Research and development costs

Research and development costs

As we covered in our other guides to expenses, Research and Development (R&D) expenses are as their name describes. These costs are incurred by activities related to any activity that relates to the research and development (essentially, the continuation) of your company’s products and/or services.

During the early stages of your company’s life, the costs of R&D it will likely incur. This is due to the stage your startup is in: you’re working on your prototype, your minimum viable product (MVP), you’re piloting. So, as you grow and pivot through your initial stages, you will need to reinvest the funds into your R&D expenditures to ensure that your product or service is competitive, cutting-edge, and can not only meet but exceed your consumers’ expectations. .

In this article, we’ll walk you through the basics of this expense category; What constitutes the bases of R&D expenditure; Why these expenses are worth investing; and how to maximize spending.

Let’s start.

1. What are the R&D expenses?
2. Components of R&D expenditure
3. The value of R&D spending
4. Maximize R&D spending

What are the R&D expenses?

As we touched on our first paragraph, R&D expenses sum up all the costs that have something to do with anything that bolsters the progress and development of your company’s revenue products and/or services. It usually has something to do with research or such activity. R&D expenses also include anything that creates intellectual property (IP), such as patents, copyrights, and goodwill.

Generally, R&D expenses are included in your operating expenses as a subcategory. They will include often intangible assets such as original designs, development and redesigns of all products; proprietary enhancements and solutions; And all the survey data, research and engineering studies your team has done, has done, or will do.

R&D, generally, is an expense whose gain is reaped several months, even years, later. Iterating your products and services reaps a cumulative but delayed reward, or as it is called, a beta test.

Something to note is that, due to the uncertainties posed by R&D, Generally Accepted Accounting Principles (GAAP) states that R&D activities must be spent in the same year that said cost was incurred. This is to take into account the lag between R&D activities and their proportional outcome, which may occur years later – such as a product launch or a new feature debut.

Components of R&D expenditure

So now that we’ve covered the R&D expenses, let’s talk a little more about the specifics. As the concept of why your startup should invest in R&D becomes clearer, what actually constitutes these costs and category?

The truth is that it will vary from industry to industry. However, there are some general consistencies. For starters, the salaries/payroll of all relevant personnel – from C-suite executives to employees of the relevant department(s) – who contribute to R&D, such as:

1. Engineers;
2. Product designers;
3. Business development strategy (for services);
4. External strategy contractors/consultants; and to top it all,
5. The chief technology officer (CTO) and his team of product/service specific executives.

Besides the aforementioned staff payroll, other components of your R&D expenses include expenses included in the design, development or patent of your product/service, such as version control service software, cloud infrastructure to store your plans/product design files, and so on.

The value of R&D spending

The importance of R&D for companies, but for start-ups in particular, is significant. It’s one of the key investments you’ll make in your business that will set you apart from others in your field. Additionally, it’s necessary to get your Minimum Viable Product (MVP) working, which in turn will help you when it’s time to seek additional funding.

Without sufficient R&D spending, your idea may be already outperformed, or merely theoretical and on pace-round. That’s why it’s important to find and enlist the right talent and people to lead your R&D department. If you are technically trained, skilled and familiar, this could also be your job alongside being a founder.

R&D is the tool that allows you to hone your competitive edge to be as sharp as possible.

Maximize R&D spending

It’s no news that start-ups are piling up and launching at high speed. Whether it’s strong competition, a lack of sufficient funding, or products and/or services that are irrelevant, it’s very difficult to stay on top and ahead.

As we’ve said before, the R&D you invest in breeds your innovation, giving you an edge at the cutting edge.

However, there is an added benefit to R&D spending, if you are a US-based startup. The United States Research and Experimentation Tax Credit is a tax credit scheme implemented under Section 41 of the IRS code, which allows you to offset some of the costs accrued under your bucket of R&D, as a general tax credit.

To determine whether or not you qualify, as part of your spending profile, for R&D tax credits, take a look at the resources available.

The medium and long-term benefits of robust R&A investments and strategic spending are indisputable for your start-up. So take advantage of any additional benefits offered today.

As with everything, the best investment you can make is preparation. To understand your R&D, you need to understand what your business needs and how much it needs to get there. There is no better guide or getting started than FinModelsLabs Getting Started Financial Model Walkthrough and Tool. Take a look today and start honing your competitive and innovative edge!

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