All startups face several financial challenges. Yet when it comes to tech companies, there are additional factors to consider. These include the highly competitive market, an inherent focus on research and development, and the possibility of tech obsolescence. For both startups and existing tech companies, robust financial management is the key to ensuring compliance and a healthy bottom line.
With the help of accounting software like QuickBooks, and the expertise of a CPA, you can avoid falling victim to the common financial challenges in the industry, and master financial management for your tech startups and companies.
Managing Cash Flow for R&D Projects
In the competitive tech industry, R&D projects are of paramount importance to ensuring that your business stands apart. However, the expansive nature of such projects can lead to problems with cash flow management.
Traditionally, project planning is divided into five stages:
- Brainstorming.
- Creating prototypes during concept development.
- Bill of Materials (BOM) planning, including labor costs, direct project costs, indirect overhead costs like utilities, IT infrastructure and admin overheads.
- Project funding approval.
- Stakeholder partnership and project forecasting.
With so much happening during R&D project planning and resource allocation, it’s no surprise that cash flow and financial management for tech companies are challenging.
When you add possible irregular income patterns due to diverse funding sources and the use of subscription models, cash flow predictions can become extremely complicated. This may pose challenges to budgeting, create an over-reliance on credit, and can even affect your tax obligations.
To rectify this, it’s important to create a detailed budget, while carefully monitoring your expenses and making informed forecasts. However, without access to variables like market conditions, and historical data, forecasting becomes problematic.
In addition, diversifying your revenue streams while keeping an eye on when to pay taxes (and how much) can go a long way in ensuring cash flow stability.
This is where efficient bookkeeping and accounting come in.
QuickBooks can revolutionize your bookkeeping
With features like automatic transaction categorization and bank reconciliation, QuickBooks can help your business eliminate the need for manual data entry, reducing the risk of errors. The software also offers real-time financial visibility of cash flow statements, ensuring that you can accurately track all incoming and outgoing revenue.
Moreover, by automating tasks like sending recurring invoices and tracking your expenses, QuickBooks allows you to easily monitor and manage your cash flow. Importantly, this can also help you with tax preparation.
Enlisting the assistance of an accountant can be greatly advantageous in the minefield that is business tax. Not only can CPAs help you with year-end tax planning, but they can help you monitor federal and state tax obligations. Considering that tax laws are always evolving, your business must be tax-compliant. Knowing how much money should be allocated to taxes can help you avoid IRS penalties.
By ensuring that your financial reporting is up to date and compliant, an accountant can help you make use of available R&D credits. These credits could help your company establish a new source of income that is traceable during cash flow calculations.
Despite this, adequate financial management for tech companies also has ramifications for businesses seeking to scale up.
What about operations scaling?
Many tech companies don’t have what is considered a ‘traditional structure’, which can complicate scaling. After all, scaling up requires more than just more manpower. It can mean you need more equipment, technology and infrastructure.
As such, operations scaling in the tech industry requires meticulous planning – especially when it comes to your finances.
One of QuickBooks’ most compelling features is its scalability and flexibility, offering advanced features and integrations that can grow with your business. This includes expanded roles and permissions, as well as advanced charting and reporting capabilities. The company has also created a platform for accountants called QuickBooks Ledger, to make the most of CPA partnerships.
With the help of an accountant, you’ll also have access to growth strategies, including plans for depreciation and amortization (or writing off costs). That way, you can ensure healthy cash flow management.
Another unique challenge to the tech industry is the nature of trading. Many tech businesses sell digital assets like software or provide services on a subscription basis. As a result, revenue recognition can become increasingly complicated.
Revenue Recognition for Software and Subscription Services
Unlike companies selling goods and one-time services, subscription- or license-based sales in the tech industry use a unique financial model. You see, subscription revenue often accounts for up-front payments received for monthly or annual services, so it’s not always immediately deliverable.
Naturally, this affects revenue recognition in tech accounting. For example, a monthly subscription of $10 means that your business can only officially recognize a daily fraction of the total fee. In this example, that would be around 33 cents. The remainder of the $10 fee is considered deferred revenue.
Cancelation of subscription services also poses a problem. For instance, your company might have a no-refund subscription contract in place. When a customer cancels their contract during this period, any deferred revenue on that account is earned immediately.
The intricate nature of subscription services means that you’ll need accurate record-keeping and data integrity. Moreover, it requires accounting software with cross-functional collaboration that automates revenue recognition.
How QuickBooks and a CPA can help
Automating and streamlining your accounting processes with QuickBooks can save you time, and make financial management for tech startups and companies easier. This is especially true with regard to third-party integrations. By connecting QuickBooks to e-commerce platforms, CRM systems, and payment gateways, you’ll have access to collaborations to streamline your revenue recognition.
For more complex transactions, or to stay informed about regulatory changes impacting revenue recognition, working with an accountant is the best solution.
CPAs can help your business comply with Accounting Standards such as IFRS 15, which outlines how and when revenue should be recognized.
Apart from revenue recognition, one of the most important aspects of financial management for tech startups and companies is how to handle investments and funding.
Handling Investments and Funding Rounds
One of the primary challenges to startups in any industry is securing funding. In the tech sector, this often takes the form of funding rounds. With funding, your tech startup has access to cash for growing the business, building your brand, or attracting more investors.
Understanding funding rounds is therefore beneficial for business success. There are four main kinds of funding rounds:
- Seed funding: This is generally the earliest stage of funding. It is also typically the smallest round, for investments of $500,000 or less. This income helps startups to start operating without a massive amount of equity.
- Angel investors: Here, your startup approaches wealthy individuals to invest their own money.
- Venture capital: Such funding is provided by established funds, or firms that invest in startups. Usually, this means a larger investment from someone with experience working with a startup.
It’s worth noting that while these first three types of funding are advantageous, there is a downside. They may require you to give up a bigger percentage of your tech company than you would do in the fourth kind of funding.
- Initial Public Offerings (IPOs). In this instance, your startup sells company shares to the public. Although, this is only a viable option for established tech companies that have already experienced a significant amount of growth.
The impact of funding on accounting
Securing funding affects your bookkeeping. Firstly, it impacts your financial reporting, as you’ll need to distinguish between regular income, and capital investments. Secondly, it could come with terms that necessitate expert advice, like signing over shares.
With QuickBooks, investment reporting is simple. By setting up an equity account, you can record and track capital investments from various funding sources.
You may still need an accountant to help you with tax planning for funding, as well as guidance on transferring equity stakes.
At the end of the day, financial resources for tech startups and companies need to be meticulously managed for business success. Thankfully, the combination of QuickBooks and a CPA’s expertise can be a game-changer in financial management for tech startups. With these tools, you’ll be able to create a robust financial management system, no matter the size of your tech business.
Schedule a Discovery Call with one of our CPAs to help your tech company take financial management to the next level.
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