- Use an Accounting System: QuickBooks Online, Xero, among other tools are great systems to keep your tech companies’ finances organized and in one place. We love using QuickBooks because bank and credit card transitions directly sync daily. Care must be taken to categorize and classify transactions.
- Find a professional who understands tech startup nuances: Tech companies have nuances that other businesses don’t have so it’s important to find a professional who understands the ins and out of Tech Startup accounting and the formalities that are inherent with operating a corporation. These include issues such as issuing stock, recording convertible debt, SAFE’s, as well common stock, preferred stock, and stock compensation plans. Some companies are fortunate enough to have individuals in-house who can assist with these matters, however if you don’t it’s important to seek help to prevent costly mistakes.
- Document Organization: Having all your documents organized and stored in one place helps come tax time. This can be done in multiple ways however the way we find easiest is to setup an email address such as [email protected] and have all bills, invoices, and documents forwarded into this inbox. This will make searching for documents later a lot easier and act as the one place you’ll need to look during crunch time.
- Revenue Recognition: Most tech companies are on the accrual basis of accounting which means revenue needs to be recorded when it is earned, not when it is received. This is especially important for SAAS based companies that may charge upfront for subscriptions on an annual basis. Recording revenue in the wrong periods can have huge financial implications and tax consequences so it’s important to keep a Revenue Recognition schedule or use software that help your business track revenue correctly.
- Expense Recognition: On the flip side of revenue recognition is expense recognition which impacts how and when expenses are recorded. If you are paying for things up front like insurance or rent these need to be recorded as ‘Prepaid Expenses’ on the Balance Sheet and then amortized over the premium (for insurance) or lease term (rent) etc. Investors want to see GAAP based financials and at least an accrual basis of accounting so it’s important for startups to get into good habits early in how they track their expenses. In addition, some services such as hosting, think AWS – Amazon Web Services may need to be recorded as a ‘Cost of Services Sold’ instead of a ‘Software Expense.’ The key there is tech companies need to the track their ‘Cost of Services Sold’ in order to calculate Gross profit which is an important KPI (key performance indicator).
- SBA Loans/ Other COVID Relief: If your tech company was a recipient of the Paycheck Protection Program (PPP), Economic Injury Disaster Grants/Loans care must be taken to clearly identify these items on your financial statements in the right place. The PPP should be shown as a loan on the Balance Sheet until you receive notification of forgiveness from the SBA via your bank. The EIDL grants will need to be shown as ‘Other Income – EIDL Grant’ on the Profit & Loss Statement and should be clearly identified so it’s not included in taxable income as there is an exception.
We hope these tips help you as you finalize your 2021 books for tax time. This has been a challenging year, so getting professional help is key. Feel free to reach out to us if you have questions.