After analyzing financial statements from over a hundred startups, we’ve identified clear patterns in accounting errors that young tech companies make. These seemingly technical issues have enormous impact on a startup’s financial credibility and attractiveness to investors.
The same issues appear repeatedly across most cases. Here are four critical areas that require special attention.
1. Improper recognition of Research & Development (R&D) costs
The Problem: The most frequent mistake is simply throwing all product development costs into current monthly expenses. This includes developer salaries, cloud infrastructure costs, tool purchases, and external services.
Consequences: This approach drastically understates EBITDA metrics and distorts the profitability picture. A startup may appear significantly less financially efficient than it actually is.
Solution: Implementing a procedure for capitalizing development costs as intangible assets. This requires:
- Precise determination of which costs qualify as developmental
- Creating transparent document flow
- Regular monitoring and documentation of development processes
Legal Aspect: R&D cost capitalization is not only permitted but often preferred under Polish Accounting Act and International Accounting Standards. It’s standard practice in the tech industry.
2. Excessive R&D cost capitalization
The Problem: The opposite of the first mistake – some startups “overdo it” with capitalization, including costs in intangible assets that don’t meet development cost criteria.
Consequences: This creates elevated tax audit risks and can lead to problems during due diligence processes. Inflated intangible asset values may raise investor suspicions.
Solution: Scrupulous adherence to development cost definitions and precise distinction from research costs or current operations. Key is maintaining transparent documentation justifying each capitalization decision.
3. Improper revenue recognition
The Problem: This error occurs at two stages of startup development:
- Early-stage startups: Lack of knowledge about revenue recognition over time
- Post-Series A startups: Procedural chaos preventing proper accounting
Example: A SaaS startup invoices a client 12,000 PLN for annual license in January. They incorrectly book the entire revenue in January, when they should spread it over 12 months at 1,000 PLN each.
Consequences:
- Distorted MRR (Monthly Recurring Revenue) metrics
- Misleading presentation of results to investors
- Problems with assessing actual company performance
SaaS Solution: Implementing deferred revenue procedures that account for the subscription model specifics.
Software House Solution: Proper project revenue recognition according to completion progress or project milestones.
4. Incorrect liability levels
The Problem: Improper booking of liabilities from complex financial instruments used by startups:
- Convertible notes
- Investor loans
- Complex investment agreements
Consequences: This error can be particularly costly during due diligence. Incorrectly stated liabilities can lead to questioning of the entire investment process.
Solution: Professional approach to booking financial instruments from the moment they’re incurred. Regular reconciliation of balances with investors and detailed documentation of all transactions.
Why these mistakes are critical
Properly maintained accounting is the foundation of startup credibility. “Financial clarity” directly translates to:
Faster funding acquisition: Investors appreciate transparent and professionally maintained financial statements.
Credibility during due diligence: Accounting errors can be dealbreakers in the investment process.
Proper valuation: Distorted financial metrics lead to incorrect startup valuation.
Operational management: Incorrect financial data makes strategic decision-making difficult.
Summary
While the mentioned errors may seem technical and abstract, their impact on startup development is very real. It’s worth investing in professional accounting processes early in the company’s development. The cost of accounting corrections is always significantly lower than the cost of lost investment opportunities.
Professionally maintained accounting is not just a legal obligation, but a strategic competitive advantage in the fundraising process.
If you want to discuss accounting specifics for your startup or need support preparing for a funding round, contact us.
