Accounting for SaaS companies can only be easy with the right tools.
When running a SaaS business, you wear all sorts of hats. You fill the role of marketer, sales executive, CEO, and operations manager. It would help if you were good at everything management and company-related — including accounting.
Tracking revenue and growth while keeping costs in check is a core aspect of growing a profitable, successful company. So let’s cover some of the basics of what you need to know.
What Founders Need to Know About SaaS Financial Statements
All company financial information can be summarized in the three formal financial statements. These tell a lot about the company’s financial history and current performance while indicating what’s to come.
The balance sheet is a snapshot of the company’s financial position at a specific time. It summarizes your business’s assets, liabilities, and equity.
A balance sheet is valuable to SaaS founders because it provides helpful insight into a business’s overall financial health and position. It allows management and investors to gauge the value of a business’s current assets and its ability to pay off any current liabilities.
A balance sheet also shows changes in financial performance over time which can aid in strategic decision-making.
The income statement, or profit and loss statement, is a financial document that outlines a company’s revenue and expenses over a given period.
The income statement helps SaaS founders understand how their company performs at any given time, making it an essential tool in analyzing the financial health of a business. It also helps business owners make more informed decisions about their operations.
For SaaS founders, having up-to-date income statements can help them better understand their customer base and whether their product is growing in popularity or declining. Income statements give SaaS founders real-time insights into how their pricing structure affects profitability and cash flow.
Cash flow statement
The cash flow statement summarizes the inflow and outflow of cash in a business. It shows all sources of revenue, including sales and investments, and expenses, such as overhead costs and taxes, and provides crucial insights into the business’s overall financial health.
The information provided by the cash flow statement can be extremely useful to SaaS founders when it comes to making strategic decisions about their product or customer base. Savvy founders can use it to get visibility into how their pricing structure affects profitability, what expenses need to be cut back on in order to save money, and where reinvestment opportunities may lie within their company.
Accounting Principles for SaaS Companies
Managing your business finances involves understanding the basics of accounting for SaaS companies.
Accrual Basis Accounting
Accrual accounting allows you to recognize revenue when you’ve earned it rather than upon receiving payment. It makes your balance sheet more accurate and less subject to change based on cash flow fluctuations.
Public companies and businesses with over $25 million in sales over three years must use accrual-based accounting. It makes sense for companies that see a large mismatch between expenses, revenue, and cash generation.
Double-entry accounting is a method of accounting that uses two entries – a debit and a credit – to record all transactions.
SaaS companies use double-entry accounting because it allows for accurate tracking of all financial information. It also allows companies to see where they stand financially at any given moment, and helps SaaS entrepreneurs maintain an accurate picture of their business’s financial health.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) are the standards that govern financial reporting for public companies. They come from a set of rules established by the Financial Accounting Standards Board (FASB), a private, non-governmental organization.
In SaaS companies, GAAP rules can affect your business by defining how you can recognize costs and revenues and which information you must include in company reports.
The Importance of Good Bookkeeping
Keeping good records is important for any business, but it’s especially important for SaaS companies. Solid records are essential for making informed decisions about pricing and strategic partnerships or whether you should hire more developers.
Software and automated bookkeeping tools has become a core aspect of maintaining accurate financial records, saving you time and money while improving accuracy and efficiency.
Automation helps accountants and bookkeepers easily manage more complex tasks, allowing them to focus on higher-level tasks like planning and forecasting.
SaaS Financial Reporting
These businesses follow a set of common, yet distinct, financial principles underpinned by robust accounting for saas companies.
Common Financial Ratios
Financial ratios are a valuable tool for comparing your company’s performance to itself and others in the same industry. Using these common financial ratios, you can measure your business relative to its peers and identify areas for improvement.
Ratio analysis is helpful because it helps you make informed decisions about allocating resources and optimizing your business model.
Organizations use financial ratios to measure the performance of a company. The most common financial ratios include:
- The Gross Profit Margin Ratio: divide gross profit by sales. This ratio shows how much money remains after deducting direct labor and material costs from sales revenue.
- The Operating Profit Margin Ratio is calculated by dividing operating income by sales. It shows how much money is left over after deducting all operating expenses from sales revenue.
- The Net Profit Margin Ratio is determined by dividing net income by sales. This ratio shows the amount left after deducting all expenses from sales revenue.
Cash Flow Analysis
SaaS businesses can burn a lot of cash building a product and attracting customers in the early stages. Cash flow analysis is a vital tool for helping understand where the money comes from and goes to, showing how your business is performing.
Budgeting and Forecasting
Budgeting and forecasting are essential for SaaS companies because they help a company understand and anticipate future needs and manage cash flow. They also help founders better understand their businesses’ financial health and direct better decisions about what to focus on in growth and product development.
For example, budgeting can help you determine how much money you’ll need to expand the size of your team or support new product features. Forecasting can help you predict how much revenue you’ll generate from different marketing efforts and customer segments.
You can use this information to decide where it’s worth investing.
Taxes for SaaS Companies
SaaS businesses can have customers anywhere in the world, even at an early stage, without needing to build out physical storefronts or distribution methods. While this is an advantage that helps with growth and can mean tax topics are more complicated for SaaS than other sectors.
Sales tax is a tax consumers pay to state and local governments for goods and services they purchase. It can be seen as an indirect tax because it is collected from the consumer at the point of purchase.
The proceeds from sales tax are then redistributed to different government services such as education, public safety and infrastructure. As SaaS entrepreneurs expand their products across state lines, they must be aware of the applicable sales taxes in order to avoid facing hefty fines.
Payroll taxes are a necessary expense that every company, including SaaS businesses, must pay.
The most common payroll tax is FICA (the Federal Insurance Contributions Act), which includes Social Security and Medicare. These taxes help provide benefits for retirees and people who become disabled. State and federal unemployment insurance (UI) taxes are also a component of payroll taxes.
When it comes to income tax, SaaS companies are subject to the same rules as any other business. Because of rapid growth and high up-front development costs, there is often a mismatch between earnings and expenses. SaaS companies should align with their CPA on applying the R&D tax credit and the rules surrounding capitalizable development expenses.
Looking for a Partner Experienced in Accounting for SaaS Companies?
SaaS can be an exciting, highly profitable, but sometimes complex, sector to do business in. Understanding the accounting fundamentals will help your SaaS company build a robust financial basis and help you make informed financial decisions.
As a founder, basic knowledge and understanding can go a long way toward helping your company succeed. But the help of a professional is essential for implementing robust processes that help you steer the business.
The experts at Founder’s CPA team can help you handle all of the complexities associated with building and running a successful SaaS business. Contact us today to see how we can help.