Ever wondered what could turn your business's hefty software costs from a burdensome expense into a strategic asset? Well, the answer might surprise you. It's right there in your balance sheet, but often overlooked - capitalising software costs. This blog post will take a deep dive into why capitalising software costs can indeed be a game-changer for your business, boosting your bottom line and propelling your company's growth.
Capitalising Software Costs - What Does It Mean?
Before we get ahead of ourselves, let's demystify what 'capitalising software costs' really means. In a nutshell, capitalisation involves treating a cost as an asset that provides an economic benefit over a long period.
When you capitalise your software costs, you're essentially recognising that the software will provide value to your business beyond the current accounting period. These costs are then spread over the lifespan of the software, giving a more accurate reflection of your business's financial health.
Can You Capitalise Software Costs?
We often get asked upfront "Can software costs be capitalised?" and the short answer is Yes! Software costs can indeed be capitalised. This accounting practice involves treating the cost of the software as a long-term asset, rather than a one-time expense. In essence, capitalising software costs recognises that your software investment provides ongoing value to your business over several years. It's an insightful approach that can enhance your financial health and boost your bottom line.
Okay, So When Can I Capitalise Software Costs?
Typically you can capitalise software costs only if you have funded the development of the software. ie
- You had a third party develop software on your behalf like us at Atreon
- you developed the software in-house using your own development team
- A combination of the two
However not all costs can be capitalised, ie costs that incur outside the project start and completion timeline
For example you cant capitalise
- Initial research and planning costs prior to deciding to start development
- Costs associated with general maintenance of the project
For these purposes you can think of it like building a new office - the initial construction and building works is treated as capital, but after its built repainting the exterior, or patching up the odd wall is not.
What Types Of Software Projects Can I Capitalise?
The list of what you can claim is nearly endless, however to try and capture a few popular scenarios
- The construction of a new Website
- Building your own bespoke CRM
- Building your own Company Portal
- Building out an MVP of a product you're planning to sell
- Construction of a SaaS product
- The construction of a bespoke data analytics platform
Really this list spans as far as your imagination does - There is a fantastic article over at the Association of Taxation Technicians
Transforming Software Costs Into Assets
You might be asking, "Why bother?" After all, viewing software costs as an expense seems more straightforward. However, there are tangible benefits to flipping the script. Let's delve into these.
1. A More Accurate Financial Picture
Capitalising software costs provides a more accurate representation of your business's finances. By spreading the cost over several years, you're acknowledging the long-term value of the software. It ensures your income statement isn't unfairly hit in the year of purchase, providing a truer picture of your annual operating costs.
2. Enhanced Cash Flow Management
By spreading the cost of the software over its usable life, you can manage your cash flow better. You avoid taking a significant financial hit in the purchase year, freeing up funds for other strategic investments.
3. Attracting Investors
Investors prefer businesses that capitalise their software costs. Why? Because it shows a business is making strategic long-term investments, rather than merely incurring costs. It's an indication that the business is poised for sustained growth. It is also a signal that your business invests in its own unique selling points (USPs) lowering risks of competitors taking a slice of your businesses proverbial pie by just using the same off the shelf systems as you and undercutting prices.
Taking the Bespoke Route
While capitalising software costs provides significant benefits, there's another crucial piece to the puzzle - choosing the right software for your business. That's where bespoke software providers come into play and makes capitalisation make that bit more sense.
Bespoke software is tailor-made to fit the unique needs of your business. Unlike off-the-shelf solutions that offer a 'one size fits all' approach, bespoke software is crafted with your specific requirements in mind. It aligns perfectly with your operations, maximising efficiencies and driving productivity.
Investing in bespoke software is a strategic decision, allowing you to create an asset that enhances your business's value over time. It's akin to constructing your own building, rather than renting someone else's space and with new software development techniques the cost of bespoke software is now more affordable than ever.
The Bottom Line
As a bespoke software development company in the UK, we've seen first-hand how capitalising software costs can boost a business's bottom line. It shifts the perspective of software from a short-term expense to a long-term investment. Combined with the power of bespoke software, this approach provides a significant competitive advantage, paving the way for sustainable growth and success.
Remember, when you capitalise your software costs, you're not just making an accounting adjustment. You're making a strategic choice to invest in your business's future. It's a decision that pays dividends - enhancing your financial health, boosting your bottom line, and putting your business on a path of sustained growth.
Do you have your own project in mind? Here at Atreon we're experts at delivering bespoke software solutions to companies across the UK, so book a free 30 minute consultation call with us today and let us help you turn your dream into a reality.
