Accounting for tech companies isn’t as straightforward as you may think. The industry has unique challenges that companies like yours face daily.
The complexities of your sector are far-reaching, especially when finances are involved. Here are some of the unique challenges of accounting for tech companies you should be aware of.
Claiming R&D tax credits
Although research and development tax credits offer support, they are also one of the challenges when it comes to accounting for tech companies.
In practice, R&D tax credits can help you either claw back some of the losses you make on a project or lower your corporation tax bill. When you decide to claim, though, you’ll need a full breakdown of how much the project has cost you in terms of eligible expenditure. Some things will qualify, such as tests and research, but tasks like marketing will not.
With the latest rules around claiming back on R&D, you’ll also have to give HMRC six months’ notice of your intentions to claim. This makes the process more complex and requires more legwork. An accountant can do this for you, so don’t panic.
Monitoring cash flow
Accounting for tech companies is multi-faceted. Due to the nature of your projects, you may find yourself receiving payment from a client before you deliver the product.
This can hurt your cash flow if you don’t properly report it. That’s why a lot of tech companies opt for accrual accounting methods.
This way, you stay on top of your accounts payable and receivable so you track all of the money going in and coming out of your company. This allows you to have a better understanding of future cash flows. This knowledge will be important if you need to apply for funding.
Focus on meaningful KPIs
In the tech industry, you’ll have specific key performance indicators (KPIs) to monitor. Some of these aren’t common generally accepted accounting principles (GAAP), but for tech companies that’s a good thing. Due to the nature of the industry, more modern measures are needed.
Here are some examples:
A burn rate for tech companies is a way of measuring how fast your business runs out of money. A positive burn rate means your company has spent more money in a set period than it has taken. A negative burn rate is the opposite; when you have more money coming in than going out (which is a good thing).
If you’re a software provider, it’s helpful to keep track of any existing and new users running your product. When you have an idea of your existing users you can calculate the demand and user growth rate. With this in mind, you can forecast potential future revenue levels.
Your runaway and burn rates often go hand-in-hand. Runaway is the measure of how soon your company will run out of money. Alongside your burn rate, you can calculate how quickly you’re spending and how many months you have left with the cash you currently have.
By tracking this every month, you can closely follow whether you’ll need to apply for further funding to keep things afloat.
We can help
There are several challenges of accounting for tech companies. With how complex the sector can be, it’s hard to keep up with the irregular cashflows and changing trends.
As an accounting firm that specialises in working with technology companies, we understand the pressure points facing your business.
If you need help accounting for your tech company, we’d be happy to help. Get in touch to find out how.