Software companies are businesses with the same needs as other businesses; they need the ability to purchase goods and services, pay vendors, service customers, account for activities, and report to stakeholders. In other ways, however, software companies have unique needs for specific software functionality and capabilities.
ERP for software and technology companies integrates financials with the unique accounting and operational needs of the industry, such as complex accounting rules for deferred revenue from sales, significant expenses with no income prior to product launch, project management requirements, and tracking capital from investors and reporting results.
Further complicating a software company’s business model is the fact that many in the market today are “start-ups” who most likely began operations recently and are dealing with the problems that accompany early and rapid growth. One dilemma for software start-ups is the product development stage; to build an initial product offering, they incur significant expenses while they have no incoming revenue.
Most start-ups solicit investors to raise the operating capital necessary to develop, market and sell their software(s), once developed. Keeping track of capital raised from multiple investors and reporting operating results to those investors requires sophisticated software that is beyond the capabilities of most “simple,” PC-based accounting software. During the start-up phase of software companies, cash management is critical to keep software development efforts on track and lay the framework for the distributor or affiliate networks needed to market, sell, and support the software product.
Even after launch, there are other complications.
Software is sold or licensed under a variety of contractual arrangements. These may include a perpetual license with periodic maintenance payments, a “pay as you go” annual or monthly subscription basis, or other market-driven pricing scenarios. In order to be competitive in the software marketplace, software firms must provide for all these acquisition terms for their customers.
In fact, the terms may be customer-specific, and they may vary by software product for each customer. This complexity requires that even start-up companies have robust and flexible software available to drive and manage their revenue growth from day one.
Software firms must also comply with complex accounting rules regarding sales activities, especially deferred revenue from sales as well as licensing activities. Accounting rules for deferred revenue impact both the Income Statement and Balance Sheet, and require transactions be recorded and balances adjusted in future periods. Properly managing deferred revenue transactions can require significant manual effort, unless the firm’s accounting software is sophisticated enough to automate such activities.
Most accounting packages available to small start-up companies are not that sophisticated.
Finally, there is the matter of investor reporting.
Start-up software firms usually have multiple investors who are naturally interested in the firm’s financial results, but they are also keenly interested in the impact of those results on their investment. So, not only do financial transactions need to be recorded accurately and in a timely manner, but the accounts need to be closed, and income or loss allocated to investor positions and reported to those parties.
Such transaction recording, allocation, and reporting requirements are well beyond the capabilities of most “basic” accounting software, and can place a significant burden on the accounting staff of the software firm or require outlays of much-needed cash for accounting services. At Acumatica we understand these needs and have designed Cloud ERP software and cloud accounting software solutions that specifically address them.
Why would we do that? After all start-up companies aren’t a very strong source of revenue in the short term.
Well, the truth is that not all that long ago we were a start-up: company, so we understand firsthand the pressures of cash management, the complexities of revenue recognition, and the need for timely, transparent reporting to investors. We lived it!
This is why we have initiated our “Smart-Ups for Startups” program, which combines software, implementation, and consulting services bundled together at a cost and terms to meet the unique needs of start-up software companies. At Acumatica, we believe that small start-up companies are the engines of economic growth and the harbingers of progress. Because who knows, the next Apple or Microsoft could be out there…and it could be you!
We encourage you to learn more about the program and reach out to contact us! You may also find it helpful to request an on-demand webinar explaining what Acumatica is all about.