Biotech Accounting - All you need to know
If you haven’t been keeping track of your books by the time you raise your first outside money, you need to get your books in order.
We strongly suggest venture backed companies move away from spreadsheets and into an accounting software as soon as possible. It makes most sense to do this right after raising seed funding, if not before.
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Many early-stage biotech startups use grants to help fund their R&D efforts. Developing grant proposals often has a surprisingly detailed finance/accounting component, and many founders are unprepared to articulate the financial implications of their research on a grant proposal. And, after receiving a grant, proper accounting is necessary to correctly track grant expenses and trigger grant payments.
The good news is that Kruze’s team is familiar with many different types of grants that life sciences companies use, and we can likely support your startup’s grant accounting needs!
Biotech companies need to regularly produce three major financial statements. These are the Income Statement, Cash Flow Statement and Balance Sheet. Additionally, biotech companies may have other “financial statement adjacent” items that they need to report on to their board or investors. These include items like headcount, projected expenses, progress toward R&D milestones and more.
The income statement shows the company’s:
For R&D stage biotechnology companies, the income statement is a surprisingly “unimportant” financial statement. Many interesting uses of capital - such as equipment spending - are going to be captured on the cash flow statement. However, the income statement does help show many of the costs of conducting research and development in a life sciences organization - in particular, headcount costs.
The cash flow statement shows the startup’s:
The balance sheet shows:
Through our work with dozens of funded life sciences startups, we realized that founders like to be able to project their future spending. That’s why we price our bookkeeping services on a set, recurring monthly level - our clients can know what their basic accounting will cost each and every month. The best founders know what they will spend next month, and the month after that. Having their accounting expenses set is one step toward effective cash management for the experienced startup founder.
Your biotech startup’s accounting partner should be experienced with the nuances of working with an R&D intensive business. This includes both the basic bookkeeping and complicated tax incentives available to biotech startups.
At Kruze, we combine automated software with experienced controllers and CPAs. Our custom-built, highly automated bookkeeping software works directly with QuickBooks Online. This automation reduces your monthly accounting expenses - and gives you the benefit of your transactions and supporting details all being saved in the industry leading accounting software, QuickBooks. Our accounting team has over 11 years, on average, of experience.
The answer to this question involves accrual accounting, which is the best way for startups to handle their accounting. Venture capital firms, venture lenders, investors, and others want to see your financials on an accrual basis. You need to recognize that revenue on a monthly basis as you provide the service over the year. Essentially, you’ll recognize 1/12 of that upfront payment each month. If you recognize the full amount when you received it, that’s called cash accounting. And you’ll have a really good month, followed by 11 months of no revenue. That doesn’t accurately represent your financial position. So you need to book this revenue on an accrual basis.
There are several tax credits that can help unprofitable, R&D stage, biotech startups reduce their burn rate. Work with an accountant who can help you with both your bookkeeping and tax work, so that you can maximize your government incentives!
Some of the best tax credits for research stage biotechnology startups are the R&D tax credit (calculate your credit here), and several state credits like the California Sales Tax Exemption, the Massachusetts Sales Tax Exemption, and the Maryland Biotechnology Investment Tax Credit. The BEST of these, which should apply to pretty much all pharma/life science startups doing reserach in the USA is the R&D tax credit.
The top biotech accountants will be very clear - the best government incentive for biotech and pharma startups is the R&D tax credit. This credit provides practically immediate relief against payroll taxes - taxes all companies with employees in the US pay!
The R&D tax credit can provide up to $250,000 in payroll tax credits - and that amount is increasing to $500,000 for the tax year 2023 thanks to the Inflation Reduction Act of 2022.
It’s very important to note that the credit is not just payroll, which is why it’s good to work with the accounting team that does your bookkeeping. CPAs like Kruze can not only get you a tax credit for the work your employees do, but can also help make sure you get credit for the R&D expenses that run through your accounting software.
We're huge fans of Vanessa and the folks at Kruze Consulting. They set up our books, finances, and other operations, and are constantly organized and on top of things. As a startup, you have to focus on your product and customers, and Kruze takes care of everything else (which is a massive sigh of relief). I highly highly highly recommend working with Vanessa and her team.
Co-Founder @ Superhuman
As a startup, moving quickly is a top priority for us and we just needed to get our tax return done. After we uploaded our docs, we got our tax return in 3 days! E-filing was confirmed by Day 4. Super responsive and helpful!
VP, Operations of Calm.com
Avochato has been growing rapidly in the past year – in fact, too quickly for us to keep up with books, taxes, and budgeting for growth. Partnering with Kruze Consulting has been fantastic to manage, track, and analyze our finances while we continue focusing on building our customer base. Kruze’s team knows what startups need.
Alex De Simone
CEO @ Avochato
Everybody, go to Kruze Consulting. They do a great job. I personally can tell you, they've done a great job for our companies, including Calm.com. I'm sure they’ll do a great job for you.
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In general, for most startups (biotech included), the best accounting software is QuickBooks Online. However, biotech accounting does introduce some complications that typical software startups will not recognize, and therefore and ERP solution like Netsuite may start to make sense earlier.
Beyond QuickBooks Online, biotechnology startups will need other fintech solutions within their accounting system. Look for tools that easily integrate with QBO and that automate menial bookkeeping and record keeping tasks. These systems include: