Tech startups generally have a need to scale, and scale quickly. Develop a product, get it to market, grow the company on the back of the product and start monetizing the business.
Unfortunately, as a result of this “get to market ASAP” strategy, important back-end business activities are often left behind. As founder and CEO of CloudCfo Inc., an outsourced cloud accounting and finance service provider for companies in the Philippines, I believe that the accounting and finance function is a crucial area that tech startup owners tend to neglect when starting out. This leads to various issues down the line when the company looks to scale.
Scaling a tech company in the Philippines can be very difficult as the regulatory and compliance framework in the country is so complex, even at the best of times. Tax penalties, SEC violations, BIR non-compliance and due diligence red flags are just some of the issues that can arise when a tech startup fails to manage its accounting and finance functions from the early stages.
Drawing from his experience of advising numerous tech startups in the Philippines, Cardoso identifies five key financial controls and processes that entrepreneurs can implement early on to ensure their companies have a strong base to achieve sustainable growth and success.
Align capital structure with future funding strategy
Before incorporating, tech startups should carefully consider which capital structure aligns best with the company’s future growth plans.
Owners should think hard about the number of authorized and subscribed shares their company is likely to require in the short, medium and long term. This decision should take into account the company’s financial capabilities, available resources and overall commercial strategy.
Then, when the company starts to scale, it will be in a position to attract new investors or buyers without the need to implement an entirely new capital structure. The cost, time and resources associated with a recapitalization/restructuring can be avoided.
By defining a company’s capital structure early on, you can remove a common barrier to scaling the business further down the line.
Tax obligations begin at incorporation
“Let’s get the company up and running. We can worry about taxes and compliance later once the money starts rolling in.” Is this effective strategy? From a compliance perspective: No!
Given the time it takes for a tech startup to bring a product or service to market, there may be a long period during which no revenue comes in and no salaries are paid out. Many owners don’t realize, however, that tax compliance obligations kick in immediately upon incorporation—even if the company is not making any money.
For example, within 30 days of incorporation, the company must register with the BIR. Failure to do so means the company is non-compliant.
Non-compliance creates issues aside from the obvious financial and criminal penalties. First of all, it can be challenging for a company to start its corporate life under the scrutiny of the tax authorities. Second, a tax compliance issue, no matter how trivial, will usually generate a red flag issue in investor or buyer due diligence. Third, resolving compliance issues takes time and resources and can distract a company and management from their core business activities and objectives.
So comply with your tax compliance obligations from Day 1. Don’t wait until Day 100.
Computerize your books of accounts
Tech startups can have a large volume of transactions early on. Selecting the most effective system of accounting books can provide a strong base for the company’s financial activities and make it much easier for the company to scale.
If a business uses manual books of accounts (the most common type of accounting books used in the Philippines), all transactions must be recorded by hand. This can create real inefficiencies within the processes of an aspiring and fast-moving tech startup.
The use of loose-leaf accounting books (the second type of accounting books system) enables a company to benefit from various efficiencies including integration with cloud accounting software, value-added use of an online invoicing system and data analytics. However, while a computer can be used for loose-leaf accounting books, you must still physically print the documents when submitting to the BIR. Again, this can make it difficult to scale transaction volumes to align with desired growth.
The optimum bookkeeping solution for tech startups, particularly as the number of daily transactions increase, is the computerized books of accounts system (the third type of accounting books system in the Philippines). With the computerized system in place, startups can scale with confidence that their internal infrastructure and systems are well-equipped to handle future growth.
Be warned however, that the processing time for an application to use the computerized system can be quite lengthy.
Your business model dictates your tax obligations
Tech startup owners must understand the tax implications of their specific business model. Tax requirements will vary depending on the product or service being developed or sold.
It is crucial for owners to understand which tax payments are necessary, which documents must be submitted and what information is required by the various government bodies in the Philippines.
The online marketplace is a prime example of how tax obligations can vary across each business model. If a business is considered a merchant, it must issue an invoice or official receipt for the full amount of any sale.
If, however, a business is considered an online intermediary acting as an agent to the merchant on the market place, it must issue an acknowledgement receipt to the buyer on behalf of the merchant and also issue an official receipt to the merchant for its commission. These are subtle differences with significant implications if not understood properly.
Knowing how your business will be classified by the tax authorities is essential to ensuring compliance with your tax obligations. You might think you are complying with your tax obligations but the BIR might take a different view. Discuss your business model with a tax adviser at the earliest opportunity.
Company technology should interface with a cloud accounting system
Tech startups generally aspire to be modern, progressive and cutting edge companies trying to provide innovative solutions for real-world problems. This ethos should also be reflected in the company’s internal processes.
The main technology that a company is developing or selling should be fully integrated with the company’s accounting processes. This enables a streamlined process for booking orders, recording payments, generating sale transactions and delivering official receipts.
A fully integrated accounting system can best be achieved through the use of cloud accounting technology. Cloud accounting enables a company to store all information and documents on a remote database, accessible anywhere in the world. Information can be transferred from the company’s main technology to the cloud accounting software and then automatically entered into the company’s books of accounts as a transaction hassle-free. The benefit of this optimized process for accounting and finance is a significant reduction in workload for management and staff.
Mickael Cardoso is the founder and CEO CloudCfo, an outsourced accounting and finance service provider for companies in the Philippines