B2B Accounting
Launching and scaling a business-to-business (B2B) startup requires a strategic approach for accounting and financial management.
Business-to-consumer (B2C) startups typically have multiple small transactions, while B2B companies have larger transactions with fewer customers. Some of the other differences between the two business models include:
- A longer sales cycle, since B2B products are usually more expensive than consumer products. That makes the decision process and the sales cycle significantly longer.
- B2B pricing strategies often include customized pricing. While pricing may be more flexible, profit margins can be lower because the cost of acquiring customers is higher.
What accounting challenges do B2B startups face?
Those differences mean that business-to-business (B2B) startups come with its own set of unique accounting challenges, including:
- Tax compliance. Businesses are required to comply with complicated tax rules that extend far beyond filing income taxes. If your company does business in various tax jurisdictions across the US and abroad, you’ll need to follow the rules on collecting sales tax. If you have tax nexus in other states or municipalities, either through sales, remote employees, or a physical presence, you may need to register and file taxes in each location where you have a tax presence.
- Complex financial models. Because of larger deal sizes and long-term contracts, B2B startups often have more complex financial models compared to B2C startups. B2B accountants need to understand how subscription-based services, customer contracts, and multi-tier pricing structures are used and reported, and create a strong financial foundation with budgets and forecasting.
- Revenue recognition. If your B2B startup relies on subscriptions, you should use accrual accounting and recognize revenue over the life of the contract. For example, if your customer prepaid a two-year contract for your services for $48,000, you will recognize $2,000 of revenue each month.The original payment will be booked as a deferred revenue liability, and that liability will be reduced by $2,000 each month as you complete the contract.
- Cash flow management. Maintaining a healthy cash flow is critical for B2B startups, since they often deal with longer sales cycles and delayed payments from clients. By using efficient billing and invoicing processes, monitoring accounts payable and receivable, stressing inventory management, and creating accurate forecasts, startup accountants can work with startups to manage cash flow.
- Monitoring cost of goods sold (COGS) and gross margin. COGS includes the direct costs associated with producing goods or delivering services, and gross margin is the difference between total revenue and COGS. Gross margin helps evaluate a startup’s profitability and operational efficiency, so it’s important to venture capital investors. Our expertise in analyzing COGS, gross margin, and other startup metrics helps startups optimize pricing strategies and operational processes.
- Bookings vs. billings vs. revenue. For B2B startups, bookings are the agreements that customers have made to buy products or services. Billings are the amount the startup will collect during a specific period. Revenue is the amount “earned” when the business delivers its product or service and can recognize the revenue from the sale. These distinctions are important and each of these metrics taken together provides a comprehensive picture of the startup’s financial health. Billings show the company’s sales momentum, billings show the expected monthly cash flow, and revenue is the actual amount the company earns each month.
- Deferred revenue management. Deferred revenue occurs when a customer is billed an pays in advance for goods or services that will be delivered later. So if a B2B SaaS startup closes a deal for an annual subscription for $24,000 and pays the full bill at the beginning of the year, that amount is recorded as deferred revenue, a liability. Each month the company will recognize $2,000 as revenue. Managing deferred revenue is critical for maintaining accurate financial records and reporting. Deferred revenue “smooths out” the revenue recognition for the startup – otherwise it would show $24,000 in revenue annually with no additional revenue during the year. That’s not an accurate representation of the startup’s revenue.
- Calculating gross profit. Gross profit is the revenue a startup retains after it pays the direct costs (cost of goods sold or COGS) associated with producing and delivering its services. This can get complicated for B2B companies, and particularly SaaS companies. Hosting and server costs, third-party software licenses or tools, and direct customer support costs (like salaries of support agents, cost of support software, or live chat or call centers) are all part of COGS. However, other types of customer support, such as customer success and account management, are not part of COGS. Research and development (R&D) costs, like salaries of developers working on new features or expenses for testing prototypes, are not included in COGS.
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Calculating key performance indicators. To effectively assess the financial performance of a B2B startup, several key metrics need to be calculated, including:
- Lifetime value (LTV), the total revenue a startup expects from a single customer account
- Customer acquisition cost (CAC), the total cost involved in gaining a new customer, including marketing and sales expenses
- Monthly recurring revenue (MRR) and annual recurring revenue (ARR), which are the predictable amounts of revenue the startup generates every month or year
- Churn rate, the percentage of customers that cancel over a given time period
These metrics can be challenging to calculate, since data needs to be collected from various systems, metrics like churn rate can vary significantly as the company grows, it can be difficult to separate the costs of marketing and sales strategies, and for very early companies, customer wins and losses will disproportionately affect these metrics.
What financial statements do B2B startups need?
Typically, B2B companies need to produce the three major financial statements: the income statement, cash flow statement, and balance sheet.
- Income statement. If you’re seeking VC funding, the income statement (or profit and loss statement) is very important – it’s often the first statement investors will review. That means it needs to be accurate. Income statements include your revenue, cost of goods sold (COGS), gross profit (revenue - COGS), operating expenses, and net profit.
- Cash flow statement. The cash flow statement lets company management and investors know which activities are generating cash, which activities are using cash, and how the company’s cash balance has changed over time.
- Balance sheet. A B2B startup’s balance sheet shows the company’s assets, liabilities, and equity. VC investors look at your balance sheet to see changes in cash over time (your burn rate), financing, inventory, accounts receivable, liabilities, and debt.
Meeting your startup’s accounting needs
At Kruze Consulting, we offer customized accounting services designed to meet the unique needs of B2B startups:
- Financial planning and analysis. Our team can assist you in developing comprehensive financial plans and establishing key performance indicators (KPIs) to track your startup’s financial health and progress towards your business goals.
- Cash flow forecasting. We provide you with cash flow projections, allowing you to anticipate future financial needs, identify potential cash flow shortfalls, and implement strategies to bridge those gaps in your cash flow.
- Tax planning and compliance. Our tax team stays up-to-date with the latest tax regulations and compliance requirements, making sure that your startup remains compliant while minimizing tax liabilities and maximizing available deductions.
- Investor reporting. We provide detailed financial reports and analysis to your investors, showcasing your startup’s financial performance, growth trajectory, and potential or actual revenue.
Useful Dates for B2B Startup Companies
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Event
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Close books for prior year
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Event
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Update financial model with December results
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Event
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Review cap table to prepare for new hire equity grants
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Events
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Review and update business plan
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Review previous year’s performance and conduct annual post-mortem
Partner with Kruze
As a specialized accounting firm focused specifically to startup companies, Kruze Consuting is ready to meet the needs of your B2B startup. Leveraging the latest accounting software and fintech solutions, we can streamline your accounting processes, improve efficiency, and give you real-time financial information to help your startup succeed.
