Last Friday, the television show “Shark Tank” returned to the small screen for a fifth season. For those of you unaware, the show allows entrepreneurs to pitch their business in front of America and five investors, or “sharks.” The sharks consist of wealthy individuals that have made fortunes and are now investors in other companies. The show is interesting because it allows people to learn more about what investors consider to be important in a business. One of the key questions that the “sharks” ask the entrepreneur is whether or not their business is “scalable.”
When most business talk about scalability, they are usually talking about scaling sales. However, scaling a business means adjusting everything within a business to handle new customers including sales, compliance, and management reporting. Software companies that are still running QuickBooks will discover that the software cannot scale with their business in the following ways:
- Sales: QuickBooks is usually a desktop application connected to a database. Under this configuration, users are actually limited in the amount of customer information they can store. When the database is filled up, no more customer information can be entered.
- Compliance: We have noted previously that it is important for software companies to produce GAAP financial Statements if they are interested in working with investors, bankers, and vendors. In producing this information, the company needs to follow GAAP revenue recognition procedures and provide audit trails that capture the identity of the individuals entering the transactions. Currently, QuickBooks cannot comply with GAAP revenue recognition requirements meaning that most calculation are performed in spreadsheets. These spreadsheets are not equipped with the necessary audit trails.
- Management Reporting: As a business scales, more demands are placed on the financial system to provide management reports. With QuickBooks, the system is limited in the number of users that can access the system at any one time. With these limitations, access cannot be granted to managers to perform their own self servicing of reports.
To illustrate the importance of scalability, let’s examine further the GAAP revenue recognition rules. One of the difficult things about these rules is that they are constantly changing. GAAP revenue recognition rules for software companies began with SAB 104 and then became more complex with SOP 97-2. Even today, the rules continue to evolve with the announcement of the FASB and IASB joint statement on revenue recognition.
Since the majority of Intuit’s customers are not software companies, QuickBooks is not concerned about GAAP revenue recognition rules for software companies. They are not going to make adjustments to the software that will help software companies scale their compliance efforts. Instead, software companies are forced to use spreadsheets to try to be compliant. This may actually be worse since spreadsheets are less scalable then QuickBooks.
A system like NetSuite may take away some of the difficulties of scaling a business. NetSuite offers unlimited database size, audit trails, and built in GAAP revenue recognition rules. It also offers a suite of management reports that can be automated and updated in real time, and grants multiple users access to that data. If you are interested in learning more, please contact us.
Tomorrow is the final article in our series, “Is it time for your software company to switch from QuickBooks?” In the final post, we will be reviewing IT costs and their relations to QuickBooks.