This is a guest post from Founder and CEO Mickael Cardoso of CloudCfo Inc, an outsourced accounting and finance service provider for companies in the Philippines. CloudCfo has partnered with Impact Hub over the last number of months. Mickael spoke at IH’s F*ck Up Night and also recently mentored startups through the Impact Hub Elevate Training Program. In this article, Mickael writes about the key accounting and financial processes to help position tech startups for scaling successfully.
The startup ecosystem in the Philippines has been vibrant in recent years but remains in its early stages. Growing a company can be difficult as the regulatory and compliance framework in this country is hard to navigate – at the best of times!
There are many obstacles to achieving the scalability desired by tech startups. That’s why our team of finance, tax and accounting experts has identified 5 key accounting and financial processes to help position tech startup to scale successfully.
A common objective for a tech startup is 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.
However, as a result of this “get to market ASAP” strategy, important back-end business functions are often left behind. The accounting and financial function is one such area that tech startup owners tend to “leave until later”. This can lead to various issues down the line as the company looks to scale.
Tax penalties, Securities and Exchange Commission (SEC) violations, Bureau of Internal Revenue (BIR) non-compliance and due diligence red flags are just some of the problems that can arise when a tech startup fails to manage its finance, bookkeeping and accounting processes from the start.
If you own, manage or operate here within the tech industry, check out the expert tips below to ensure your tech startup is in the best possible position to achieve sustainable growth.
Expert Tip 1 – Align capital structure to the funding strategy
The minimum capital requirements for companies at incorporation have recently been removed (see our recent article which outlined the key elements of the Revised Corporation Code). Tech startups should, however, still carefully consider which capital structure best aligns with the company’s future growth plans.
Owners should think hard about the number of authorized and subscribed shares the company is likely to require in the short, medium and long term. When the company begins to scale, it will then be in a position to attract new investors and/or buyers without the need for a new capital structure. The cost and time, not to mention another SEC application process, associated with a recapitalization/restructuring can be avoided.
Seek expert advice early – define the capital structure and reduce the barriers to scaling the company further down the line.
Expert Tip 2 – Tax obligations arise upon incorporation
“Let’s get the company up and running. We can worry about tax compliance later once the money starts rolling in.” Good 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 no revenue coming in or salaries paid out for some time. However, it is important to remember that tax compliance obligations kick in immediately upon incorporation!
Even if a company has no operations, tax compliance is still a necessity. In fact, within 30 days of incorporation, the company must register with the BIR. Failure to do so means the company is non-compliant!
Why is non-compliance such an issue? First of all, the company is starting its corporate life on the wrong side of the tax authorities. Second, a tax compliance issue, no matter how trivial, will usually create a red flag issue in investor/buyer due diligence. Third, resolving these issues takes time, resources and can lead to financial penalties.
Each of these issues can easily be avoided by getting it right from the start. So understand and comply with your tax obligations from Day 1 – not Day 100!
Expert Tip 3 – Computerize your books of accounts
Check out our recent article for a quick recap on the types of books of accounts companies in the Philippines are required to maintain.
Tech startups will generally have a large volume of transactions from the outset. If a tech startup opts to use manual books of accounts (most common type of accounting books used in the Philippines), all transactions must be recorded by hand!
This is neither efficient nor progressive and can slow down a company’s internal processes.
We recommend that tech startups apply to use the loose-leaf books of accounts as soon as possible. This will enable the company to benefit from various efficiencies including integration with cloud accounting software (e.g. Quickbooks, Xero, Hilsoft), value-added use of an online invoicing system and data analytics.
Loose-leaf registration does however still require the printing of physical financial documents – which can have an impact on the scalability of transaction volumes.
The optimum bookkeeping solution for tech startups, particularly as the number of daily transactions increase, is to apply for computerized books of accounts. However, be warned – the BIR must first approve a company’s use of this system. The application process can be lengthy.
With a computerized system of accounting books in place, startups can then begin to scale with full confidence that their internal systems are equipped to handle future growth.
Expert Tip 4 – Understand the tax implications of your specific business model
Tech startup owners must understand the tax implications of their business model. Tax requirements may vary depending on the product or service being developed or sold. Owners should understand what tax payments are necessary, what documents must be submitted and what information needs to be provided to the various government bodies in the Philippines.
Let’s take, for example, a popular tech product/service – the online marketplace for buying and selling goods, also known as an online intermediary service.
The BIR would actually consider such businesses as the merchant/retailer if the service provider controls the collection of the buyers’ payments or if the market place also sells multiple products for its own account.
This would have major implications for the recording and documenting of transactions. If a business is considered a merchant, it has to issue an invoice or Official Receipt for the full amount of a sale.
The business could also be considered an online intermediary acting as an agent to the merchant on the market place. In this case, it should issue an acknowledgement receipt to the buyer on behalf of the merchant and issue an Official Receipt to the merchant for its commission. These are minor differences but with potentially large implications.
Understanding how your business model will be considered by the tax authorities is essential to ensuring compliance with tax obligations. Tech companies should take expert advice tailored to their specific business model and product or service.
Don’t just follow the crowd on this one!
Expert Tip 5 – Company technology should interface with a cloud accounting system
In light of fierce competition, tech startups must be modern, progressive and cutting edge companies seeking to provide innovative solutions for real-world problems. This ethos should also be reflected in the startups’ internal processes.
Whatever technology a company is developing or selling, we recommend that it be fully integrated into the company’s accounting and bookkeeping system. In a fully integrated system, the primary technology can interface with the company’s accounting system which enables the booking of an order, the recording of payments, the generation of a sale and ultimate delivery of a receipt. The alternative is irregular manual entries, a greater potential for error and an inefficient process.
The success of a fully integrated accounting system can best be achieved through the use of cloud accounting services. The use of cloud accounting enables a company to store all information and documents on a remote database, accessible anywhere in the world. Some of the cloud accounting solutions that CloudCfo uses include Xero and Quickbooks Online.
Helpfully, most cloud accounting solutions offer off-the-shelf APIs (Application Programming Interface) which are not hard to implement. This enables all of the information obtained from the primary technology to be transferred automatically to the cloud accounting software and entered into the company’s books of accounts as a transaction – hassle-free.
This is very helpful come audit season or when preparing for due diligence.
CloudCfo has advised numerous tech startups in implementing and managing their accounting and financial functions. We have advised across a range of activities – from financial modeling, to capital structuring, to the implementation of professional bookkeeping processes. We know the specific issues that can arise for tech companies in the Philippines. More importantly – we know how they can be resolved! Contact us at firstname.lastname@example.org or visit us at www.cloudcfo.ph to find out how we can help you grow your startup.
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