Sales

-$0.06

$0.13

-$0.08

-$0.09

$0.12

Net Cash From Investing Activities

-$0.32

-$0.61

-$0.14

-$0.24

-$0.33

Borrowing Money From Mom

$0.00

$0.33

-$0.10

-$0.04

$0.08

Net Cash From Financing Activities

$0.00

$0.33

-$0.10

-$0.04

$0.08

Cash Profit

$0.05

$0.01

$0.02

$0.04

$0.05

Generally I focus on the items which contribute 10c or more to cash flow.

Operating Activities

Traditionally, operating activities are business operations as opposed to investments (putting the money somewhere to make money) and financing (borrowing money) .

Cost of Ingredients From the Corner Store (Subscription and Support Costs)

Costs for the stand are the highest they have ever been at 27c and have been steadily increasing for about eight years. This is the first year that the ingredients (costs) have gone past 25c (25% of revenues).

It is hard to make ends meet when costs keep rising.

Taste Testing (Research and Development)

Taste Testing has been constant for about four years at 15c. In other words, Salesforce spends around 15% of revenues on research and development. This is similar to Microsoft’s 14%.

Posters (Marketing and Sales)

Marc spends a lot on posters. This year, 47% of revenues went to marketing and sales. For the dollar received for selling a lemonade, 47c goes to the printing of posters. However, this spending has reduced over the last five years.

This is where we see how far Salesforce departs from, say, Microsoft. Microsoft, by comparison, spends around 17% on Marketing and Sales. Even with the rate of reduction Salesforce have, they have a long way to go.

Selling Sister a Share of the Business (Expenses related to stock-based awards)

To prop up the sales of the lemonade, Marc selling shares in the business to his sister. His sister sees how much the business is growing and, not worrying about the profits, wants in on the action. Every year Marc prints off some more shares on the home printer and gives them to his sister in exchange for cash.

For every $1 in actual lemonade sales, Marc receives 15c in share income from his sister.

Loyalty Program (Deferred Revenue)

Salesforce receives a lot of money for services yet to be delivered. In short, they receive the subscription money up front, usually as part of an annual contract.  The contribution to the cash flow has been slowly reducing over the years and now sits at 14% of revenue. That is, for every dollar received for an actual lemonade, Marc receives 14c in loyalty coupon purchases.

Net Cash From Operating Activities

All of the above are the big ticket cash flow items for operating activities and the total cash into the business is 30c. One way to look at this is half of the cash coming into the business from business operations comes in from the sales of shares and the other half from the promise of future services with the one dollar handed over for the cup of lemonade covering ingredients, sales and marketing, and research. Salesforce is in the business of selling software but equally in the business of selling shares and selling the promise of future services..

Investing Activities

In the case of the lemonade stand, this covers the purchasing of rival stands (Business Combinations), repairs to the lemonade stands (Land activity and building improvements) and the buying and selling of comics to make some extra cash (Purchases of Marketable Securities).

Buying Out and Taking Over Other Lemonade Stands (Business Combinations)

Marc has been busy acquiring with 38% of this year’s revenue going towards it, literally more than triple the value from last year. In fact the big purchase was Demandware which Salesforce bought for $2.8b in cash; around 87% of the acquisition cash. Demandware is a cloud-based e-commerce platform so it aligns well to Salesforce’s other offerings.

Comic Purchases and Sales (Purchases of Marketable Securities)

Marc sold off some of the comic collection this year bringing in 12c for every dollar of lemonade sold. Marketable securities have taken a lot more money than they have earned Marc over the years. The two years where they have brought money into the business are 2014 and 2017. Every year other than these, since 2003, have taken money out of the business. This either means there are a lot of valuable comics sitting in Marc’s basement or he keeps purchasing because the old ones are junk.

Net Cash From Investing Activities

Overall, investing activities took 33c out of the business, despite the comic sales. So, overall, operating and investing activities meant 3c left the business whenever a lemonade sold. Let us turn to the final source of cash, financing activities.

Financing Activities

Financing activities are the borrowing of money to finance the business (it could be argued that Marc selling shares to his sister is a financing activity but traditionally it is considered an operating activity. In our case, the only line item is borrowing money from mom (Proceeds from borrowing on convertible debt). To cover the 3c shortfall from the other two areas, Marc borrowed 8c for every dollar of sale from mom meaning the cash flow into the business overall was 5c.

If we did bundle the selling of shares, the borrowing of money from mom, and the loyalty program (which is, effectively borrowing from customers) we would have the following:

  • Selling of lemonade (operating activities excluding share selling and loyalty program): 1c per lemonade coming into the business
  • Comics and stall acquisitions (investing activities): 33c per lemonade out of the business
  • Borrowing from mom, sister and customers (financing activities): 37c into the business

For every lemonade sold by Marc for one dollar, he receives 1c back, after all costs are accounted for. Borrowing allows Marc to maintain his stands, buy some comics and additional stands but to finance this he borrows from mom, his sister and the customers themselves. If any one of those sources of financing stopped, Salesforce’s cash flow would be negative. So it is fair to say Salesforce is being sustained through borrowed money and is not self-sustaining with its current activities.

Even if Marc stopped buying comics and stands, maintenance of the existing stands runs at seven cents per lemonade which still requires financing to cover. The obvious way for Marc to make the lemonade stands sustainable is to print less posters and bring marketing and sales into line with the rest of the industry. To date, Marc has been more focussed on market share than sustainability.

Conclusions

Another year and Marc is still borrowing to stay in business. With marketing and sales costs as high as they are, I cannot see this changing in the short/medium term. For me, this is the source of the problem for Salesforce and, even at the current rates of reduction, will not be under control for at least 15 years. This is a long time for his sister (the share market) to hold faith in Marc’s vision. This becomes even harder when Forrester is now suggesting Microsoft’s lemonade is better.

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