Research and Development Expenses
Financials
Industry:
Sector Agnostic
Short Definition
R&D (Research & Development) Expenses are the costs to discover and build new or improved products, software, or processes. They sit in operating expenses. Count only work aimed at creating new capability, not maintenance or customer delivery.
Short Definition
R&D (Research & Development) Expenses are the costs to discover and build new or improved products, software, or processes. They sit in operating expenses. Count only work aimed at creating new capability, not maintenance or customer delivery.
Short Definition
R&D (Research & Development) Expenses are the costs to discover and build new or improved products, software, or processes. They sit in operating expenses. Count only work aimed at creating new capability, not maintenance or customer delivery.
Why it matters for Investors
Innovation engine: R&D spend shows how much the company is investing in building its future products.
Competitive moat: Consistent R&D creates differentiation that protects long-term margins and market share.
Scalability signal: Tracks whether growth is driven by product improvement (healthy) or pure sales push (less durable).
Valuation impact: High, efficient R&D can justify premium valuations because it signals strong innovation ROI.
Why it matters for Investors
Innovation engine: R&D spend shows how much the company is investing in building its future products.
Competitive moat: Consistent R&D creates differentiation that protects long-term margins and market share.
Scalability signal: Tracks whether growth is driven by product improvement (healthy) or pure sales push (less durable).
Valuation impact: High, efficient R&D can justify premium valuations because it signals strong innovation ROI.
Why it matters for Investors
Innovation engine: R&D spend shows how much the company is investing in building its future products.
Competitive moat: Consistent R&D creates differentiation that protects long-term margins and market share.
Scalability signal: Tracks whether growth is driven by product improvement (healthy) or pure sales push (less durable).
Valuation impact: High, efficient R&D can justify premium valuations because it signals strong innovation ROI.
Formula
Practical considerations:
Include:
Salaries and benefits of engineers, scientists, designers.
Prototype materials, lab supplies, test data costs.
Contractor, consultant, and software development costs for R&D.
Depreciation of R&D equipment.
Exclude:
Routine maintenance or bug-fix work.
Quality assurance or customer-specific implementation.
Marketing, training, and admin overhead unrelated to R&D.
Timing: Record when incurred. If your policy capitalizes some development (e.g., certain software regimes), expense begins later via amortization.
Reporting location:
Income Statement: Under Operating Expenses
Balance Sheet: Any capitalized development costs appear as Intangible Assets and are amortized over useful life.
Formula
Practical considerations:
Include:
Salaries and benefits of engineers, scientists, designers.
Prototype materials, lab supplies, test data costs.
Contractor, consultant, and software development costs for R&D.
Depreciation of R&D equipment.
Exclude:
Routine maintenance or bug-fix work.
Quality assurance or customer-specific implementation.
Marketing, training, and admin overhead unrelated to R&D.
Timing: Record when incurred. If your policy capitalizes some development (e.g., certain software regimes), expense begins later via amortization.
Reporting location:
Income Statement: Under Operating Expenses
Balance Sheet: Any capitalized development costs appear as Intangible Assets and are amortized over useful life.
Formula
Practical considerations:
Include:
Salaries and benefits of engineers, scientists, designers.
Prototype materials, lab supplies, test data costs.
Contractor, consultant, and software development costs for R&D.
Depreciation of R&D equipment.
Exclude:
Routine maintenance or bug-fix work.
Quality assurance or customer-specific implementation.
Marketing, training, and admin overhead unrelated to R&D.
Timing: Record when incurred. If your policy capitalizes some development (e.g., certain software regimes), expense begins later via amortization.
Reporting location:
Income Statement: Under Operating Expenses
Balance Sheet: Any capitalized development costs appear as Intangible Assets and are amortized over useful life.
Worked Example
Beginning of March: None capitalized assumed.
Item | Description | Amount ($) | R&D? | Treatment | Notes |
|---|---|---|---|---|---|
A | Engineers building new AI feature | 180,000 | Yes | R&D Expense | Direct innovation work |
B | Prototype sensors and testing rigs | 60,000 | Yes | R&D Expense | Material used for development |
C | External contractor for model training | 40,000 | Yes | R&D Expense | Vendor directly tied to R&D |
D | Bug fixes in current version | 35,000 | No | Non-R&D Operating Expense (or COGS per policy) | Maintenance, not R&D |
E | Customer implementation work | 25,000 | No | COGS | Delivery, not innovation |
R&D Expense (March) = 180,000 + 60,000 + 40,000 = $280,000
Notes:
Track only new capability work here; move maintenance/bug fixes/implementations out.
Count costs when incurred; if you capitalize any development, show that separately and amortize later.
Split R&D by project/feature so you can tie spend to shipped outcomes.
Use two views: R&D % of Revenue and time-to-ship from project start to release.
Flag price-only vendor tools used mainly for R&D as R&D; general IT/admin tools are not.
Keep a short policy memo: what qualifies as R&D at your company, with 3–5 examples each of include/exclude.
Reconcile monthly: R&D expense + capitalized development = total R&D spend (so product budgets match finance).
For board decks, pair R&D spend with outputs: features released, patents, % revenue from products <3 years old.
Worked Example
Beginning of March: None capitalized assumed.
Item | Description | Amount ($) | R&D? | Treatment | Notes |
|---|---|---|---|---|---|
A | Engineers building new AI feature | 180,000 | Yes | R&D Expense | Direct innovation work |
B | Prototype sensors and testing rigs | 60,000 | Yes | R&D Expense | Material used for development |
C | External contractor for model training | 40,000 | Yes | R&D Expense | Vendor directly tied to R&D |
D | Bug fixes in current version | 35,000 | No | Non-R&D Operating Expense (or COGS per policy) | Maintenance, not R&D |
E | Customer implementation work | 25,000 | No | COGS | Delivery, not innovation |
R&D Expense (March) = 180,000 + 60,000 + 40,000 = $280,000
Notes:
Track only new capability work here; move maintenance/bug fixes/implementations out.
Count costs when incurred; if you capitalize any development, show that separately and amortize later.
Split R&D by project/feature so you can tie spend to shipped outcomes.
Use two views: R&D % of Revenue and time-to-ship from project start to release.
Flag price-only vendor tools used mainly for R&D as R&D; general IT/admin tools are not.
Keep a short policy memo: what qualifies as R&D at your company, with 3–5 examples each of include/exclude.
Reconcile monthly: R&D expense + capitalized development = total R&D spend (so product budgets match finance).
For board decks, pair R&D spend with outputs: features released, patents, % revenue from products <3 years old.
Worked Example
Beginning of March: None capitalized assumed.
Item | Description | Amount ($) | R&D? | Treatment | Notes |
|---|---|---|---|---|---|
A | Engineers building new AI feature | 180,000 | Yes | R&D Expense | Direct innovation work |
B | Prototype sensors and testing rigs | 60,000 | Yes | R&D Expense | Material used for development |
C | External contractor for model training | 40,000 | Yes | R&D Expense | Vendor directly tied to R&D |
D | Bug fixes in current version | 35,000 | No | Non-R&D Operating Expense (or COGS per policy) | Maintenance, not R&D |
E | Customer implementation work | 25,000 | No | COGS | Delivery, not innovation |
R&D Expense (March) = 180,000 + 60,000 + 40,000 = $280,000
Notes:
Track only new capability work here; move maintenance/bug fixes/implementations out.
Count costs when incurred; if you capitalize any development, show that separately and amortize later.
Split R&D by project/feature so you can tie spend to shipped outcomes.
Use two views: R&D % of Revenue and time-to-ship from project start to release.
Flag price-only vendor tools used mainly for R&D as R&D; general IT/admin tools are not.
Keep a short policy memo: what qualifies as R&D at your company, with 3–5 examples each of include/exclude.
Reconcile monthly: R&D expense + capitalized development = total R&D spend (so product budgets match finance).
For board decks, pair R&D spend with outputs: features released, patents, % revenue from products <3 years old.
Best Practices
Separate new product development from maintenance for clarity.
Track R&D by project or feature, not just department.
Monitor R&D / Revenue and R&D Efficiency (output per dollar spent).
Tie R&D to outcomes — new releases, patents, or % of revenue from recent launches.
Maintain a future-dated roadmap so R&D aligns with GTM and renewals.
Best Practices
Separate new product development from maintenance for clarity.
Track R&D by project or feature, not just department.
Monitor R&D / Revenue and R&D Efficiency (output per dollar spent).
Tie R&D to outcomes — new releases, patents, or % of revenue from recent launches.
Maintain a future-dated roadmap so R&D aligns with GTM and renewals.
Best Practices
Separate new product development from maintenance for clarity.
Track R&D by project or feature, not just department.
Monitor R&D / Revenue and R&D Efficiency (output per dollar spent).
Tie R&D to outcomes — new releases, patents, or % of revenue from recent launches.
Maintain a future-dated roadmap so R&D aligns with GTM and renewals.
FAQs
Why track R&D separately?
It shows how much you’re investing in innovation versus running the business. High R&D intensity signals a product-led, future-oriented company.What counts as R&D in startups?
Work that builds or improves the core product — engineering, design, data science, or prototyping. Not maintenance, onboarding, or marketing.Why isn’t R&D part of COGS?
COGS reflects the cost to deliver what’s already built. R&D builds what doesn’t exist yet, so it belongs in Operating Expenses.How do investors read R&D levels?
Too low → risk of stagnation. Too high → execution or focus risk. Balanced with output → strong product velocity and moat.How do I know if my R&D is efficient?
Track outcomes: number of releases, new features, patents, and % of revenue from products launched in the last 2–3 years.Should founder salaries be included?
Only if the founder works directly on product or technology development — not management or fundraising.Does R&D always create value?
No. Only when it converts to usable features, products, or defensible tech. Measure by what ships, not just what’s spent.
FAQs
Why track R&D separately?
It shows how much you’re investing in innovation versus running the business. High R&D intensity signals a product-led, future-oriented company.What counts as R&D in startups?
Work that builds or improves the core product — engineering, design, data science, or prototyping. Not maintenance, onboarding, or marketing.Why isn’t R&D part of COGS?
COGS reflects the cost to deliver what’s already built. R&D builds what doesn’t exist yet, so it belongs in Operating Expenses.How do investors read R&D levels?
Too low → risk of stagnation. Too high → execution or focus risk. Balanced with output → strong product velocity and moat.How do I know if my R&D is efficient?
Track outcomes: number of releases, new features, patents, and % of revenue from products launched in the last 2–3 years.Should founder salaries be included?
Only if the founder works directly on product or technology development — not management or fundraising.Does R&D always create value?
No. Only when it converts to usable features, products, or defensible tech. Measure by what ships, not just what’s spent.
FAQs
Why track R&D separately?
It shows how much you’re investing in innovation versus running the business. High R&D intensity signals a product-led, future-oriented company.What counts as R&D in startups?
Work that builds or improves the core product — engineering, design, data science, or prototyping. Not maintenance, onboarding, or marketing.Why isn’t R&D part of COGS?
COGS reflects the cost to deliver what’s already built. R&D builds what doesn’t exist yet, so it belongs in Operating Expenses.How do investors read R&D levels?
Too low → risk of stagnation. Too high → execution or focus risk. Balanced with output → strong product velocity and moat.How do I know if my R&D is efficient?
Track outcomes: number of releases, new features, patents, and % of revenue from products launched in the last 2–3 years.Should founder salaries be included?
Only if the founder works directly on product or technology development — not management or fundraising.Does R&D always create value?
No. Only when it converts to usable features, products, or defensible tech. Measure by what ships, not just what’s spent.
Related Metrics
Commonly mistaken for:
CapEx (Physical, proven long-term asset spend)
G&A Expense (Back-office costs, not R&D Expense)
S&M Expense (Go-to-market spend, not R&D Expense)
Related Metrics
Commonly mistaken for:
CapEx (Physical, proven long-term asset spend)
G&A Expense (Back-office costs, not R&D Expense)
S&M Expense (Go-to-market spend, not R&D Expense)
Related Metrics
Commonly mistaken for:
CapEx (Physical, proven long-term asset spend)
G&A Expense (Back-office costs, not R&D Expense)
S&M Expense (Go-to-market spend, not R&D Expense)
Source of:
Index