Starting a new software company can be an extremely exciting endeavor. Once you have a great idea or system in place, you’ll be ready to begin taking the steps necessary to turn your ambitions into a reality. However, as you will soon discover, there are many different challenges that will emerge along the way. For some aspiring software firms, the first big challenge they encounter is bookkeeping.
While many business owners consider bookkeeping to be rather tedious, its importance cannot be overstated. With a clean, well-maintained set of books, your business will find itself in a position to make better decisions and improve its bottom line. Without adequately kept books, on the other hand, you’ll find yourself facing financial and even legal issues.
Though you are probably eager to invest in the “flashier” components of your business, such as the end product itself, do not forget to make sure all your finances are being actively and effectively managed. Some small business owners might attempt to initially manage their books on their own, but unless they have experience and training, these responsibilities will almost always need to be outsourced or directed elsewhere.
In this article, we will discuss the most important things for aspiring software companies to know about outsourced finance departments. By taking the time to understand the value an outsourced finance department can offer a given business, you can decide if making the decision to outsource makes sense for you.
What is a Fractional CFO?
A fractional CFO is someone who performs all of the ordinary functions of a chief financial officer but only works for a company for a fraction of the time. Most leading fractional CFOs offer scalable services, making it easy for your business to adjust as it changes size over time.
The most important role of a fractional CFO will be to balance the books and also prepare your company to pay all relevant taxes. Taking advantage of opportunities for write-offs and alternative sources of funding (such as those provided by the CARES Act , the Small Business Administration (SBA), etc.) will also help position your business for long-term success.
Fractional CFOs will help prepare your company’s most important financial statements. Typically, these statements include your balance sheet, your income statement, and your statement of cash flows. In the software industry, many companies’ most valuable assets will be intangible goods, such as patents, goodwill , and brand value. Having an outsourced, yet accessible finance team that is familiar with these bookkeeping nuances will be extremely valuable.
In addition to effectively managing your books in the status quo, an outsourced accounting and finance team should also help you prepare for the future. This includes planning expansions, preparing for sudden financial turbulence, and developing ambitious, yet obtainable goals. The more your fractional CFO can do to help your business upfront, the less likely you will run into unexpected problems later on.
How can Outsourcing my Finance Department Improve my Bottom Line?
The total cost of hiring a fractional CFO will depend on which outsourcing firm you choose to work with. However, fractional CFOs—as their title suggests—only cost a fraction of what it takes to hire someone to work in-house. Furthermore, the cost will usually be quickly recovered by the various improvements being made to your business’ bottom line:
- Better Tax Practices: finding ways to legally minimize tax obligations and find opportunities for saving can help your software business improve its profit margins.
- Cost and Revenue Allocation: strategically distributing your costs and revenues will ensure your business can continue to operate smoothly.
- Long–Term Financial Planning: your fractional CFO will not only help your business stay afloat in the short-term but also position itself for sustained success.
- Better Use of Time: by allocating your bookkeeping responsibilities to an outsourced expert, you’ll have more time each quarter to focus on the revenue-generating components of your business.
- Better Decisions: through the use of advanced metrics, mass data, and up-to-date information, it’ll be much easier to determine which moves are in your best interest.
Hiring an accounting and finance team is an essential part of growing your business. Unsurprisingly, the vast majority (85 percent) of businesses would recommend their outsourced partners.
Addressing the Unique Need of Software Companies
Of course, if your business is in the competitive software development space, you are going to want to hire an outsourced accounting partner that is familiar with the challenges unique to your industry. The best bookkeeping practices for a software company might often be very different from the best practices for a law firm or a retailer.
Some of the unique challenges faced by software development companies include:
- Revenue Recognition: due to the sale process, the complexities of sales transactions, and the digital delivery process, it can be difficult to know when revenue needs to be “recognized.”
- Intangible Assets: if your company holds any intangible assets, especially copyrights and patents, you will need to determine just how much these assets are worth.
- Early Losses: many software development firms will accrue losses for the first several years they are in business. Be sure to work with an accounting team that can help you manage these losses in a healthy way.
- Pricing Model: switching from a single purchase to a subscription pricing model—as many software companies elect to do—can create unique accounting and cash flow challenges.
- Regulations: as members of a relatively newer industry, software companies are often subject to a rapidly changing regulatory environment. Intellectual property rights, for example, are constantly evolving.
These are just a few of the occasions where working with a specialized software accounting team can be extremely beneficial.
The software industry is worth trillions of dollars and plays a major role in our economy. Starting a software company is a great way to provide value to the market and achieve your long-term goals. However, just because innovative software is always in demand, that does not mean succeeding in this particular space will be easy. If you want your business to be in it for the long-haul, be sure to build a qualified finance and accounting team. In many cases, this will require finding an outsourced accounting firm .
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