Mary F. is reading Accounting for the Numberphobic, and she wants to know how to account for development costs for her start-up business.
Here’s her question:
“I am reading your book Accounting for the Numberphobic and love it. Do you have a recommended resource for how to account for online businesses like a life coach or a business that offers software as a service? So many accounting books always use merchandising businesses as an example. They don’t provide examples of how to account for virtual products. I am looking for answers to problems like how to account for the research and development of an e-course or how the cost of goods sold fits into the regular costs of delivering an e-course after it is developed. Hopefully, you can offer some direction. Thank you in advance!”
You mention two types of “costs” with e-commerce; the first is development costs, which are like Research and Development for pharmaceutical companies. Depending on accounting standards, this might be a cost that is amortized over time which is the equivalent of depreciating an asset that has a long life. Sometimes these costs can be substantial, like when you’re building a new website, which we’re doing here at Best Small Biz Help.com.
These development costs are sunk costs; whether you sell one or a million courses, the time and effort to develop them is absorbed by the business. Your accountant can better tell you the best way to handle these costs to your tax advantage when it comes time for filing your taxes.
He or she will look at whether it’s a one-time charge or if it’s ongoing. They will probably also look at how high the cost is relative to your income to determine if it makes sense to write it all off in one year or spread (amortize) the cost over several years.
Last, the cost to deliver a course is a direct labor cost. My guess is, your accountant will handle THIS cost differently. In a service environment, this cost is the cost (or value) of your time and expertise. It would be the equivalent of your sales cost (or, in a product business, your Cost of Goods Sold). It’s essential you know how much TIME you’re investing to deliver the course and what an hour of your time is worth.
Then I’d correlate your registration price to take the course and your time to deliver the course to ensure you’re getting an adequate gross profit on each course you deliver.
Regarding consulting or coaching work, the thinking is very similar. I’m wrestling with this as well since I, too, do coaching. The key here is the contract cannot be fixed for the client with your time open-ended. Accounting for the Numberphobic brings this up in the early chapters. You want the time you’re investing and your compensation to be directly correlated. If the client wants more of your time, then they have to pay you for it.
The key with consulting is the client has to have a positive economic incentive not to waste their time.
This is a great question, Mary. Thanks for reaching out to ask it.
Also, please be sure you write your unfiltered comments on Amazon about Numberphobic!