All You Need To Know About Accounting for IT Business
05

Mar 2020

Starting an IT Company is hard work but neglecting accounting while concentrating on business development, marketing, and other such departments can be fatal. You can as well say a robust infrastructure based on marketing, operations, and accounting is a vital part of starting up an IT firm, regardless of its size and demographics. If you are not a number cruncher, it may be a task for you. But do not worry, as we are going to give you tips on doing that task well.

Many start-ups fail because they do not concentrate as much on financial and cost models. It is essential to have a track on your capital, expenses, and where to make changes. Having basic knowledge about general accounting helps IT sector entrepreneurs run their business more efficiently. The essential accounting tips mentioned in this blog can help you cover your accounting base before moving to the next step.

Before jumping over to the tips, let us know what different types of issues an IT company faces than any other company.

Accounting Issues in IT Companies

●Choice of Entity Type

IT start-ups often start as flow-through entities (like LLC) to enjoy the flow-through of tax credits and losses, provide maximum flexibility in an exit transaction, and avoid the potential for double taxation. But they later realize that it is more advantageous to convert to other entity types to accommodate a significant venture capital or foreign investments. Some other times, IT business owners find it more advantageous vice-versa.

●Capitalization of Software Development Costs

GAAP (Generally Accepted Accounting Principles) provides for software development costs to capitalize from the time in which technological feasibility is established until the point of products’ global launch. Tax rules generally permit these costs to be immediately capitalized or expensed and amortized, at the taxpayer's election.

It is also befitting to mention here that just like tax-basis financials, GAAP financials are structured to please people outside the company. GAAP does a better job of producing useful financial reports for an IT entrepreneur, but more often than not, not a good enough job.

●Revenue Recognition

As software sales often have a very high margin and an establishment may have infrequent but substantial sales transactions and continuing obligations after the initial delivery, complex rules govern the revenue recognition timing from the sales. These regulations usually operate to defer revenue recognition. Such may be beneficial to minimize the company’s cash outlay for income taxes but undesirable from GAAP perspective.

●Qualified Retirement Plans

To attract and retain talent, many IT sector companies need a qualified retirement plan. Such plans permit immediate tax deduction to the company while providing the employee with potentially a very long-term tax deferral.

Tips to enhance your IT Business with Accounting

1.Establish Financial Goals

One of the significant business activities includes establishing smart and logical financial goals around your IT business model. Financial milestones help you stay on track and make necessary increments for constant growth.

Setting and achieving small goals along the way gives you the confidence to hit the larger goals you set for the long-term. Having business advisory services may give you a better idea to make improved decisions.

2.Hire Experts

IT start-ups function in a high-frequency environment and may forget or skip crucial business steps along the way. Financial and accounting professionals can help in developing performance evaluations, financial investigations, and do business health checks to keep the company in line. Hiring experts or outsourcing such experts can make entrepreneurial duty less stressful, and help the founders focus on the vital business decisions.

3.Automate Manual Tasks

In the operational part of a company’s journey, there are always manual tasks which can be automated. Accepted that specific jobs must be handled manually, but to ensure consistency, increase efficiency, and save time and energy, automate as many routine tasks as you can.

Services like IIFT are available online to help your business achieve its automation goals. Having a reliable software infrastructure will save a lot of money and time, especially accounting, preventing manual errors.

4.Research Tax Law

Nothing else sinks an IT start-up’s budget faster than a fit bill from the Tax Department. Every particular aspect and process of your business, ranging from an operating structure to tax deductions must be placed in focus while you prepare for tax returns and cash flows. Having an idea about tax implications for your business allows you to make choices. The choices include spending and allocating liquid capital. An important step may be to have a word with a legal and tax consultant expert to advise for your business.

5.Ask Questions

If there is anything that you have doubts or queries about the financial or any statutory functions for your company, asking questions and having a word with experts is the way to go at it. Having a secure grip on the subject topics of your start-up is not enough to witness financial growth for the future. Expert services are readily available to consult and outsource anytime. At Jaxa Chartered Accountants, there is an efficient team of experts to solve all your business problems. We also provide a range of other services. To know more about all the services, contact us- we’d be happy to help.