A Quick Guide to Accounting for Tech Companies

By Gene Godick | March, 31, 2023 | Technology / SaaS

An effective approach to accounting for tech companies takes a slightly different approach to that used by a more traditional business.

Of course, there are similarities. Tech companies, like all companies, have revenues and expenses. They have employees who need to be paid and customer invoices that must be collected. And ideally, they should abide by Generally Accepted Accounting Principles (GAAP).

There are, however, many nuances to accounting for tech companies. Tech companies often have entirely different revenue models, cost structures, and growth targets compared to more traditional businesses. Accounting can be complicated further by complex cap tables and ambitious fundraising plans, another characteristic of many tech businesses.

All of these distinctions, as well as many others which we’ll explore in this article, demand that tech companies work with an accounting partner that understands their business and the wider industry.

Many tech founders would agree that accounting isn’t exactly at the top of their list of priorities. But as we’ll see, that can be a mistake. By adopting best practices for accounting for tech companies, founders can unlock a wide variety of hidden efficiencies in their business and discover game-changing financial insights that change their growth strategy.

G-Squared Partners provides a wide range of outsourced CFO, accounting, and bookkeeping solutions to dozens of tech companies. Contact an advisor today to learn more about how we can support your business’s accounting needs.

Why is Accounting for Tech Companies Different?

The accounting process inside a tech company can be markedly different from that at a more traditional firm. We’ve already briefly mentioned a few of the factors that drive this, but it’s worth exploring them in a little more detail.

Here are several factors that make accounting for tech companies different:

Revenue Model & Revenue Recognition: many tech companies have recurring revenue streams that fluctuate according to a variety of different factors. This has implications for cash flow, there’s also the question of how to accurately report revenue in financial statements. Additionally, correctly recognizing revenue is a complex task for many tech companies. These businesses often negotiate annual contracts with customers and receive up front payments, but must only recognize this revenue as it is earned each accounting period

Cash Burn: many tech companies aim to scale rapidly, investing external capital in areas including product development and marketing in order to reach a critical mass. This spending is typically funded by venture capitalists, private equity funds, or even debt. When spending so much of someone else's money, it’s incumbent on tech companies to have reliable accounting processes.

Cost Structures: tech companies frequently have much higher levels of fixed costs than traditional companies, which often have more variable costs. In a tech company, the main expense lines typically include Selling General & Administrative (SG&A) costs and technology costs––not traditional Cost of Goods Sold (COGS) expenses.

Different Success Indicators: for a scaling tech company, profitability isn’t success: it’s a sign the business isn’t investing enough in growth. Effective accounting in a tech company demands an intentional selection of Key Performance Indicators (KPIs) that provide an accurate illustration of the business’s progress toward its goals.

Not every tech company is the same. In some, the accounting environment may be more similar to traditional firms, in others, it might be even further removed. Regardless, these nuances underscore the importance of taking an approach to accounting that’s guided by financial leaders with experience running accounting for tech businesses.

How Do Tech Companies Typically Approach Accounting?

In their early days, many tech companies take a fairly bare-bones approach to accounting. This makes sense: the company may be pre-revenue, not have a lot of customers, or simply have other, more pressing priorities.

This often results in the business using cash accounting, where the business recognizes revenue and expenses as cash flows in and out of the business. A simple Quickbooks setup is typically the only mechanism tech businesses use to track their accounting in the first phase of their growth.

However, once the business starts to experience traction and investors begin to inject external capital into the company, there’s an expectation that the business takes the required steps to establish a more mature accounting system complete with necessary internal controls. Let’s explore exactly what that looks like.

Best Practices for Accounting for Tech Companies

Building a scalable, robust financial infrastructure is a key part of building any business, particularly a high-growth tech company. But tech founders shouldn’t just see this investment in their finance and accounting team as something they need to do to comply with their investors’ wishes; it’s an invaluable opportunity to improve the management of the business.

Here are three best practices that tech companies should be aware of in managing their accounting.

1. Adopt GAAP Reporting & Accrual Accounting

Adopting GAAP financials isn’t only a sign of financial maturity, it’s a way to gain much more insight into the financial performance of a company. GAAP is a set of accounting standards that businesses can choose to follow. Often, investors will require tech companies to become GAAP compliant after a certain point, typically a Series A.

One key element of GAAP is producing regular financial statements: a Profit & Loss Statement, a Balance Sheet, and a Cash Flow Statement. Together, these documents help investors and executives understand how the business is performing. Bringing a business up to GAAP often requires tech companies to work with a contract CFO or outsourced accounting team.

Accrual accounting is a key component of GAAP. When a company adopts accrual accounting, it recognizes revenue when it is earned. For tech companies with long-term contracts, embracing accrual accounting enables leaders to have a much more precise understanding of future cash flows.

Accrual accounting helps a tech company to understand burn rate: a key metric for many tech businesses. By tracking accounts receivable and payable, leaders have a much more comprehensive view of their financial position than they would by just looking at their cash on hand.

2. Develop Meaningful KPIs

Not every KPI a tech company uses has to be a GAAP metric. In fact, the opposite is true; many GAAP metrics are not particularly relevant to a fast-growing tech company.

In addition to GAAP metrics, tech companies should also select non-GAAP KPIs that portray a more accurate understanding of how the business is actually progressing toward its goals. In the tech industry, popular non-GAAP KPIs include:

Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR)
Burn Rate
Cash Runway
Churn Rate (Logo Churn & Revenue Churn)
Customer Acquisition Cost (CAC)
Average Annual Contract Value
Number of Customers

Learn more about these KPIs in our Ultimate Guide to SaaS Business Accounting.

3. Partner with an Outsourced Accounting Firm

Building this financial infrastructure can be an intimidating task for a tech founder who tends to be focused much more on engineering or business development. Effective accounting for tech companies demands talented professionals, proven frameworks, and the experience to know exactly what success looks like.

Due to this complexity, many tech companies outsource their accounting to an external vendor. These outsourced accounting firms offer tech companies access to well-established accounting processes, proven financial leadership, and highly-skilled professionals.

G-Squared Partners: Experienced Outsourced Accountants to the Tech Industry

Unlocking the value that lies within any tech company’s financial environment begins with a mindset shift. Accounting shouldn’t be viewed solely as something companies must do: it should be viewed as a potential growth engine. With a more sophisticated approach to accounting, the leaders of tech companies can benefit significantly from access to real-time financial insights that enable higher-confidence decision making.

If you need support upgrading your accounting infrastructure, the team at G-Squared Partners is here to help. We bring over a decade of experience providing outsourced accounting and CFO services to leading tech companies, with an executive team that’s served in financial leadership positions at leading public and private tech companies.