Technology businesses strive to deliver innovative products to succeed in a volatile and competitive marketplace. At the same time, they must manage their finances according to legal requirements, create reports, oversee research and development (R&D), raise capital, and engage in mergers and acquisitions. Strategic planning and financial transparency are crucial to success in this industry. This blog will explain what accounting for technology companies is and how to implement it in your organization.
Accounting features of technology organizations
Many tech business owners have concluded that their finances differ significantly from accounting in retail and other industries. Consider the main factors that affect the economic sector of enterprises:
- Cash burn: A lot of tech firms plan to scale quickly by raising outside capital to develop products and implement marketing campaigns. Such expenses are usually funded by venture capital funds or debt capital. A company needs robust accounting processes if it plans to raise a lot of outside money.
- Cost structure: Technology organizations have high fixed costs, while variable spending dominates standard companies. Regarding technology firms, the most critical sources of capital flight are general, administrative, and technology costs, not the cost of goods.
- Different parameters of prosperity: When analyzing the activity of large organizations, profitability is not the primary indicator of success; this often means the enterprise is not allocating sufficient resources to expansion. To ensure precise bookkeeping, tech firms must choose key performance indicators (KPIs) that measure progress fairly.
Accounting for technology companies requires a deep understanding of financial transactions and industry bookkeeping standards. By managing these activities effectively, organizations can improve their financial performance and make more informed decisions.
How to make technology industry accounting
Forming a flexible and reliable financial system is a crucial element of any business, especially if it is a fast-growing technology enterprise. As of 2022, the market value of the US technology industry has reached $1.8 trillion. It is expected to rise by another 4.5% in 2023
The owners of such a business should not consider investing in the formation of a finance department as something that they need to do only to satisfy investors. It is an excellent opportunity to improve business management. Let’s look at a few optimal practices that technology enterprises should know when doing technology industry accounting.
Using GAAP reporting and accrual accounting
Dealing with GAAP financials is a sign of economic maturity and a path to obtaining more data on a firm’s financials. GAAP is a system of bookkeeping norms that a company must adhere to. Many investors require technology firms to meet GAAP standards after reaching a certain level of maturity.
Accrual accounting is a core part of GAAP. If a firm implements such technology, it should recognize revenue as it is realized. When we speak about technology firms with long-term agreements, accrual accounting provides the accounting CFO with a more exact view of the current economic position than simple cash analysis.
Creating a balance sheet
The balance sheet is one of the most critical documents for technology companies as it provides information about the physical assets that the organization owns. Accounting can be especially difficult for technology companies that have to deal with many intangible assets.
Technology firms may have difficulty creating such a document due to the nature of investing in new products. On the front-end, they must invest heavily in creating state-of-the-art software.
However, even if profit occurs, they do not receive significant income from the sale of such a product. It affects the balance sheet as it can be seen that the organization spends more than it gets. The accountant who deals with your finances must understand this feature of the technology market.
Making a checklist of the most important KPIs
Not all KPIs that a technology firm utilizes are GAAP measures. Many GAAP indicators are irrelevant to a rapidly evolving technology organization. In the technology industry, we recommend using the following efficiency parameters:
- monthly or annual regular income,
- burn rate,
- cash runway,
- the cost of attracting one client,
- number of clients,
- the average yearly cost of the contract, etc.
Such parameters provide a more accurate understanding of how the company moves towards its goals.
Effective payroll management is another critical activity in accounting for technology companies. Hiring suitable candidates can be difficult due to fierce market competition and a lack of technical expertise, so you will likely incur high costs in hiring experts.
If you decide to do your own payroll, keep in mind you will need to calculate staff remuneration, control public holidays, keep track of legislative changes, and maintain accurate records, which creates additional stress.
Cooperation with an outsourcing organization
Forming an economical structure can be a daunting objective for a technology enterprise owner who prefers to concentrate on growing the firm and developing new products.
Therefore many tech businesses outsource their bookkeeping to an outside provider that guarantees access to well-established accounting procedures, proven economic leadership, and qualified staff. We recommend you consider outsourced accounting to ensure the prosperity of your tech enterprise.
The importance of accounting for technology firms
In the field of technology, things are changing rapidly. As your business grows, the need for accurate and up-to-date financial reports increases, which means you need to partner with professionals who understand and share your goals and have industry-specific knowledge to achieve them. Consider other benefits of quality bookkeeping in the technological area:
- Cash flow management: maximize capital flow, visibility, and monitoring by moving from budget to actual documents and a structured accounts payable process.
- Development capital: with sound economics, you can access standard bank lines of credit at better rates than a short-term loan.
- R&D control: maximize your tax deduction by accurately controlling your R&D spending and time throughout the year.
Whether it’s an enterprise pre-investment or a recipient of seed funding, professional accounting, cash flow management, and efficient use of workforce and experience become increasingly essential to expand an organization’s growth potential as the business rises.
Key accounting challenges in the technology sector
Technology enterprises face challenges ranging from raising capital to scaling and maintaining products in a volatile industry. Technology firms need to monitor their bookkeeping and keep an eye on tax laws to avoid problems with the IRS and audit. Most often, such enterprises face the following issues:
- Dealing with revenue: the technology sector often implements subscription-based or software-as-a-service (SaaS) business systems, making revenue recognition difficult. Revenue recognition directives require firms to record capital inflows at the time of earning, not when the money is received. In SaaS implementations, revenue must be recognized over the life of the subscription, which requires complex calculations and can change financial statements.
- Intangibles: technology enterprises are dependent on intellectual property, including patents, trademarks, and copyrights. Such resources can be challenging to value and account for, and their price can fluctuate dramatically. Tech organizations must have a complete understanding of the current price of intangible assets and their accounting features.
As we can see, bookkeeping tasks in the technology industry require specialized knowledge and skills. Interacting with experienced economic experts is vital to ensure compliance and effective financial management.
The American technology field continues to grow rapidly, with hundreds of startups springing up each year to meet increasing demand from businesses and users. Not all of them survive, often because they cannot cope with the massive amount of work. Don’t let this happen to your organization.
BooksTime offers accounting for tech companies, creating a solid foundation for your organization’s prosperity. Our professionals will ensure you avoid unnecessary expenses and maximize gains.
As your enterprise grows, make sure your bookkeeping is not left behind. Take advantage of our advanced financial services!