In previous posts, we have noted that over 90% of small business and software startups use QuickBooks for their financial management system. In the beginning, there are many good reasons for companies to choose QuickBooks. However, software startups should realize that just because they start with QuickBooks does not mean that they need to end with it. There is a very real question software startups have to ask themselves: given the complexity of revenue recognition and VSOE compliance, at what point should they consider a QuickBooks replacement? To determine the right time for a change, today we will perform a comparison between QuickBooks and NetSuite, particularly the advanced revenue recognition module.
In our comparison, we will first look at a compliance area and explain why software companies should be focused on it. We will then review each system and determine its effectiveness in addressing this particular compliance area:
GAAP Compliant Financial Statements – The purpose of GAAP financial statements is to present financial information in a way that it is easily comparable between companies. Investors, bankers, and suppliers are all interested in GAAP compliant financial statements. In addition, as companies grow, more compliance becomes necessary including audit trails, Sarbanes-Oxley, and user segregation.
System Results – Although QuickBooks can produce financial statements, they are not GAAP compliant unless the company has also purchased additional reporting packages. On the other hand, NetSuite was designed completely with GAAP compliance in mind and GAAP financial statements are part of the standard reporting package.
In addition, QuickBooks does not track audit trails and grants users access to all parts of the system. NetSuite, on the other hand, provides audit trails, limits user access, and provides both the financial and IT information necessary to help companies show external auditors that they are SOX compliant.
Revenue Recognition – For today’s software company, multiple element arrangements are the rule, not the exception. Software companies do not just sell a license anymore. They sell software, hardware, implementation services, and post contract support. According to GAAP revenue recognition rules, each of these elements has to be separated and tracked separately. As they are completed and delivered, the revenue can then be recognized.
System Results – As we have noted previously, QuickBooks does not track each element within a contract separately. Instead, revenue elements are tracked in a different system or in spreadsheets. On the other hand, NetSuite’s revenue recognition module does not just track each element separately, it automates it. Benefits of automation include increased productivity within the finance group and a faster month end close.
The other benefits of NetSuite revenue recognition module is that it can help companies track and establish VSOE. For software companies, establishing VSOE is the holy grail of revenue recognition compliance. When companies establish VSOE, they can more easily resist sales pricing discounts and they become a more attractive acquisition target.
There is no specific right time for all software companies to switch from QuickBooks to something better. However, if your company needs GAAP compliant financial statements and would like to automate revenue recognition procedures, it is time to switch from QuickBooks. Please contact us if you would like to learn more about NetSuite.