After a software startup passes $1M in annual revenue, the founders may actually pinch themselves and ask whether the whole thing is a dream. Meeting this milestone is an accomplishment worth celebrating, if only for a minute. However, it also comes with a whole new set of problems. For example, at the $1M in revenue mark, startups need to start concerning themselves with regulatory compliance issues like revenue recognition. In summary, they need to ask whether GAAP compliance with QuickBooks is even possible.
In yesterday’s post, we noted that by the $1M in revenue, the accounting department had grown from a single part time bookkeeper to a full time bookkeeper. Like 89% of small business, this bookkeeper was running QuickBooks as his desktop accounting software. However, recently he had found himself spending more time calculating revenue within a spreadsheet and then booking a single journal entry into QuickBooks. This process was not quick at all. Here was how he spent a typical day:
The sales team contacted him in the morning and informed him that they had recently sold a multi-element contract consisting of software, professional services, and post contract support. After that call, the CEO stopped by and informed him that the angel investor was pressuring him to show some revenue growth. He was wondering whether the revenue on the recent contract could be recognized this period or would it all have to be deferred until the different elements were delivered. He requested a report showing the revenue schedule for the recent sale.
The bookkeeper reviewed the reports in QuickBooks, but noted that there was nothing that showed revenue recognition on multi-element arrangements. He turned instead to his spreadsheets. Using the spreadsheets, he was able to create a report showing that vendor specific object evidence of fair value had been established on the software, but they still could not show it on the professional services or support. He created a simple report in a spreadsheet showing the revenue schedule for the three elements and sent it over the CEO.
One interesting thing to note about the bookkeepers day is that he was not able to generate the information requested out of QuickBooks. Instead, all the information he provided was from internal spreadsheets he maintained to support the revenue recognition journal entry in QuickBooks.
Within this example, GAAP compliance is a requirement because of the angel investors. Most investors prefer GAAP based financial statements because it makes the financial statements comparable to other companies. What this example shows is the degree of labor required to obtain GAAP compliance with QuickBooks.
QuickBooks was designed as a bookkeeping system and not to comply with all GAAP accounting rules. This is particularly true when it comes to revenue recognition. For software companies using QuickBooks, expect to spend more time calculating VSOE and revenue deferment in spreadsheets before transferring a final number into the general ledger.
At the $1M in annual revenue mark, the accounting department is probably spending more time in spreadsheets then they are in QuickBooks. At the $10M in revenue mark, QuickBooks has become obsolete. If you want to know more about whether moving off of QuickBooks is right for your company, please contact us. [subscribe2]
Tomorrow, we’ll look at what happens as a company moves from $10 million in revenue to $100 million.