SaaS Accounting: Benefits and Best Practices for Finance Teams

Reviewing the contracts you hold each month is imperative so that you don’t prematurely recognize revenue. The price of incorrectly accounting for revenue and deferred revenue can be high. Public technology companies spend even more time doing due diligence of SaaS revenue recognition, so if you are going to be acquired these numbers matter. Deferred revenue is even more complicated since it’s not as easy of a financial figure to understand. At its most basic level, if your clients are paying ahead of time for services, your company will put a deferred revenue liability onto the balance sheet.

• For these types of outstanding payments contracts are lumped into 3 different collection windows 30-days, 60-days, and 90-days.
• The matching principle means that revenues and their expenses must be recorded in the same period.
• Apprenda can also be used for safe development of accounting software, and accounting data maintenance.

A mess of calculations that don’t accurately give insight into the state of the company. If you aren’t already working with a SaaS business in some capacity, the chances are high that you will soon. As an accounting professional, it is crucial to understand the differences in managing the operations and finances of a traditional software business versus those of a SaaS business.

Products

To stay compliant, you always should recognize revenue evenly over the life of the contract, even if that means at the beginning of the contract you are recognizing more revenue. The accrual accounting method is a double-entry method that follows the matching principle. A double-entry method is when every business transaction makes an equal and opposite change in at least two different accounts. The matching principle means that revenues and their expenses must be recorded in the same period. As accountants, it pain us to say this, but gross profit is an under appreciated SaaS metric. A SaaS company’s Gross Margin is a financial metric that measures the profitability of a company’s products or services.

• It manages the intricacies of long sales cycles, with many customer touchpoints, and varied pricing models.
• For SaaS companies, accurate GAAP financials and metrics are vital, since SaaS models primarily rely on future revenue and performance.
• The rules and guidelines for financial accounting and reporting are enlisted by accounting standards.
• They set up our books, finances, and other operations, and are constantly organized and on top of things.
• Accountants can be so much more than back-office number crunchers bogged down by compliance structure and data aggregation.
• Accrual basis accounting doesn’t count revenue until cash is earned, regardless of how much cash is on hand.

While many key SaaS metrics and KPI’s are not reported in financial statements, many key metrics can be pulled from financial statements. This means that the company has to have some extra accounts for both income and expenses. For revenue, Accounts Receivable is needed to record revenue earned but not yet received, and Unearned Revenue is needed to record revenue received but not yet earned. While this is a very simplified example, you can see how cash-basis accounting distorts a company’s true earnings. There are a few key differences between SaaS companies and other business models that make SaaS accounting unique from other companies.

Enterprise Solutions

This is where a founder, their sales team, their accounting system and their SaaS accountant need to be in tight sync! Companies recognize revenue when the service is actually delivered to the client. SaaS accounting rules state that a contract is recognized ratably over the life of the contract live/as the service is used by the customer. ASC 606 and IFRS15 establish when businesses should recognize the revenue for contracted services.

SaaS accounting refers to recording, analyzing, and interpreting the financial information of your SaaS business. Because of the complexity of accounting in SaaS, most SaaS businesses leverage cloud SaaS accounting software to manage their financial statements and reports. Revenue recognition is one of the principles of the Generally Accepted Accounting Principles (GAAP US). It provides the condition under which revenue is recognized and a way to account for it in the financial statements.

Can AI be the future of Financial Crime?

In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see /about to learn more about our global network of member saas accounting firms. For example, if a customer can terminate at any point and receive a pro rata refund, the arrangement should be accounted for as a daily contract. SaaS is a popular and viable option for businesses, both large and small. In recent industry surveys, experts have identified SaaS accounting as one of the top selling categories of SaaS software used by corporations.

The following products are highlighted because they offer SaaS-tailored tools and rank highly on the Accounting Software TrustMap—a dynamic grid that measures TRScore and the interest of B2B buyers. They are ordered according to the number of ratings and reviews they’ve earned on TrustRadius. Companies large and small have learned the hard way that Excel won’t cut it for their accounting needs. Case in point, Chase’s $2 billion loss due in large part to errors in manual Excel spreadsheets. This reduces the cost of chargebacks and administrative costs which come with chargebacks. In some tax jurisdictions it is legally required to store all the invoices for 10 years, so that tax authorities can audit those invoices and relevant tax filings.

Cash Flow Statement

It’s not a GAAP or accounting defined metric, but it’s a way of looking at contracts that has been informally agreed upon by well-known SaaS investors and startup founders. It’s important to let investors know how you’re calculating it, so there are no surprises. It doesn’t include non-recurring revenue streams such as installation or one-off consulting revenue. It’s important for SaaS companies because it helps them understand the average value of a customer contract and predict future revenue. It’s also used to measure the performance of sales teams and the overall health of the business.

However, the scruples about data leakage cannot be ignored, especially by the large and small enterprises. As the financial data is immensely invaluable for any concern, so there are specific providers for PaaS one needs to consider for secure access and usage for virtual accounting. https://www.bookstime.com/articles/accountant-for-independent-contractors SaaS accounting software helps businesses realize cost savings because they only pay for the resources they use. Companies either pay a monthly or annual fee for access to the software. Therefore, data migration is an essential feature of good accounting software.

What is Recording Transaction in SaaS Accounting?

This model is advantageous in the sense that your business can better forecast revenue and expenses. Although complicated compared to cash-basis accounting, accrual accounting can better serve quickly growing SaaS businesses. If a SaaS has high bookings but lower billings, it is a leading indicator of future cash flow problems. To maintain healthy cash-flows, SaaS businesses have to think of ways to get customers to pay upfront and increase billings. SaaS accounting is a bit more nuanced because of the subscription business model. The revenue is subject to routine changes (think plan upgrades/downgrades) and is mixed with one-time fees and upfront payments.

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Step 5: Monitor & Analyze Metrics

It’s not uncommon for some accounting teams to spend upwards of three weeks trying to close the books on the previous month. The mission-critical workflows, when handled in entirely manual ways, are massively time-consuming, which has two effects. First, it means that by the time accounting delivers the numbers to the rest of the business, they’ve essentially gone stale. And second, it means that you have little time left to offer any strategic value to the business.