100% Pure and Fresh Part 1

by | Sep 14, 2023 | Choosing an Accountant

100% Pure and Fresh

Part 1 – Why the Traditional Accounting Model does not fit early stage tech companies well

My accounting practice started in 2002 and right from the start I decided that it would focus on early stage technology companies.
The boom in tech companies that has happened in the intervening twenty one years has attracted some traditional generalist firms to the sector, some dating back even to the 19th century when the Institute of Chartered Accountants of Scotland was formed.
It is much easier to build a business to work with technology companies from the very beginning than to move one with such a legacy of traditional clients from which the majority of the firm’s profit is earned. I recently noticed a partner in a generalist firm with an Entrepreneurial Tax department celebrating that 30% of their business came from high growth entrepreneurial SME’s.
By contrast, Accountech has 100% purely tech company clients.
In this blog, I set out why I believe that the traditional accountant model does not fit early stage technology companies well, and why it is time for a fresh approach.
Part 1 details what has changed and why this means that the traditional accountant is no longer the best option for the new tech start-ups that have emerged.
In Part 2, I will outline a fresh approach which serves early stage tech start-ups better, as it recognizes and meets their unique requirements.

The traditional accountant model
When I started my career in the early 1990’s accountancy training was still based around the annual audit, which involved checking client systems , tracing transactions, random sampling and reviews of the figures for unusual variations. While much of this work was routine and was not particularly exciting, it did involve visiting client premises and obtaining a close up view of all sorts of different businesses.
Audit was also the engine which drove the rest of the firm – as clients grew, they could be cross sold more profitable services such as tax advice, consultancy and corporate finance advice.
Accountancy was substantially unchanged since the 1950’s and the business model for accountancy practices was based on a hierarchical structure with junior staff at the bottom on short-term training contracts, qualified salaried staff and managers in the middle, with the pinnacle being profit sharing partners who shared in the profit that the firm made.
With relatively fixed overheads, the higher that the firm’s fee income went, the more profit there was for the profit sharing partners.
The two ways to increase fee income are still:
(1) Increase the number of clients – generalist accountancy practices typically have 250-300 clients, with the larger firms having many more.
(2) Prioritise clients that generate the highest fee income – assuming that companies spend a relatively fixed proportion of their sales on accountancy fees, this equates to prioritizing larger clients.

Tech Start-ups do not fit this model
Tech start-ups have no income at all when they start and possibly for several years after that while they develop their product.
For a generalist accountant they are therefore one of many clients but are low priority as they do not generate significant income. This means that they are allocated the cheapest, least experienced staff, changing year on year as new trainees start, and it is difficult and expensive for them to contact the more experienced members of the firm.

What has changed since 2002
(1) Audit Exemptions
For many years, all active limited companies whatever their size were required to have an independent audit. In 1994, some smaller companies became exempt from audit in the UK and over the years, the threshold was gradually increased so that no small company now requires an audit. At the same time, technological improvements mean that most large company audits are done remotely. This has significantly reduced accounting trainees’ exposure to the “real world” of business.
(2) R&D Tax Credits were introduced
R&D Tax Credits were introduced for SME’s in 2000 and a separate scheme for large companies was added in 2002.
Traditional accountants have mainly steered away from the scheme and instead earned referral fees from specialist R&D tax credit providers, but the latter have been unregulated and in 2022 major fraud was uncovered in the use of the scheme which has resulted in a much more challenging environment for making claims.
We specialised in R&D tax credit claims from the start, as it is a vital component of the funding available for tech start-ups and it makes sense for the accountant completing the corporation tax return to also prepare the related R&D claim without 25-30% of the benefit having to be paid to an external consultant.
(3) The Internet and Cloud Accounting
Cloud accounting emerged in the mid 2000’s and the market leader Xero, whose software we exclusively use, was launched in New Zealand in 2006.
It has automated the bookkeeping function so that work can be done more efficiently and remotely, enabling smaller companies to have real time financial information.
Yet according to Will Farnell’s recently published book, “The Human Firm”, while there are about 5.2million small businesses in the UK less than 1million of these are using cloud accounting.
This is because the traditional accountant has not engaged with cloud accounting fully and is still clinging to the old ways of doing things.
In Part 2, I will outline a fresh approach, where the unique requirements of tech start-ups are recognised and met, and where 100% of clients are also tech companies.