Saas Accounting 101: How to do Accounting for Your SaaS

What is SaaS accounting?

SaaS accounting is a specialized form of accounting that is designed for software-as-a-service (SaaS) startups and businesses.

Unlike traditional businesses, SaaS companies typically generate revenue through subscription-based models, which can present unique challenges when it comes to accurate financial reporting.

Strategic areas

SaaS accounting helps to ensure that a company’s financial statements accurately reflect its recurring revenue streams and other key SaaS metrics.

In addition, SaaS accounting can help startup companies manage their cash flow and make informed decisions about pricing, product development, and other strategic areas.

As the SaaS industry continues to grow, SaaS accounting will become an increasingly important part of doing business.

Why is SaaS accounting important?

SaaS accounting is important for startups and businesses because it helps to track expenses and income.

SaaS accounting software can help businesses manage their finances and make informed decisions about their spending.

Without accurate financial information, businesses can quickly become overwhelmed by expenses and miss opportunities to save money.

In addition, SaaS accounting can help businesses keep track of their customers and vendors.

Valuable insights

By tracking customer payments and invoices, businesses can better manage their cash flow and avoid late payments.

For startups, SaaS as accounting can provide valuable insights into the financial health of the business.

By understanding where the business is spending its money, startups can make informed decisions about how to allocate their resources.

When used correctly, SaaS accounting can be a powerful tool for managing finances and growing a business.

7 SaaS accounting basics you need to know about

If you’re new to the world of SaaS accounting, there are a few basics you need to know.

Accrual accounting

Accrual accounting is an essential part of running a successful SaaS business.

By recognizing revenue and expenses when they occur, rather than when cash changes hands, accrual accounting provides a more accurate picture of your company’s financial health.

This information is essential for making sound business decisions and for attracting investors.

While accrual accounting can be complex, there are many software programs and online resources that can make the task easier.

With a little time and effort, you can ensure that your accrual accounting is up to par and that your business is on the path to success.

The revenue recognition

Revenue recognition is a complex and ever-changing accounting principle that SaaS companies must carefully navigate.

The revenue recognition principle generally requires that revenue be recognized when it is earned, which can pose challenges for SaaS companies since they typically provide access to their software on a subscription basis.

To comply with the revenue recognition principle, SaaS companies must carefully consider the terms of their subscriptions and the value that their customers receive.

Additionally, SaaS companies must keep up with changes in revenue recognition accounting standards, which can vary from country to country.

Despite the challenges, SaaS companies that appropriately apply SaaS revenue recognition principles can provide valuable insights into their business performance.

The matching principle

The matching principle is one of the most important accounting rules for SaaS businesses.

Simply put, the matching principle requires that expenses be matched with revenue in the same accounting period.

This ensures that the financial statements accurately reflect the true cost of doing business.

Without the matching principle, SaaS businesses would be able to defer expenses indefinitely, which would give them an unfair advantage over their competitors.

Fortunately, the matching principle is well-established and there are clear guidelines for how to apply it.

As a result, SaaS businesses can continue to grow and thrive while ensuring that their financial statements are accurate and transparent.

Generally accepted accounting principles (GAAP)

The Financial Accounting Standards Board (FASB) has issued guidance on accounting for software as a service (SaaS).

This guidance is in the form of a FAQ document, which provides answers to common questions about the application of GAAP to SaaS transactions.

FASB guidance generally recommends accounting for SaaS transactions in the same way as subscriptions.

A subscription-based revenue recognition model would be appropriate here, over the contract’s lifecycle.

For example, if a customer signs a one-year contract for $100 per month, the company would recognize $1,200 of revenue over the year.

The main implications of this guidance are for deferred revenue and metrics such as customer churn.

Companies that previously recognized revenue upfront, will now need to adjust their financial statements and disclosures to reflect the change in accounting policy.

In addition, companies will need to pay close attention to metrics such as customer churn, as this will have a direct impact on deferred revenue.

Cash basis accounting

It is a method of recording revenue and expenses that only records cash exchanges.

This means that income is only recognized when cash is received, and expenses are only recognized when cash is paid out.

For businesses that use cash basis accounting, it’s important to closely monitor cash flow to ensure that there is enough cash on hand to cover expenses.

Many small businesses, including startups and SaaS companies, use cash basis accounting because it’s simpler than accrual basis accounting (which records revenue and expenses when they’re incurred, regardless of when cash changes hands).

Cash basis accounting can also be a good choice for businesses with irregular cash flow or businesses that have difficulty predicting when they will receive payment.

However, there are some drawbacks to using cash basis accounting.

First, it can create a distorted view of financial performance since income isn’t recognized until after payment is received.

This can make it difficult to track trends and make long-term decisions.

Second, cash basis accounting doesn’t comply with generally accepted accounting principles (GAAP), so businesses that use this method may have trouble obtaining financing.

Overall, cash basis accounting can be a good choice for small businesses and startups that want to simplify their financial reporting. However, it’s important to understand the pros and cons of this method before making a decision.

Accrual basis accounting

As a SaaS company, one of the most important things you can do is track your SaaS metrics.

This will help you to ensure that you are always improving your product and growing your business.

Part of tracking your SaaS metrics is understanding accrual basis accounting.

This type of accounting records revenue when it is earned, regardless of when the money is received.

This is important for SaaS startups because it allows you to track your growth over time and identify areas where you need to improve.

By understanding accrual basis accounting, you can make sure that your SaaS  company is always on the right track.

Income statement

As a SaaS company, it is essential to have a clear understanding of your income statement.

This document shows your company’s revenue, expenses, and profit for a given period.

It can also be used to track your cash flow and assess your overall financial health.

To create an income statement, you will need to gather data on your sales, costs of goods sold, cash flow statement, GAAP financial statements, operating expenses, and any other income or expenses.

Once you have this information, you can input it into a template or software program to generate the statement.

Reviewing your income statement regularly can help you to identify problems early and make necessary adjustments to keep your business on track.

How to start with SaaS accounting?

SaaS businesses are unique and require a different approach to accounting than traditional businesses.

However, there are some key concepts that all SaaS startups should be aware of.

One important concept is deferred revenue.

This is the revenue that a SaaS business has collected, but has not yet earned.

Lifetime value (CLV)

Because SaaS businesses typically have recurring revenue, it’s important to track this deferred revenue so that you can correctly account for it in the future.

Another key concept is the customer lifetime value (CLV).

This is the total value that a customer will bring to your business over the entire course of their relationship with you.

Knowing your CLV can help you make strategic decisions about marketing and sales spending.

Finally, it’s also important to understand the difference between cash and accrual basis accounting.

Business’s financial health

Cash basis accounting recognizes revenue when cash is received, while accrual basis accounting recognizes revenue when it’s earned.

For most SaaS businesses, accrual basis accounting is more accurate and provides a better picture of the business’s financial health.

SaaS accounting: DIY or outsource?

Bookkeeping and accounting system is the core infrastructure for any business.

It is a set of software programs that record, classify, and summarize financial transactions to provide information that is useful in making business decisions.

The term “accounting” can refer to the bookkeeping and accounting system as a whole or specific activity within the bookkeeping and accounting system. 

External service providers

Businesses have traditionally outsourced bookkeeping and accounting to external service providers.

However, with the advent of cloud-based bookkeeping and accounting systems, many businesses are now considering whether to DIY or outsource their bookkeeping and accounting. 

Defined performance obligations

There are several factors to consider when deciding whether to DIY or outsource bookkeeping and accounting.

One important factor is performance obligations.

When businesses outsource bookkeeping and accounting, they typically enter into contracts with service providers that specify the level of service to be provided.

In contrast, when businesses DIY their bookkeeping and accounting, they may not have clearly defined performance obligations.

As a result, it may be difficult to hold businesses accountable for errors or omissions in their bookkeeping and accounting. 

Another important factor to consider is cost.

Outsourcing bookkeeping and accounting can be expensive, particularly for small businesses.

By DIYing bookkeeping and accounting, businesses can save money on labor costs. 

Outsourcing may be the best option

Finally, businesses should also consider their internal capabilities when deciding whether to DIY or outsource bookkeeping and accounting.

Do they have the necessary resources (e.g., trained staff, adequate technology) to DIY bookkeeping and accounting?

If not, outsourcing may be the best option. 

There is no one-size-fits-all answer to the question of whether to DIY or outsource bookkeeping and accounting.

The decision should be made on a case-by-case basis, taking into account the specific needs of the business.

How is SaaS accounting different?

Business owners who offer software as a service can use SaaS accounting to keep track of their finances.  

Because SaaS businesses have a recurring revenue model, they have unique accounting needs that traditional businesses do not.

For example, SaaS businesses must account for subscription revenue, deferred revenue, and customer churn.

In addition, SaaS businesses often have complex pricing models, which can make it difficult to accurately track revenue.

As a result, SaaS businesses need to use specialized accounting software to manage their finances.

This software typically includes features such as subscription management, churn analysis, and deferred revenue recognition.

By using these tools, SaaS businesses can more accurately track their finances and make better decisions about pricing and product development.

Can you capitalize implementation costs for SaaS?

Many SaaS products have a free trial period, which allows users to try out the product before commitment.

  In order to proceed, the user must first commit to using the service and pay for it.  

But can you capitalize on implementation costs?

In other words, can you treat the cost of using the software as an investment, rather than an expense?

The answer is yes and no. If you are using the software for business purposes, then you can capitalize on the costs.

This means that you can deduct the costs from your taxes as business expenses.

However, if you are using the software for personal use, then you cannot capitalize on the costs.

You will simply have to treat them as personal expenses. In either case, it is important to keep track of all your expenses so that you can file your taxes accurately.