Is it time for your software company to switch from QuickBooks? Compliance / Vendor Specific Object Evidence of Fair Value / Business Intelligence / Scalability / IT Expense (The Case For Netsuite)

Kevin Lalor for Bi101 writes: 

Compliance

In 1965, the Byrds released their hit song “Turn! Turn! Turn! (to Everything There Is a Season)” and were rewarded with international recognition. The lyrics from the song are inspirational, which may be attributed to the fact that they are almost completely taken from the Book of Ecclesiastes in the Bible. No matter where the inspiration comes from, the message regarding a “time” and a “purpose” for “everything” resonates not just in life, but also in software. Looking at the life of a software company, it should be recognized that there is a time and purpose for QuickBooks and a time and purpose to change QuickBooks. At Bi101, we believe that when software companies are required to comply with FASB software revenue recognition rules, it is time to “Turn, Turn, Turn.”

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“A time to be born”

As a software solution, QuickBooks was designed to help small business with their accounting needs. By focusing on the problems of their target audience and adding helpful features throughout the years, they have been able to corner somewhere between 80%-90% of the small business accounting market.

More specifically, QuickBooks is a bookkeeping system. It allows small business to track sales, generate invoices, and perform payroll. For most small companies, it is the right software at the right price.

This is also true for small software companies. Most early stage software companies use QuickBooks because it is easy to hire skilled workers that are familiar with the system, thus cutting down on training costs. In addition, the software provides all of the basic accounting needs for the startup including payroll services, monthly reporting, and some general ledger capabilities.

But what happens when a small company grows up?

“A time to build up”

Hopefully within the software company’s life, a tipping point will be reached and there will be momentum to grow the business. With this momentum, there will be new demands on the accounting group including new compliance requirements.

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To grow into a large software company, a firm will need capital. And to obtain capital, it will need to produce GAAP complaint financial statements. And to produce these statements, it will need to comply with FASB software revenue recognition rules.

Unfortunately, QuickBooks is not equipped to handle FASB software revenue recognition rules. Of course, a firm could always choose to calculate revenue schedules using a spreadsheet, but eventually this will either be too cumbersome or will require the hiring of additional full time employees.

Besides FASB software revenue recognition rules, QuickBooks was not designed to produce GAAP complaint financial statements. To produce these statements, a firm will have to purchase an additional reporting package.

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QuickBooks may have been a good solution in the beginning, but now your software company is growing.  QuickBooks is not really able to grow with the company. It is time to switch to something better. If you are interested in learning more, please contact us.

As we have noted in this posting, one main indicator that it is time to switch from QuickBooks is when investors, bankers, and vendors are requesting that firms comply with FASB software revenue recognition rules. But there are other indicators as well. Tomorrow, we will cover vendor specific object evidence (VSOE) as another indicator that it is time for your software company to switch.

Vendor Specific Object Evidence of Fair Value or VSOE.

Recently, I overheard a conversation between an entrepreneur and his mentor.  The entrepreneur had an idea for a company but was concerned about the legal framework necessary to be in business.  The mentor told this young man not to be concerned about business cards, incorporating, or any other compliance activities until he actually had a customer and a proven model.  Once these were up and running, there would be plenty of time to think about the legal and compliance framework necessary for business.

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Some software founders may have received this same advice for their company.  Based on this advice, the founders may have purchased QuickBooks and began to record their accounting transactions within its databases.  However, the company may now have reached a point where compliance is more valuablethan the cost savings of noncompliance and it is time to migrate off of QuickBooks.  To illustrate this point, let’s determine the costs/benefits between compliance and noncompliance regarding Vendor Specific Object Evidence of Fair Value or VSOE.

Benefits of VSOE Noncompliance:  The main benefit of not complying with the revenue recognition rules regarding VSOE is the cost savings.  These cost savings may include software expense savings since the business will continue to use QuickBooks instead of a GAAP compliant system.  Other cost savings may include not having to hire additional full time employees to track VSOE within a spreadsheet.

Costs of VSOE Noncompliance:  Investors, Bankers, and vendors desire to work with businesses that are financially stable.  All of these groups are usually willing to take a discount in some form (lower interest rate, better terms, etc.) because financial stability lowers the risk of interaction.  Companies that choose not to comply with VSOE revenue recognition rules should expect the cost of capital to be more expensive since they cannot provide proof of stability.

Benefits of VSOE Compliance:  As noted above, software companies that comply with VSOE rules should expect a discount for cost of capital.  However, there are even more benefits than lower borrowing costs.  By establishing VSOE, software companies have created a tight band around pricing.  Based on the bell curve approach, to maintain VSOE the final price cannot move more than +/- 15%.  This reduces the amount of discounts that are given to customers too freely by the sales team.  In addition, VSOE compliance can make the company an attractive merger or takeover target if the founders are interested.

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Costs of VSOE Compliance:  VSOE compliance is complicated and will require some cost outlays to obtain.  If management insists upon staying with QuickBooks, the accounting group may have to increase their employee headcount so that they can properly track all of the proper calculations within spreadsheets.  Or, if the company is ready to switch from QuickBooks, they may have to spend some capital on purchasing a new system.

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In our opinion, the benefits of VSOE compliance clearly outweigh the costs of compliance and the costs and benefits of noncompliance.  For managers that are weighing the costs and benefits of staying with QuickBooks verses moving to another system, you might want to consider NetSuite.  Besides all of the above mentioned benefits of VSOE compliance, other cost savings include a reduction of IT costs since the system is cloud based.  

Business Intelligence

Business decisions are made in many different ways. Some managers make a decision based on their “gut.” Others prefer to gather inputs from multiple individuals and evaluate the best alternative. Still others prefer to wait for some divine inspiration to lead them down the right path. However the decision is eventually made, the root of the decision is based on data inputs. Managers receive data, process the information, and then respond to the data with a decision. To be better decision makers, managers need to be aware of the source of their data. Those software companies running QuickBooks may find that the data supplied from the system isn’t sufficient to support whatever decision making process managers use.

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Data Provided by QuickBooks

When it comes to obtaining the appropriate data, there are two major flaws with QuickBooks . First, the system is extremely limited in the amount of information that it stores. For example, when tracking software revenue recognition within QuickBooks, the only information captured within the system is the revenue journal entry. The system cannot track vendor specific object evidence calculations, track revenue recognition schedules, or automatically book revenue when milestones are completed.  With QuickBooks, tracking software revenue recognition is done in spreadsheets outside the system.

Another example is when a customer contacts billing regarding a project status or invoice. Instead of pulling this information up within the system, account managers have to search through multiple spreadsheets to provide the requested information. Since the necessary information is not stored directly within the system, retrieving information can be extremely cumbersome.

The second major flaw with QuickBooks is that all data has to be entered manually. If a customer changes their contact information, a clerk is required to type this information into the system. When a vendor changes an address, this has to be updated manually as well. The amount of manual input into the system and the time it takes to update this information means that some of the data within the system may be inaccurate or just wrong.

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The need for Business Intelligence

For software companies, the information necessary to make business decision is not in QuickBooks but is buried within other applications and databases. To gather the right information, employees must spend time gathering it in from disparate locations.  If you have reached the point in your business where you are spending time looking for business intelligence, it is time to switch from QuickBooks to a system that can provide the following:

• Real Time Information – Information loaded through a batch job is too late. To gain a true competitive advantage, managers need access to information in real time. With real time updates, account managers know the specific details of a project down to the minute and can inform clients of the current status.
• Workflow Automation – By automating business processes, employees are free to focus on other tasks while the system handles the transactions. The best example of this is in regards to software revenue recognition. Using the right system, software revenue recognition can be automated and revenue is recognized by the system when milestones are completed.
• Self-Service Information – Instead of manually updating the information, it would be easier to allow customer and vendors self-service access. By outsourcing the data entry process to the customer and vendor directly, your internal employees are available to perform tasks for your company.

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Better decisions can be made with business intelligence. For those software companies running QuickBooks, getting the right data from the system to make those decisions may be difficult. If you are interested in learning more about a system can provide automated software revenue recognition and better business intelligence, please contact us.

Today, we focused on the benefits of business intelligence and automating software revenue recognition.  Tomorrow, we will discuss scalability as another sign that it is time to migrate from QuickBooks.

Scalability

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.”

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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.

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• 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 aboutGAAP 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. 

IT Expense

There is a famous tale from India known as the blind men and the elephant. In the story, six blind men touch parts of an elephant to find out what it is like, but each one only touches one part. When they compare notes, one describes the tusks while another describes the legs, tail, head, etc. In the end, a man with sight has to describe the entire elephant in order for the blind men to understand the “big picture.”

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When it comes to understanding the IT cost of supporting QuickBooks, most software companies are like the blind men. They may claim they understand how much it costs, but they are only describing a part of it, primarily the licensing cost. If they were to step back and see the big picture, they would realize that the direct IT expense for supporting QuickBooks must include network connectivity, availability, security, database management, and backups/restores. The indirect IT expense for supporting QuickBooks may also include manual labor hours, contractors, time tracking systems, revenue recognition software, and any other additional systems that integrate directly with it. When looked at from the “big picture” perspective, QuickBooks can be a costly implementation.

To illustrate the point further, let’s examine the cost of the revenue recognition process under QuickBooks and the “big picture” required to support this process. The first expense that should be recognized is QuickBooks’ licensing expense. Since QuickBooks is the system of record, it is required revenue recognition software. However, as we have noted here previously, QuickBooks is a bookkeeping system and only records the final revenue calculation. The actual revenue recognition schedule is probably tracked somewhere else like a spreadsheet.

The expense of spreadsheet software is probably minimal and would be purchased anyway, so this is not an actual expense. What can be recognized as our second expense is the manual labor required to calculate and track the revenue recognition schedule. Depending upon the size of the software company, this may be performed by two or three additional accountants within the finance department. These accountants may dedicate upwards of 75% of their time tracking calculations like VSOE and determining when project milestones have been completed so that revenue can be recognized.

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The third expense that should be included in our “big picture” is a percentage of the time the IT department spends on security and backup/restores. If QuickBooks and other revenue recognition software were not in place, then these additional expenses would not be required.

Once companies understand the “big picture” in regards to the expense of their QuickBooks implementation, they also realize that they have been paying a high price for minimal functionality. QuickBooks does not provide workflow, revenue recognition software automation, and business intelligence of any kind. And yet it is expensive.

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When software companies look at the “big picture” around IT expense, they realize that it is time for a change. Overpaying for minimal functionality is a poor business decision, especially when there are alternatives.