Legal and Tax Considerations for a Section 85(1) Rollover from an Accounting Perspective

The Tax Benefits of Section 85(1) When Incorporating

When growing your business, you may be considering incorporating to take advantage of tax savings or to avoid personal liability. Even though incorporating may not change the day-to-day operations of your business, the act of incorporating is more than just a status change. It involves changes to the structure of your business, which can create new tax costs. Luckily, there are provisions in the income tax act that can help you defer some potential taxes, including the Section 85(1) provision.

Deferring Capital Gains Taxes with Section 85(1) Rollover

To understand Section 85(1), let’s use a hypothetical scenario. You are a sole proprietor dentist. As part of your business, you own an office, which you purchased for $300,000. You also own $200,000 in equipment. Over the span of 2 years, your business grows and you decide to incorporate. Because the corporation is a separate business entity, this requires an asset transfer – that is, you have to transfer the assets from your personal ownership to the corporation. Moreover, you must transfer the assets at a fair market value. This poses a problem: despite the fact that you own the corporation, the asset transfer is tantamount to a legal sale. As a result, on your personal tax return, you would have to pay capital gains taxes on the transfer of the assets to the new corporation. Capital gains can be significant, particularly when it involves things like property, whose value can skyrocket.  

Luckily, 85(1) allows you to defer these capital gains taxes through an asset rollover. This provision of the income tax act rolls the assets over to the corporation through an exchange of assets for shares in the newly formed corporation. In our dentist scenario, you would transfer the assets to the corporation at cost base using the section 85(1) rollover in return for shares of the corporation. As a result of the rollover, there are no immediate tax consequences. Taxes will only be incurred if you sell the corporation or if the corporation decides to sell the assets at a future date.

Avoiding Complications

While an 85(1) rollover may sound straightforward, it is a complicated and multi-layered process that requires experienced professionals with knowledge of the CRA’s provisions. Beyond this, it involves accountants and lawyers working hand-in-hand. Accountants prepare an instruction letter that lays out the cost base for the transfer of assets. This can be difficult because it involves assessing the fair market value of assets, which can be tangible (e.g. properties or equipment) and intangible (e.g. goodwill). Moreover, because the rollover requires a transfer of shares in return for the assets, a lawyer has to execute the transaction.

NOVAA and Section 85(1) Rollovers

At NOVAA, we aren’t just traditional accountants who manage your books. We are a full-service firm that covers the full breadth of your tax services and accounting needs. Our experienced team have worked closely with lawyers executing 85(1) rollovers, including when incorporating or executing an asset rollover will help you achieve your business goals. Beyond this, we pride ourselves on making sure our clients understand what they’re doing, translating tax codes so that non-specialists can understand when and how such decisions can be beneficial to them.

For more information on how NOVAA can help you with incorporation or a Section 85(1) rollover, book a free consultation.

Cloud Accounting Software for SaaS Startups: QuickBooks Online vs Xero

Accurate accounting is key to the success of any business. It allows you to keep track of costs and revenue in order to implement your business plan, while also giving you concrete numbers to show potential investors. While this might seem to go without saying, many in the competitive software-as-a-service (SaaS) field have failed to follow through with accurate accounting. For startups, this is a particular concern as you attempt to go from pre-revenue to bringing in profits. Agile Payments found that one of the main reasons SaaS startups failed was the failure to save financial resources because they didn’t know how much money they had or needed.

Luckily, accounting software has become a standard technology that SaaS startups can use to avoid this problem. But this poses a different problem: which accounting software should you choose? While there is no “one size fits all” choice and it will depend on your needs, two of the most used accounting software platforms in the SaaS industry are QuickBooks Online (QBO) and Xero.

The Importance of Cloud Accounting

Both QBO and Xero are cloud accounting software platforms. This means that your accounting will be 100% online rather than stored on a computer. This has a number of benefits over desktop solutions. Because desktop solutions are on a computer, they present a greater security risk both in terms of being hacked and in terms of theft. Cloud solutions are protected by state-of-the-art security systems and are not on-premises. Likewise, cloud solutions are constantly backed up and you don’t run the risk of losing your accounting data, which can happen through manual errors or system failures with desktop solutions. Finally, while desktop options are largely limited to the single computer they are on, cloud accounting software allows for easy accessibility to those who have permission. Relatedly, you can check cloud accounting software while on the go via your phone or other devices, whereas desktop solutions require direct physical access to the computer on which the accounting software is on.

Choosing Your Solution: QuickBooks Online vs. Xero

While QuickBooks Online and Xero are both cloud accounting software solutions, which of them is better for you will depend on compatibility with your needs. Here are some things to consider when making a choice.

1. Subscriptions

Xero offers three monthly subscription plans: Starter, Standard and Premium. While they all come with basic features and allow for unlimited users, Starter has usage limitations, including for quotes, invoices, and bills. Standard offers unlimited quotes, invoices, and bills. On top of these unlimited features, Premium includes foreign currency transactions and project and expense management. 

QBO also offers three monthly subscription plans: EasyStart, Essentials and Plus. While there are no limits on usage, as you move up the scale different subscriptions offer increased user capacities and more complex features, such as accelerated invoicing and enhanced reporting and tracking. 

Aside from feature sets, the biggest difference lies in the price ranges: Xero ranges from $15 to $52 per month; QBO ranges from $20 to $60 per month. But price isn’t everything. What really matters is figuring out which feature set will best suit your needs.

2. Setup 

Once you’ve selected which software and subscription you prefer, both offer easy setup and provide customizable dashboards so that you can organize it in a way that best fits your needs. However, before you sign up for a subscription you need to check whether they are supported by your bank. If they aren’t, you won’t be able to integrate your bank accounts with the software and there will be no reason to purchase a subscription.

3. Functionality 

Much like choosing a subscription, functionality will depend on your needs and your expertise. QBO is an older platform and was designed for people with accounting backgrounds. While you should obviously have accountants doing your accounting, if you take a collaborative approach and want you or your team to have some oversight with accounting software, there can be a steeper learning curve. At the same time, its advanced reporting and tracking tools are exceptional. 

Xero is a newer platform and designed in a way that is more user friendly for non-specialists. This makes the learning curve less steep and allows for easier training when it comes to things like invoicing, which may be done by members of your team other than accountants. But it can also mean limitations in terms of advanced features.

4. Integrations 

Your cloud accounting software needs to interact with the other platforms and tools you use, whether it’s payroll, payment, or any other software. Both QuickBooks Online and Xero offer a growing number of integrations, with Xero providing, at the time of publication, more integrations. Of course, raw numbers don’t matter. You need to make sure the integrations they have work with the software solutions that you depend on.

4. Scalability

You want to choose software that will grow with your business. Migrating to another platform because your accounting software can no longer handle what you need is costly and time consuming, as well as rife with the possibility for problems. QBO offers a great solution for small businesses hoping to expand to the Enterprise level. However, Xero has increasingly become the choice for startups, as it can cater to mid-market companies with up to 1000 employees. 

Live Accounting with NOVAA

Even if you’ve narrowed down your cloud accounting software choice to QBO or Xero, the choice isn’t easy given the different subscriptions and features available. This is why it’s best to consult experts so you can best assess your accounting needs and which solution suits them.

At NOVAA, we are accounting experts and are certified by Xero with Silver Partner status, and as QuickBooks Online certified ProAdvisors. Regardless of which cloud solution you choose for your business, we provide “live accounting” for our clients. Unlike many accounting firms that wait until the end of the month or year to update your books, we update them daily so that you have live access to your accounting data. That means that you can login to your account and look at accounting entries as they happen, assuring ease of use and access to all of the information you need to run a successful SaaS startup.  

For more information on NOVAA’s live accounting services for QuickBooks Online or Xero, book a free consultation.

Creating Attainable Financial Projections

Understanding your company involves knowing where you are financially at any given moment as well as where you will be in the future. For this reason, financial projections are imperative for any company. Financial projections draw on available historical data to model the future financial performance of your company, including cash flow, costs, and revenue. Modeling this data is a standard practice. But it’s important to know why it is a standard practice and how financial projections can benefit your company.

3 Benefits of Financial Projections

1. Funding Rounds

In order to take your business to the next level, you need funding from investors, and they want to see future growth in sales and revenue. Financial projections provide potential investors with key benchmarks for your company that let them assess whether you are worth investing in, including, most importantly, when you will start bringing in a profit and showing them a return on their investment.

2. Loans

As with funding, companies may need loans for additional capital. In order to give out loans, banks and other lenders require not only a full accounting of the current state of your company but projections for where it will be in the future. They need to know that your company is viable and that you’ll be able to pay back the money you borrow.

3. Planning and Growth

Financial projections are also important from an operational standpoint. On the one hand, they allow you to assess how your company is doing from a cash flow perspective and when you need to open a new funding round or seek out loans. On the other hand, financial projections allow you to analyze key performance indicators, including assessing actual vs. projected numbers so you can re-adjust your projections to account for deficits or surpluses in projected funds. These are necessary for long term growth strategies, including knowing when you need to start hiring new employees, spending money on capital investments, and investing in other expenditures or reducing costs.

The Importance of Accurate Financial Projections

It bears mentioning that it’s important your financial projections are accurate. Ultimately, you want to be optimistic but realistic at the same time. If you want to have X million dollars in sales in 2 years, you need to have a plan to get there. Likewise, you need to have reasonable explanations for all of your expenses. For example, you need to show why the salaries you are paying are necessary (e.g. are they in line with the average for the market) or how you are coming up with your future sales projections (e.g. are they based on current contracts and the prospects for renewals and growth). If your numbers aren’t realistic, investors and lenders will not provide you with funds. Moreover, inaccurate projections can lead to shortfalls that undermine your ability to operate.

Financial Projections for SaaS Startups

Financial projections are particularly important for startups, especially in the SaaS industry. Because startups are in the infant phases of developing, they often lack direction in their first few years as they adjust to changes in the market and within the company. Likewise, they are often pre-revenue and need to understand future financials. At such an early phase, they need to know their monthly and annual burn rates to see how much cash they have on hand and how much they need to keep operating. 

Likewise, they need projections to tell them when they can break even or even start pulling in revenue. From a purely operational standpoint, projections allow them to know when they need to cut costs and when they need to spend money as part of their growth planning, whether this is hiring new employees or acquiring new technologies or another company. Finally, financial projections are key to understanding when they might need to bring in outside capital through a new funding round or loans and what their valuation is.

Recurring Financial Projections with NOVAA

Both as a standalone service and as part of our fractional CFO services, NOVAA offers experienced recurring financial projections using cutting edge business intelligence technology. This involves offering more than just a model or template. Models and templates are based on projections and historical data. But startup companies in particular evolve in directions that alter financial projections. Most companies don’t have the skills to re-assess and re-model their projections, which become obsolete as your company changes and grows. It’s necessary to maintain accurate and useful financial projections whether you’re looking for investment or just engaging in long term planning. To help do this, we tailor your projections to your company and business plan, then maintain and change them on a recurring basis so that your projections develop as you do. This avoids your financial projections becoming obsolete because of changes in markets or within your company.

Additionally, we have a proven track record helping SaaS startups grow into successful enterprises. Given this, we know how to account for future expense projections and costs as you grow from pre-revenue to revenue-bearing. This includes accounting for cash flows, planning for the next 6 to 12 months of operations, and figuring out when you need to open a new funding round. Given that in the tech industry who you know is as important as what you know, we also have connections in the venture capital world and can get word out about your product.

For more information on NOVAA’s financial projections services, contact us today.

What to Look for in Subscription Management Software for B2B SaaS Companies

Recurring subscriptions are the norm for SaaS services. They allow customers to manage costs by paying on a recurring basis as they continue to use the service. But billing can be a major pain point for business-to-business (B2B) SaaS companies. They have to manage subscriptions across different pricing tiers and customer lifecycles, while also collecting payment through a variety of providers. Fortunately, state-of-the-art management subscription software, like SaasOptics, Recurly, and Stripe, offer a solution to these pain points. Top notch subscription software not only allows your B2B SaaS company to manage and automate subscriptions, but also provides you with advanced analytics that can be used to assess your marketing and sales efforts. Here are what we think are the most important attributes to look for in a subscription management solution that will scale with your business. 

Automation and Efficiency: You Want to Set it and Forget It

The most important aspect of subscription management software is the ability to automate your payment processes. Automation eliminates the need for your accounting department to manually deal with subscriptions across customer lifecycles. This can be overly complex and subject to human error, particularly when you have a tiered pricing system that may include free trials. If your business is growing then you don’t want to wait to invest in a robust subscription management solution. The longer you wait, the more complicated it will be to migrate away from legacy software or spreadsheets, which can create bottlenecks in the migration process and efficiency of your billing system.  

The right subscription management software allows you to automate the entire billing process, while also customizing it so the software efficiently serves your business plan. 

4 Benefits of Automated B2B Subscription Management Software

  1. It saves your catalogue and pricing, allowing customers to customize their subscription, including giving them the option to upgrade or downgrade their subscription. You can also use the software to test different price points and offer discounts and promotions.
  2. It stores customer information and manages billing and payment, including integrating with different payment gateways. This also means the software automatically contacts customers for payment failures or declined credit card payments, which are a major source of lost revenue in manual processes.
  3. It scales as you scale, avoiding the hassles that come with migrating data from legacy systems.
  4.  It provides PCI compliance. Customer payment information data needs to be encrypted and protected in accordance with regulatory compliance expectations. With manual processes, encryption is both more complicated and more expensive. Most management subscription software is PCI compliant out-of-box.

Leverage Data for Marketing, Sales, and Investors

By automating the process, subscription management software let’s you take a hands-off approach to billing and payments. But you still want to keep your eyes on the data that is produced through the software and integrate it with your other management software, including customer relationship management (CRM) and other analytics software. By doing so, you can gain key data insights, including:

  • How many subscribers you have
  • Your churn rate
  • How long subscribers are subscribing for
  • How many customers are converting from free trials to subscriptions
  • Basic demographic information about who your customers are

While the most common blocker to using subscription management software is the fees, consider this an investment. The type of data you gain is key when it comes to analyzing and assessing the success of your marketing and sales outreach efforts. Subscription data allows you to re-assess these outreaches and improve your conversion rates. Under the subscription model, subscribers are key and this data can help expand your subscriber base. 

Additionally, once companies start to grow, potential investors and other stakeholders want to look at key trends, like customer growth, before they’re willing to back your company. Subscription management software makes it easier to provide comprehensive subscriber data and growth projections to potential investors.

NOVAA’s B2B Subscription Management Software Solutions

As SaaS has exploded, so have subscription management software solutions. This presents the problem of figuring out what solution is best for you. Moreover, you need to customize the software to fit your needs. This is so the automating functions work without constant oversight and you continue to collect data that can help to assess your marketing and sales and have data ready for potential investors.

NOVAA provides experienced management consulting for precisely these purposes. Whether it’s SaaSOptics, Recurly, or Stripe, we have the expertise to help you figure out which solution is best for you based on your needs and the different feature sets they offer. Once we’ve helped you select your software solution, we set it up with customizations to fit your goals. This establishes a baseline for all of the automated features. Finally, we integrate the subscription management software with your existing software solutions so that all of the components of your organization are in communication with one another and providing you with the data that is necessary to help realize your business goals. 

Contact us for more information on how subscription management software can help you realize your business goals.

Fractional CFO

When to Hire a Fractional CFO For a SaaS Startups

Early phase SaaS startups face a number of decisions in their drive for growth and profitability. One of the biggest decisions relates to executive hiring. No matter how young the start-up, you need a Chief Financial Officer (CFO). CFOs are key players in the success of a business, overseeing day-to-day financial matters as well as taking on the long-term assessment of key performance indicators and planning related to growth. But companies with less than $5 million in annual revenue often don’t need a full-time CFO. Their CFO needs are limited to signing off on cheques or preparing for a funding round, after which the CFO needs will decrease. Given the limited duties and that a base salary can start at $200,000, hiring a full-time CFO is burning money that could be better spent elsewhere.

It’s because of this that many SaaS startups are turning to fractional CFOs. Fractional CFOs are outsourced, part-time CFOs, whether individuals or firms. They are hired only for the number of hours required to carry out these early phase CFO duties, which may be as little as 10 hours a week or even a month. This helps to cut down on costs, while laying the groundwork for growth until you need to hire a full-time CFO. A fractional CFO obviously helps you to save money. But who should hire a fractional CFO and what benefits will they bring, aside from costs?

Who Should Consider a Fractional CFO and When Should They Hire One?

  • Startups in the seed funding stage
  • Startups going through Series A, B, or C funding rounds

At the Seed and Series A to C fundraising rounds, a fractional CFO is ideal for SaaS startups. At these early phases, the CFO’s job will be limited and hiring a fractional CFO allows you to bring someone on with the expertise to do the job, while avoiding paying them a full-time salary that is unnecessary. The cost- and time-savings can then be better allocated towards other strategic and growth areas. That said, as you progress in funding rounds and your company grows, interactions with your CFO become more regular. As a result, at the D series or higher you will generally need to hire a full-time CFO.

To successfully carry out fundraising rounds, you need to have all of your financials and projections in place. The CFO’s duties include creating a financial plan based on modelling and tracking key performance indicators, as well as building relationships with potential investors. If you’re going to hire a fractional CFO, you should hire them at least three months before a fundraising round. This will give them time to have everything in place so that you can meet your fundraising goals.

4 Benefits of Hiring a Fractional CFO

1. Cost Saving

The biggest reason start-ups fail is that they run out of cash. Hiring a fractional CFO is an obvious cost-saver. You’re paying for the hours you need, rather than paying a costly full-time salary. But beyond this, a fractional CFO also helps to save you the costs of an intensive job search. Instead of looking for a single person with vast expertise in numerous roles, which involves a recruitment firm and a lengthy search process, you can bring in a firm or individual with an established record in the early phases that you are in. Likewise, you have the flexibility to increase or decrease the hours you are paying for as your business needs change.

2. Experience

Of course, while you want to avoid unnecessary costs, you also want to have the best, most experienced support possible. Fractional CFOs, particularly when the role is filled by firms, provide you with precisely this sort of support and experience. They have entire teams behind them, with expertise in different areas, including accounting, bookkeeping, and taxes. These are often areas that a single individual, even while working full-time, doesn’t have covered. 

3. Flexibility

Because firms have full-time teams, when you contract out fractional CFO duties, their teams have the flexibility to ramp up or ramp down work in specific areas according to your needs. Basically, you have a team of experts read to meet your needs, based on the required hours, as they arise.

4. Outside Perspective

At the same time, when you hire an experienced fractional CFO, you’re getting someone with a record of helping startups in diverse fields, which can bring different perspectives and new connections to your company. In terms of different perspectives, a fractional CFO brings best practices and diverse-market knowledge to the table, which leads to a solid business model. In terms of connections, it’s often said that tech success is based as much on who you know as what you know. Fractional CFOs can open your company up to new business connections and investors. Moreover, if your fractional CFO has these types of connections and a successful record, it brings greater credibility to your company.

NOVAA: A Full Suite CFO That Is an Extension of Your Team

Given the importance of a CFO, the idea of hiring a fractional CFO may give you pause, as you worry about how much value they are going to bring as an outside consultant who isn’t invested in your company beyond the part-time work they do for you. Likewise, fractional CFO services often focus only on CFO responsibilities and rely on other companies for basic tasks like bookkeeping or tax services. As a result, in addition to the CFO’s part-time salary, you’re also paying for outside services.

At NOVAA, we view ourselves as an extension of your team, not as an external consultant. This means always making time for you and being fully invested in helping you to achieve your business goals. We embrace technology and build skills that best fit your evolving needs and provide full suite support backed by an experienced team of professionals with expertise across the CFO spectrum of needs.

Technology Forward

Our full suite approach begins with a technology forward perspective. We use Fathom’s cutting edge financial reporting tools to fully integrate all of your technology systems. The purpose in doing so is to allow your different software solutions, from billing to accounting to payroll and beyond, to talk to each other and harmonize operations. Because every business’s goals are different, we then customize your dashboards and analytics reports to match your business objectives. One of the great things about Fathom is that, in addition to integrating with virtually any software platform, it’s analytics come in easy to digest graphic representations that better allow you to see how your company is performing.

Experienced Professionals

Additionally, we have a full suite team of experienced professionals to cover all your areas of need. This solves major problems that can arise with a standard fractional CFO. To begin with, contracting out services that are below the CFO’s job description puts data into other people’s hands. We want to control data so that we have the most accurate data possible to measure key performance indicators. For these purposes, we have a team of professionals and strategic partners that cover the full spectrum of financial tasks, including accounting and bookkeeping. Historically, CFOs have limited knowledge in tax and tax planning, which results in them having to hire tax people to complete important tasks. Taxes are one of our specialities, which means that the task remains in our experienced hands without additional costs.

Working With NOVAA

CFOs are integral to the success of any business. SaaS startups need a CFO to help manage day-to-day operations and provide expertise for fundraising, but a full-time CFO isn’t always necessary. For Seed and Series A-C level SaaS startups, a fractional CFO can help to keep costs down, while still providing levels of expertise that a full-time CFO doesn’t have. NOVAA offers full-suite fractional CFO services that operate as an extension of your team and provide the expertise and support that you need to grow your business. For more information on our CFO services, don’t hesitate to contact us.