CLOUD ACCOUNTING SERVICES
How to’s, tips, and systems advice from the leader in cloud accounting services.
Kruze Consulting, CPA
Cloud accounting offers benefits to startups
More and more startups are adopting cloud-based solutions to run their businesses, including human resources, payroll, customer service, sales, and accounting.
For early-stage businesses, cloud accounting services offer a number of advantages:
- Remote access. A cloud accounting system gives you access to your data and information from anywhere, at any time, from a variety of mobile devices.
- Collaboration. Smaller companies can work with remote teams on the same platform without investing in IT infrastructure.
- Integrations. The best cloud-based software integrates with other systems, and cloud accounting software is no exception. Automated bank feeds, payroll integrations and more make cloud solutions the best solutions for most growing startups.
- Automatic software updates and backup. Your software is in a data center, which provides seamless updates and better security for your data, and automatically backups your company’s financial data.
- A wide range of functions. Cloud-based accounting software provides more than just basic accounting functions, including invoicing, bank interfaces, payroll systems, real-time dashboards and reporting, and integration with a wide range of software systems.
- Savings. Most cloud accounting systems are offered on a subscription basis, making it very affordable for startups that don’t want to spend money on expensive hardware and software. Additionally, cloud accounting software is usually purchasable in extensible increments, so you can keep costs lower until you need more advanced features.
- Unlocks outsourced virtual accounting services. Because it allows remote access, cloud accounting systems are easy to use with best-in-class, outsourced cloud accounting services providers. You can get lower cost accounting experts at a fraction of the cost of full time staff.
- Lower lock in. A cloud accounting system from one of the major providers like Intuit is a highly-adopted solution, meaning there are millions of accountants and bookkeepers around the world who are qualified to run your financials. By choosing a widely-used platform, you make your data and system highly portable to many different providers of cloud accounting services.
Funding rounds and acquisitions can occur quickly, and startups need to be ready to present their financial data for due diligence quickly. A cloud-based accounting solution increases your efficiency and gives you and your accounting team real-time access to your financial information.
Cloud Accounting Services
Kruze is one of the pioneers in cloud accounting services. As a CPA firm, we can not only produce reliable, GAAP compliant monthly financial statements, we can file tax returns and represent you before the IRS and other taxation authorities. Kruze serves VC-backed startups who have raised over $10B in funding, and know what it takes to be prepared for financial due diligence.
Why did Kruze shift to the cloud?
Our COO, Scott Orn, was interviewed on the Cloud Accounting Podcast (the leading podcast covering cloud accounting software and services). He explained the what and why of Kruze investing in technology and embracing virtual accounting solutions. From the interview,
“What it really comes down to is you either need to make a choice: you’re gonna be a high hourly-rate person, conceptually, and just charge a lot for your services, and be kind of a lone wolf, or a small firm/small headcount, or you need to really standardize, drive adoption, drive process, driving improvements, become a bigger firm. We’ve chosen the process-centric approach in scalability, and investments in software to make ourselves big…”
What are cloud accounting services?
Cloud accounting services are remote accounting, tax and bookkeeping services delivered using SaaS cloud accounting software like QuickBooks Online. Companies choose cloud accounting services providers like Kruze to lower their costs, improve financial reporting quality and prepare for complex accounting and tax due diligence. With cloud accounting services, accounting data is stored in the cloud, leading to better reliability, lower costs and improved quality.
Get a cloud accounting system
We recommend QuickBooks Online (QBO) for startups and high-growth small businesses. As the leading cloud accounting software for small businesses in the US, it interfaces with a wide variety of other automated cloud-based systems like payroll. It’s also an industry standard, so you can easily find remote bookkeepers or accountants that can work with this system. We are a partner of QBO, and highly recommend their system to most, US-based startups. Note that as a partner, we can receive a commission from them if you sign up through our link.
As companies scale, cloud accounting software becomes even more important (unless the business will be 100% co-located in one office, in which case, hey, be old school and run everything locally! Just kidding, don’t do that, cloud technology is still better, as it provides better backup, easier remote access, superior workflows and more.) At scale, additional solutions are a good fit. We see startups switching to Netsuite and SageIntact as they approach an IPO.
What can cloud accounting experts bring to your startup?
The top reason startup companies fail is running out of cash. Hiring a cloud accounting expert can help you track and manage your cash flow, review your expenses, file state and local tax returns, and much more. Routine cloud bookkeeping tasks include:
- Categorizing and posting all your transactions to your accounting software.
- Reconciling your bank accounts.
- Sending, tracking, and reviewing invoices.
- Paying vendors, contractors, and other bills.
This sounds complex, but online accounting software can streamline the process. By using a cloud system, you’ll get access to first-class accounting systems that can help you, or your remote bookkeeper or accountant, handle the regular accounting tasks.
In addition to ongoing bookkeeping tasks, the best cloud accounting experts provide your business with the information you need to make informed decisions, including crucial information like your runway and burn rate. These two metrics may be the most important for a startup. Your burn rate measure how fast you’re spending your funds every month. That provides you with your runway, which is the number of months you have until you run out of money, or reach your zero cash date.
It’s common for founders to do their own accounting in the initial stages of launching a startup, but it’s never too early to consult an accountant. It’s important to get questions answered like that accounting method you should use (you should use accrual) and other details like the records you’ll need to file taxes.
To get you started, we’ve provided some startup tips that can help you handle your own accounting, including budgeting, financial model templates, recordkeeping, and more.
Budgeting is the first step in accounting
A budget, which is an estimate of your expenditures and income (if any), is an essential tool for startups, because it’s crucial for you to know how much money you’ll need to make it through your first few months. Cloud accounting systems can help you structure your budget and then monitor it to make sure you stay on track. Your budget will get more complicated as your company grows.
Tips for your budget:
- Your biggest expense in most cases will be employees. You’ll need to know what team members you need to reach your milestones, and how much they will cost you.
- Cash burn is a key metric that you need to track carefully. You need a very good idea of how much you’ll spend each month, and how long your runway is before you need additional funding
- Think carefully about your potential market and how much revenue you eventually expect to earn. Smaller companies with lower revenue expectations don’t require as much capital as larger ones.
How do you create a financial model?
Almost all companies engage in financial planning, but a financial model is crucial for startups. You need a realistic assessment of your business idea, so you can determine if you can turn your idea into a successful business. Other reasons for financial models include:
- You need to look at scenarios. What happens if your business doesn’t go well? How will you adjust? That’s true of the best case scenarios as well. If things go really well, will you need to raise as much funding?
- Fundraising requires a financial plan. Angel investors, venture capitalists, banks, and other sources of funding are going to want to see the details of your business, to determine if it’s an opportunity they want to pursue.
- Investors will need updates. Once you have investors and shareholders, they’re going to expect regular updates on how you’re spending the funds they provided.
You can find helpful tips, instructions, and videos for financial modeling here. Many cloud accounting systems provide financial modules for financial planning, budgeting and more.
Do you need to review budget vs. actuals?
We highly recommend using your financial models and projections to compare with you actual business activities every month. Your company’s financial health depends on how well your actual sales and/or expense numbers stack up against your financial projections. Good accounting software can help you create dashboards and other tools to quickly match your budget to your actual results.
What information do you need for due diligence?
Every startup needs three traditional financial statements as part of their financial models. The statements need to be prepared using generally accepted accounting principles (GAAP) and your cloud accounting system can help you get the information you need to handle due diligence. If you’re seeking funding or being acquired, investors and buyers will want to see GAAP financials as part of due diligence. For more information, you’ll find our downloadable VC checklist here.
What accounting statements do you need?
Cloud accounting software can help you adhere to GAAP standards as you develop your:
- Income statement. Your income statement reports your startup’s income through a particular time period, and uses the following formula: Net Income = Total Revenue - Total Expenses.
- Balance sheet. A balance sheet is a snapshot of your company’s financial position on a specific date, and uses this formula: Assets = Liabilities + Shareholders’ Equity.
Cash flow statement. The cash flow statement summarizes all cash inflows your startup receives from ongoing operations and external investments, and deducts all the cash outflows as your company pays various expenses and obligations.
Key Financial Metrics That Matter
There are a few important metrics that entrepreneurs should know about accounting for early-stage businesses.
The burn rate is how much money you are spending every month. The cash-out date is the estimated date you’ll be in business until given your monthly spend and the remainder of the investment you have sitting in your bank account.
Are your customers paying you ahead of time? Deferred Revenue is when a client pays you ahead of you delivering a service. For example, if you charge a client’s credit card for a 12-month subscription, contracts - you just got 12 months of cash from that client! But you owe them the subscription, so Deferred Revenue gets added to your balance sheet as a liability. The offset to this on your balance sheet is cash - so you’ll have more cash flow than your income statement would “predict.” Not a bad problem to have… Watch our deferred revenue video here.
Accounts receivable (AR) refers to the amount that your customers owe to you for the goods or services sold to them on credit. This lives on your balance sheet under liability because you haven’t yet received the cash for the item or service provided.
Accounts payable (AP) is the money your business owes to its vendors for providing goods or services to you on credit. These are bills that you haven’t yet paid. Different vendors have different payment terms, so you should use this to your advantage. But remember, in accrual accounting, if you use a service/get invoiced by a vendor, you’ll see it on your income statement even if you haven’t paid them yet - thus, making your operating loss different from your cash burn.
How can a cloud accounting system help you get ready for your tax return?
Getting through tax season can be stressful, but organization and a cloud accounting system can help. Remember that even unprofitable startups need to file federal and state tax returns.
You’ll need the following documents to complete your tax return:
- EIN Letter from the IRS (this is the Employer Identification Number letter that the IRS created for you when you requested your EIN for your company.)
- Vital Business Statistics
- Business Address
- Shareholder SSN/Address info
- Prior Year Tax Returns (Federal and States)
- Local Tax Returns (if any)
- Financials
- Full-year Balance Sheet
- Profit & Loss Statement
- General Ledger
- Capitalization Table
If you prefer to hand off your returns to a CPA, Kruze Consulting can help.
Consider the Research and Development (R&D) tax credit
This government-sponsored tax incentive rewards companies for conducting R&D activities in the United States, and even pre-revenue startups can use the R&D tax credit to reduce their burn rates. Kruze has helped our clients get millions of dollars in tax savings through our work with this tax credit.
This tax credit can offset your expenses by up to $250,000 a year. Note that the maximum amount will double for the tax year 2023 thanks to the Inflation Reduciton Act of 2022. Visit our R&D Tax Credit Calculator to estimate how much your company can save. Contact us now to see how we can help your early-stage business!
Combining cloud accounting automation and experienced accountants
At Kruze Consulting, we’ve developed a refined process to manage bookkeeping for startups and provide a multi-level review of all the accounting.
Step 1. Our process relies on a cloud accounting system like QuickBooks Online and our own software that interfaces with QBO and categorizes and labels transactions.
Step 2. After the initial step, a staff accountant verifies that all the transactions are labeled and in the correct accounts, and then reconciles the accounts against statements.
Step 3. The controller, who is an accountant with at least 10 years of experience, checks the transactions to make sure there are no errors.
Step 4. An account manager or CFO reviews the financials before they are provided to the client. Since they are familiar with the individual clients, they can make sure the clients’ specific procedures are followed correctly.
Why don’t I see my contracted revenue on my Profit & Loss Statement?
If your startup is selling a service and starts earning revenue, it’s important to account for that revenue correctly. If the service is contracted over a period of time, you only get to recognize part of the revenue each month. For example, if your startup sells a 12-month contract for services, you only get to recognize one-twelth of your contracted revenue each month. The remainder of the revenue stays on your balance sheet under “deferred revenue,” and that total will come down over time as your startup recognizes the contracted revenue each month. That’s part of accrual accounting, which is the best way for startups to handle their accounting. It’s also what venture capital firms want to see as part of the due diligence process.
Kruze Cares More!
Ready to Work With The Best Accountant?
HOW ARE WE DIFFERENT?
We know you are busy. So, we have developed highly automated systems that we use to quickly get the job done for you. However, we don’t just stop there. We go above and beyond automation and always have a team of certified public accountants (CPA) experts ready to provide you with white-glove service. This is the Kruze way!
Don’t take our word for it. Check out our client reviews and testimonials.
