Startup CXO. Matt Blumberg

Fun, fun, fun. Sales taxes are a complicated challenge and they become more challenging the longer you ignore them or put them off. Many companies, including ones I have been involved in, ignored the sales tax issue until the company became “bigger” because small companies really don't hit state radar until $100k or so in revenues as they trigger the amount in the Wayfair sales tax ruling. But if you do put it off, it can become a huge and expensive problem. States have become more aggressive as remote work has become more prevalent and recent court decisions mean that you have to pay sales tax in more states than ever before. Currently, if you are doing more than $100k (or 200 transactions) with a state, you will need to address sales taxes in that state. Some businesses may not have to pay sales tax, but again, states are becoming increasingly aggressive in their audits. One of the best things you can do is work with a technology partner to collect and submit sales taxes and integrate everything in your financial systems.

      One task that you'll do repeatedly—monthly at a minimum—is the accounting close. Having an organized monthly accounting close is an effective way to ensure you are working well with your partner or internal accounting team. Every company has a different close process but most efficient ones share a few things. First, create an accounting close checklist, something that's repeatable and that has each task and the responsible party that can be checked off as complete when done. You can set up a simple spreadsheet or you can also use a project management tool or accounting close software to help provide more information. As your company scales, it is helpful to move to a software solution which will ensure your visibility and accountability during the process as you grow. I have found this to be one of the easiest quick wins to put in place as you scale.

      Another item to include in your operational accounting system related to the close is a reasonable time goal each month. Of course, your goal will depend on resources, business requirements, and complexity, but it's always helpful to establish a goal. Say your goal is five business days. The organization knows that the Financial Planning and Analysis (FP&A) reports will not be done until after that five‐day period so this provides a bit of cover to your team. It also gives the team (or your partner) knowledge that if they're going to miss that deadline and need more time, they'll have to communicate with you to avoid surprises.

You may very well get “surprises” from time to time but, especially around the close tasks, you can manage that by creating effective lines of communication and by understanding the dependencies of your company. The accounting team will be dependent on a number of things in order to have an effective close, ranging from accrual information for services used by your company where you haven't received an invoice, to timely expense reports or sales closes. You may have to send reminder emails to others in your company or, better yet, have them involved in the actual closing checklist.

Accounting Rules Implementation

      Once you get the basics of your operational accounting systems, reporting, responsibilities, and approach set up, you'll need to tackle accounting rules. Generally, in the early days, you can get away with non‐GAAP reporting, but like many other things, you are putting off future cleanup and missing an opportunity to have the organization embrace generally accepted accounting principles or GAAP financial reporting. So even in the early days it's worth implementing basic GAAP and the following few areas are important to get into good shape when you're starting up:

       Capitalization of fixed assets. You can make capitalization a complex process or simplify it. I suggest simplifying it and the easiest thing to do is to choose a dollar amount and anything greater than that amount should be capitalized according to GAAP. For example, if you choose $2,500 as your limit, then any fixed asset like a computer or furniture would need to be capitalized. After doing an initial pass on fixed assets within the company (deciding what's above or below your limit) you can then quickly research GAAP guidelines on that type of asset for how long you need to amortize it. It is also helpful to maintain a fixed asset ledger and many accounting systems will do that for you. In addition, for software development, there is the topic of capitalization of software. I was always a fan of the simple approach of expensing as much as you can, especially for early‐stage companies. As the company scales, you may have to capitalize software development. The important things to keep in mind if you do this are: (1) alignment with your Board and investors, as there are implications on financial metrics; (2) to have a consistent and documented process so there is clarity and transparency (auditors will want this); and (3) close partnership with the Product Development team so the inputs to the process are understood and easily captured by the team, hopefully by using already existing processes.

       Accrual of annual pre‐paid and liabilities. Most startups will have a lot of systems they use to run the business. We had almost 15 within two weeks of starting Bolster, which is fairly typical of a startup. Many of these systems either require payment up front for a year or give large incentives to pay up front. If you do pay up front, you want to make sure you are creating a pre‐paid asset and then expensing 1/12 of it each month, rather than just expensing the entire payment. You also don't want to forget expenses you have incurred but not yet invoiced or paid, like legal bills, commissions, or bonus payments.

       Revenue recognition. It is super useful to think through revenue recognition as early as possible. Some more advanced financial systems will have deferred revenue recognition and modules tied to revenue received and billing but it's more likely as you start up that you'll create a spreadsheet as your revenue recognition schedule. To do that easily, create each row to function as a revenue schedule and include items like the client, invoice number, total amount, currency, etc. This way you will always be able to show a waterfall schedule for your booked revenue. It can also be helpful to have a related sheet for your planned invoices, so you can easily produce a number that represents the “booked but not yet billed” revenue. Depending on your revenue streams, it can also be helpful to break out revenue by type, for example, subscription revenue vs. transactional revenue.

       Stock compensation. Often in the early days, companies ignore stock compensation as part of their financials. That's OK because once a company goes through an outside financial audit, the audit firm will help them calculate the expense. But if you are using modern cap table software and performing 409a valuations appropriately, the software will be able to give you the monthly compensation expense with back up. So, it will save you time and money if you start to do this early on.

       ASC 606. ASC 606 is a framework developed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) for businesses to recognize revenue more consistently. It also ends up impacting sales commission expense. It considers the length of time of the service, if the revenue is transactional or recurring, and a number of other factors. It can also impact your IT systems, HR policies, and more so it is a good idea to research the implications for your business as early as possible and discuss the impact with your financial auditors.

       Sales commission. Sales commissions can be tricky from an accounting perspective. In order to be ASC 606 compliant, you need to consider a number of factors including service period, plan period, and client terminations. These factors can end up with some balance sheet implications since you are deferring the recognition of the expense. It might be helpful to use software to help make accurate accruals and help you work with your auditor.

       Sales taxes. While implementing and following GAAP rules early will save you a lot of hassle in the future, putting in sales tax collections processes will save you a lot of bother AND money. As I mentioned earlier, states have become a lot more aggressive in going after even small companies for improper sales tax collection. Your best bet is to find a technology partner and automate sales tax collection. This will save your team time and a partner focused on sales taxes will be able to keep you up to date on rates, rules, and regulations.

       Major expense categorization. Most companies as they scale start to care more about how their expenses are categorized, particularly high‐level categories like cost of goods sold (COGS), selling and marketing, research and development, and general and administrative. As the business grows and raises money through a series of rounds all the way to being a public company, investors and prospective investors will use these numbers (and changes to these numbers)