FINANCIAL SOFTWARE

There are several different types of financial software that will become necessary as you grow your company. The first will be accounting software that will help track cash and the expenses that you will incur, automate the payment of vendors and employees, and provide various managerial and financial reports required to monitor your business. The second is fixed asset software, which performs double duty as a better depreciation calculator than a tedious spreadsheet and as an asset tracking and identification tool. The third is equity tracking software that will not only aid in equity record keeping but also with the complex calculations required for audited financial statements.

ACCOUNTING SOFTWARE

As noted above, accounting software provides the means to track cash and expenses, automate certain redundant tasks, such as writing checks, and provide various financial reports. While it is not necessary for the entrepreneur to be able to analyze the various product offerings, it is important for the entrepreneur to be able to communicate to their accountant what types of financial information will be required from the software in order to manage the business.

Some points to consider are:

  • The target audience(s) for your reports. The investors will want to see the three common financials (balance sheet, income statement, and statement of cash flows) but in a summarized form. However, the software should be able to easily provide more detailed information for each financial statement line item to better provide explanations to the investors and to aid company management in their monitoring of expense activities.
  • The need for departmental reporting. At a minimum, you will need to segregate your company into a Research & Development department and a General & Administrative department. This will allow your tax accountant to be able to easily calculate amounts in order to claim research and development tax credits on your federal and state tax returns. As your company and management team grow, the need for departmental reporting will become more necessary.
  • The need for reporting against budget and the ease with which to make changes. The more budget revisions, the greater the need for a transfer utility to/from the budget source. While most all software programs provide a utility to input budget data and provide relevant reporting, the number of versions that can be tracked and the ability to upload/download budget data from a spreadsheet or budget software varies widely.
  • Your budget for accounting software. Don't overspend early on but don't skimp as your company grows. The first software you buy won't be your last. Your reporting requirements will change as you evolve, particularly when you consummate partnering or joint venture deals or expand into foreign countries and establish new entities. Your rate of growth will also have an impact. Beyond your initial stages, you'll want software that can grow with you.

You don't want to have to retool with new accounting software at every stage of your company's growth. Properly fitted accounting software will save you administrative expense.

  • The need for security. In a very small operation, minimal amounts of password security will be required. As the company grows and more people become involved in the various accounting facets, a more complex security structure will be required. Restricting access to certain reports, data, software modules, input windows, and even input fields may be necessary. Another security measure should include the inability to delete or alter previously recorded transactions. You don't want to find out your historical data has changed in the software from previously published reports without an audit trail as you are about to go public!

In turn, with this information and a budget, the accountant will be able to acquire the proper software. Following is capsule summary of categories of accounting software and their relevant price points. We will defer the discussion of the enterprise class of software (for large companies); when you're at that stage, your company's needs will far exceed those discussed above and the price points are in the six and seven figure range, with implementation costs approaching 2 to 3 times software costs.

  • Low End. This category includes the two leading products in their field: QuickBooks and Peachtree. Each comes in several flavors, come in single-user and multi-user configurations, and can be purchased at retail outlets such as Staples and OfficeMax. Costs will range from $300 to $3,000. Implementation costs will be ½ to 1 times the software cost. Other competitors in this area include BusinessWorks and Cougar Mountain. Watch for Microsoft's answer in this field, The Small Business Manager.
  • Mid-Range. This category includes several tried and true packages such as Great Plains, Solomon, MAS90, and Macola, which come in LAN and client server offerings. Their cost is not only dependent upon the number of modules required but also the number of concurrent users needed. Costs will range $20,000 - $80,000. Implementation costs will generally be 1 to 1½ times the software cost.
  • ASP. One attractive alternative to the significant cash outlay for a more sophisticated software package is to outsource its residence to a managed data center (ASP -- Application Service Provider) through the software reseller. You'll still have to pay for some implementation costs, though the cost should be less than with an implementation on your office server. You'll also need to have a high-speed data line to ensure reduced latency for your accounting staff as they enter transactions and run reports. Advantages include:
    • More rapid implementation; o Capable IT management of related hardware; o Regular software upgrades; o Remote backup; o No requirement for internal IT support; o Predictable monthly service fee; o A far smaller upfront cash outlay; o Flexibility to change your mind later on if you chose to bring the application in-house or switch applications;
    • Laptop users who have Citrix server software loaded can access the application wherever they can use a high-speed internet link.

FIXED ASSET SOFTWARE

During the early stages, companies typically maintain their capital expenditure information on a spreadsheet. For each asset purchased, the information would include the date purchased, the cost, the economic life, and a depreciation calculation for the required timeframe. The spreadsheet's maintenance can be a chore especially when a new depreciation method is required, such as for tax returns. A fixed asset software program is organized as a database and, with the better packages, can:

  • Calculate multiple depreciation methods, including proscribed federal tax methods;
  • Track non-accounting data such as location, serial number, component of, warranty dates, vendor, and several user-defined fields;
  • Provide a variety of standard reports such as a monthly depreciation calculation sorted by asset class;
  • Provide a report writer to generate a warranty expiration date report sorted chronologically, for example;
  • Provide the ability to easily provide necessary insurance reports.

EQUITY SOFTWARE

Like fixed asset tracking, stock and stock option tracking in the early stages of a company is usually done on a spreadsheet, which lists stock issuances sorted by type of stock, identifying percentage of company ownership, and a detail of stock option pool comings and goings.

However, since the early 1990s, required footnote disclosures in audited financial statements and the calculation of charges incurred by certain option and stock issuances posted to the income statement have become more complex. Unlike fixed asset tracking, which requires the use of relatively simple functions in a spreadsheet, stock option valuations require the use of complex mathematical models incorporating natural logarithms (remember them?) and normal distributions. Stock and option vesting schedules, in order to be foolproof, should make use of complex date arithmetic functions. Add to these "simple" issues, changes in employment status, multiple plans with varying parameters, option exercises, and tax issues, and you quickly realize how difficult an animal this is to control and maintain.

Inevitably, these needs have given rise to software programs that can provide reports for both the benefits manager and the CFO incorporating these complex formulas. Likewise, data entry of stock and option data is relatively easy. Two leading software programs that help manage this function are Express Options™/Express Share Tracking™ by Transcentive and Equity Edge™ by eTrade. Costs are rather inexpensive while you are a private company ($3,000-5,000/year) but rise significantly when you go public ($xx,000).