Venture Capitalists Want Your Software Company off QuickBooks
If your strategy to grow your business involves securing funding from a Venture Capital (VC) firm, one of the first things they will want you to do is move off of QuickBooks and on to a GAAP-compliant accounting solution.
While accounting is not your core business, it is an important window that outside investors can look through to understand your competitive position. VCs want to see you thinking, acting, and operating like a publicly traded company. This means they want to know your financials, forecasting, and reporting are reliable, accurate, consistent, and compliant with accepted practices — they want your accounting GAAP-compliant.
Why Generally Accepted Accounting Principles (GAAP)?
To make the US securities market rational for investors, the Securities and Exchange Commission (SEC) requires public companies to follow standard accounting practices, for instance they require companies to comply with GAAP (Generally Accepted Accounting Principles) as formulated by the Financial Standards Accounting Board (FASB). When companies employ GAAP, it makes their financial reports consistent and comparable so that key stakeholders (investors, creditors, etc.) can make informed financial, credit and investment decisions. GAAP compliance also helps ensure that your forecasts will be reliably predictive, helpful for you and your potential investor.
So it’s natural that when a Venture Capital firm is contemplating a significant investment in your enterprise, they prefer to review financials reported in compliance with GAAP. Also, because Venture Capital firms normally want to either take their investments public or sell them to other public companies, GAAP compliance becomes necessary.
While the goal of GAAP is to make your company’s numbers comparable and consistent, how does it differ from how you may keep your books today? Many small and medium size privately-held companies rely on simple accounting solutions such as QuickBooks. To be sure, QuickBooks has its place. But it isn’t designed to support full compliance with GAAP, and it can’t streamline important business functions as efficiently as more robust solutions can.
GAAP lays out procedures that help ensure data integrity that QuickBooks is not designed handle. Because QuickBooks doesn’t record all data changes, errors and irregularities may creep in. GAAP-compliant applications such as Intacct and Netsuite automatically audit for and log all changes and any irregularities. These audits can be invaluable if you need to troubleshoot any errors or investigate any outliers in your reports. And, when you look at it from the investors’ point of view, let’s face it: they want to know your system will help them detect not only errors, but any kind of fraud – they don’t know your company as well as you do.
While there are various practices that dictate when a company can recognize revenue, software companies operate under their own special — and especially complicated — set.
Why do software companies merit their own rule? Most software companies don’t just sell an application these days; they sell a package of goods and services as a solution. When your company writes a sales contract, it may include maintenance and support, training, a bundle of software and hardware, a software subscription – or some combination of these. And it is because software companies tend to bundle disparate deliverables into a sale that the FASB devised SOP 97-2 and what’s known as “VSOE.” VSOE is an acronym for Vendor Specific Object Evidence – and what is that?
VSOE is part of a complicated solution to a complicated revenue and business model. But what does it really mean? It means that there are specific rules about how you can determine the fair value of various components of your sale. And there are rules about when you can recognize different portions of the revenue in a contract that sells various combinations of software, hardware, and services.
Successfully streamlining and automating adherence to all of these revenue recognition practices also means that your company will be able to produce more reliable and comparable reports. You will also be able to produce more consistent and predictable revenue models and forecasts. And with consistent forecasts, you gain tools to help effectively manage your cash flow and pipeline. And while it is all necessary if you’re aiming for GAAP compliance, it also means QuickBooks can’t help you now.
Other Benefits of Moving Beyond QuickBooks
You can see that GAAP compliance can make your company more attractive to investors by making your books comparable, rational, consistent, and accurate. But when you move to a GAAP-compliant solution, your business may gain other advantages.
For instance, if you are operating – or planning to operate – under more than one tax authority, a variety of peculiar reporting rules may come into play. For instance, in some places such as New York and Florida, if you bill your clients for both software and services on the same invoice both are subject to sales tax – however if you bill the software and services on separate invoices, only the software is subject to sales tax. And that’s just one example. How can you be sure you’re in compliance with sales tax authorities? If you’re moving to a GAAP-compliant solution such as Intacct, you can integrate sales-tax tool sets that will automate, streamline, and audit sales tax compliance.
Another advantage to moving to a more robust accounting solution is the ability to integrate and automate renewals of maintenance and service and subscription sales. Small and medium size software companies using QuickBooks are often trying to manage their renewals on spreadsheets or by other labor-intensive, error prone methods that allow dates to slip and billing to become erratic. Not only can this forfeit revenue directly, inaccurate or confusing invoicing can also create a confusing and dissatisfying customer experience which may create lost revenue opportunities or even lost customers.
It’s clear that merging renewals management into your accounting solution – and so simplifying and streamlining the process is one way to curb revenue erosion and assure a predictable and satisfying customer experience. And with renewals being such a key function, investors want assurances that they will be handled efficiently.
Making the Move
While migrating from QuickBooks to a scalable, robust, GAAP-compliant accounting solution is by no means trivial; it is one that gives distinct advantages to businesses willing to make the change. It can introduce standard operating procedures that will make models of your business plan more reliable, help prevent revenue erosion, and make your company’s business more transparent and attractive to Venture Capital investors.
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