Want to get your SAAS accounting in order?
Then you’re in the right place!
My name is Connor Gillivan. I’ve been an Entrepreneur for the past 10 years and I’ve read hundreds of financial statements.
I ran an eCommerce business and a freelance marketplace, FreeUp, and now I run three companies: Outsource School, EcomBalance, and AccountsBalance.
In this article, we’ll break down everything you need to know about SAAS accounting.
Here’s what we’ll cover:
- What Is SAAS Accounting and How Does It Work?
- What Makes Accounting for SAAS Businesses Different?
- 3 Types of SAAS Accounting Methods
- Best SAAS Accounting Software
- Revenue Recognition for SAAS Companies
- Common SAAS Financial Metrics to Track
- SAAS Accounting FAQs
Let’s dive into it!
What Is SAAS Accounting and How Does It Work?
SAAS accounting is a specialized form of accounting that is specifically designed to cater to the unique financial requirements of SAAS businesses.
In this type of accounting, the focus is on tracking the financial performance of a SAAS business, which includes revenue, expenses, cash flow, and other financial metrics.
1. Recurring Revenue
Unlike traditional accounting, SAAS accounting involves the recognition of revenue over a period of time, rather than all at once.
This is because SAAS businesses typically charge their customers on a subscription basis.
For instance, if your SAAS business charges $100 per month for a subscription, and a customer signs up for a year, then you would recognize $1,200 in revenue over the year, rather than all at once. This is known as recurring revenue and is a fundamental aspect of SAAS accounting.
2. SAAS Revenue Recognition
Another key feature of SAAS accounting is that it involves the management of complex financial processes such as revenue recognition, deferred revenue, and subscription billing.
These processes can be quite challenging to manage manually, which is why many SAAS businesses use specialized accounting software to automate these tasks.
SAAS accounting software typically integrates with other business systems such as customer relationship management (CRM) software, payment gateways, and billing systems. This integration allows for seamless data transfer between systems, which can help to reduce errors and improve the accuracy of financial reporting. You can also find revenue recognition software that helps specifically with SAAS companies.
3. GAAP & ASC 606
In addition to the above, SAAS accounting also involves the management of financial compliance and regulatory requirements such as GAAP (Generally Accepted Accounting Principles) and ASC 606 (Accounting Standards Codification 606). Compliance with these standards is critical for SAAS businesses as it ensures the accuracy and transparency of financial reporting.
What Makes Accounting for SAAS Businesses Different?
As the world becomes more digital, Software as a Service (SAAS) businesses are becoming increasingly popular.
Unlike traditional businesses that sell physical products, SAAS businesses provide software solutions that are accessed through the internet.
While SAAS businesses have many advantages over traditional businesses, such as scalability and flexibility, they also have unique accounting challenges that need to be addressed.
1. SAAS Revenue Recognition
One of the biggest differences between SAAS accounting and traditional accounting is the way revenue is recognized. In traditional accounting, revenue is recognized all at once when a product is sold. However, in SAAS accounting, revenue is recognized over a period of time (subscription revenue accounting), typically monthly or annually. This is because SAAS businesses provide ongoing services rather than a one-time sale.
2. The Ability to Track Expenses
Another challenge that SAAS businesses face is tracking expenses. SAAS businesses often have unique expenses that need to be tracked, such as server costs, software development costs, and customer support costs. These expenses can vary greatly depending on the size of your SAAS business and can make accounting more complex than traditional businesses.
Server costs are a major expense for SAAS businesses as they need to maintain servers to host their software. These costs can include server hardware, software licenses, and maintenance fees. Additionally, SAAS businesses need to ensure that their servers are secure and reliable, which can require additional expenses for security software and backup systems.
Software development costs are another major expense for SAAS businesses. As SAAS businesses provide ongoing services, they need to continually develop and improve their software. This can include hiring developers, purchasing software licenses, and investing in research and development.
Customer support costs are also an important expense for SAAS businesses. As SAAS businesses provide ongoing services, they need to provide ongoing support to their customers. This can include hiring customer support staff, investing in support software, and providing training to staff.
3 Types of SAAS Accounting Methods
When it comes to accounting for SAAS businesses, there are three main methods that are commonly used. Each method has its own advantages and disadvantages, and choosing the right method can have a significant impact on the financial health of your business.
Cash-Basis Accounting
The first method, cash-basis accounting, is the simplest and most straightforward method. This method involves recognizing income and expenses when they are received or paid, respectively. This means that you only record revenue when you receive payment and expenses when you make a payment.
While this method is easy to understand and implement, it may not be the best option for SAAS businesses that have a lot of deferred revenue or prepayments. This is because cash-basis accounting does not take into account any revenue that has been earned but not yet received.
Modified Accrual Accounting
The second method, modified accrual accounting, is a bit more complex than cash-basis accounting. This method involves recognizing income when it is earned but recognizing expenses when they are paid. This means that you record revenue when it is earned, regardless of when payment is received, but you only record expenses when they are actually paid.
This method can be a good option for SAAS businesses that have a lot of deferred revenue or prepayments, as it allows you to recognize revenue when it is earned, even if payment has not yet been received. However, it can also be more difficult to implement and may require more accounting expertise.
Accrual-Basis Accounting
The third method, accrual-basis accounting, is the most complex of the three. This method involves recognizing income and expenses when they are earned or incurred, respectively. This means that you record revenue when it is earned, regardless of when payment is received, and you record expenses when they are incurred, regardless of when payment is made.
This method can provide a more accurate picture of your business’s financial health, as it takes into account all revenue and expenses, even those that have not yet been received or paid. However, it can also be the most difficult to implement and may require the most accounting expertise.
Ultimately, the method of accounting you choose will depend on the specific needs of your SAAS business. It’s important to carefully consider the pros and cons of each method before making a decision, and to consult with a qualified accountant or financial advisor if you’re unsure which method is right for you.
Best SAAS Accounting Software
Here are the 4 most popular SAAS accounting software:
- QuickBooks Online is a popular choice for small businesses due to its user-friendly interface and robust feature set. With QuickBooks Online, you can easily manage your finances, track expenses, and generate reports. Additionally, QuickBooks Online offers a variety of integrations with other software tools, such as PayPal and Shopify, making it a great choice for businesses that rely on multiple platforms.
- Xero is another top choice for SAAS accounting software. This platform offers a variety of features, including invoicing, payroll, and inventory management. Xero also offers a mobile app, allowing you to manage your finances on-the-go. One unique feature of Xero is its ability to handle multiple currencies, making it a great choice for businesses with international clients.
- Wave is a free SAAS accounting software option, making it a great choice for small businesses on a budget. While it may not offer as many features as some of the paid options, Wave still offers a variety of tools for managing your finances, including invoicing, accounting, and receipt scanning. Additionally, Wave offers a variety of integrations, including PayPal and Etsy.
- Zoho Books is another popular choice for SAAS accounting software. This platform offers a variety of features, including invoicing, expense tracking, and project management. Zoho Books also offers a mobile app, allowing you to manage your finances on-the-go. One unique feature of Zoho Books is its ability to automate workflows, streamlining your accounting processes and saving you time.
Read this article for more SAAS accounting software options.
Revenue Recognition for SAAS Companies
Revenue recognition is a critical aspect of accounting for SAAS companies. SAAS companies are unique in that they provide their services over a period of time, rather than delivering a tangible product. This makes revenue recognition more complex, as it requires the company to recognize revenue over the life of the contract.
The Financial Accounting Standards Board (FASB) has issued guidelines for SAAS companies to follow when it comes to revenue recognition. These guidelines state that revenue should be recognized over the period of the contract and that expenses should be recognized as incurred. This is known as the “matching principle,” which requires that expenses be matched with the revenue they generate.
Following these guidelines is critical for SAAS companies to ensure that their accounting is accurate and compliant. Failure to do so can result in financial penalties and damage to the company’s reputation.
One of the challenges of revenue recognition for SAAS companies is determining the length of the contract. SAAS contracts can range from a few months to several years, and the length of the contract can have a significant impact on revenue recognition. For example, if a SAAS company signs a three-year contract, it must recognize revenue over the entire three-year period, even if the customer pays upfront.
Another challenge is determining the fair value of the services being provided. SAAS companies must be able to estimate the fair value of their services at the time of the contract, as this will impact revenue recognition. This can be particularly challenging for new or innovative services that have no comparable market value.
SAAS companies must also be aware of the impact of changes in the contract. If a customer requests changes to the contract, this can impact revenue recognition. For example, if a customer requests additional services midway through the contract, the company may need to recognize additional revenue.
Common SAAS Financial Metrics to Track
In addition to revenue and expenses, there are other important financial metrics that SAAS businesses need to track. These include:
- churn rate
- customer lifetime value (CLV)
- customer acquisition cost (CAC)
- net profit margin
- refund rate
SAAS Accounting FAQs
What are common challenges of SAAS accounting?
There are several common challenges that SAAS businesses face when it comes to accounting. These include keeping track of recurring revenue and expenses, managing cash flow, and ensuring compliance with accounting regulations. Additionally, SAAS businesses often have complex revenue streams that can be difficult to manage, which can lead to inaccurate financial reporting if not handled properly.
Where can I hire a SAAS accountant or bookkeeper?
If you’re looking to hire a SAAS accountant or bookkeeper, there are numerous options available to you. You can use job boards and search engines to find freelance or full-time SAAS accountants or bookkeepers, or you can work with a company that specializes in providing accounting services to SAAS businesses. Some popular options include AccountsBalance, Pilot, & Bench.
What are the rules for SAAS revenue recognition?
As mentioned earlier, SAAS revenue recognition follows guidelines set by the FASB. These guidelines state that revenue should be recognized over the period of the contract and that expenses should be recognized as incurred. It’s important to ensure that your SAAS accounting follows these guidelines to ensure accuracy and compliance.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
SAAS accounting should be taken seriously.
As a SAAS business owner, you’re responsible to build the business based on how the financials are performing.
Make sure that you get your SAAS accounting under control early on in your growth.
This will help you avoid issues as you scale your SAAS customers.
If you still have questions about bookkeeping and accounting for your SAAS business, reach out to us at [email protected] and we’ll be glad to help!
Cheers!
