Keeping accurate and consistent accounts and financial documents can make or break your long-term success.
According to Botkeeper, Philadelphia’s government lost $924 million to simple bookkeeping errors in a single year. That’s just one of many examples emphasizing the very expensive nature of poor accounting.
At Founderpath we’re well aware of how vital it is for bootstrapped SaaS founders to get things right from the get-go if they want to scale. In this guide, we’ll explain what SaaS accounting is, the best practices you’ll want to employ and the insights well-kept accounts can offer.
Let’s dive in!
What is SaaS Accounting?
Generally speaking, SaaS accounting is no different from any other type of accounting. It involves keeping records of financial data, as well as analyzing and interpreting this data to gain insights, make decisions, and comply with tax laws.
However, due to the complexity of subscription-based models and recurring revenue, it can be a more taxing process (excuse the pun). Due to the amount of work involved, SaaS businesses tend to employ cloud SaaS accounting software.
What are the different types of SaaS accounting?
There are two main methods used for SaaS accounting:
Cash-basis accounting involves recording revenues and expenses in your accounting records when money is actually received or spent.
This approach is popular with small businesses, as it’s built on the fairly intuitive idea that your books should reflect your bank balance. While that might seem like a good match for SaaS businesses at first glance, it can be problematic for services with subscription-based or recurring revenue streams.
Accrual-basis accounting involves recording revenue and expenses when the transactions occur—not when money actually enters or exits your accounts.
This model is well-suited for SaaS, as it can offer improved revenue and expense forecasting. While this approach is more complex than cash-based accounting, it’s a great match for SaaS businesses, especially those experiencing fast growth.
Accrual accounting books with reported assets and liabilities reported can provide you with a clear sense of your existing resources and allow you to plan ahead intelligently. Moreover, your accrual accounts track monthly recurring revenue (MRR), arguably the most important metric for SaaS.
Examples of SaaS accounting metrics that you should track
There are many accounting metrics you’ll want to keep track of for the various insights they can provide you about your business, its projected future, and its relationship with customers.
Monthly recurring revenue (MRR)
MRR is how much your SaaS expects to receive per month. You can calculate this metric using the following formula:
MRR = (Sum for all Tiers (Number of Subscribers * Monthly Subscription Price))
Monitoring this MRR over time will give you a sense of how well your SaaS is performing and whether it is growing (and if so, to what extent).
Customer acquisition cost (CAC)
CAC is simply how much you need to spend (on average) to acquire a new customer. For SaaS companies, these costs will usually include marketing and sales software, wages, overhead, and professional services (e.g., SEO agencies).
To calculate CAC, you can use the following equation:
CAC = (CC + W + S + PS + O) ÷ CA
- CC: Campaign costs
- W: Wages
- S: Software
- PS: Professional services
- O: Overhead
- CA: Customers acquired
CAC serves the purpose of determining how profitable your acquisition teams are. Of course, if CAC is higher than customer lifetime value (CLV) your business is not sustainable. Ideally, you’ll want to spend no more than 33% of your CLV to obtain the customer in the first place—although this does vary from business to business.
Founderpath helps bootstrapped SaaS founders stay on top of key metrics like CAC, MRR, and churn with an automated reporting suit that delivers data-driven insights about expenses, payroll, and growth. You can even benchmark your SaaS against other companies to get an idea of where your business is headed!
Bookings happen when customers reserve the right to use your service(s) in exchange for a set payment. While bookings are a form of deferred revenue (i.e., money that customers have committed to pay but you’ve yet to receive), they’re your best indicator of future revenue growth.
This can refer to either customer churn or revenue churn. Starting with the former, customer churn measures how many customers/accounts leave your service per month as a percentage of your SaaS’ total customer count. Revenue churn, on the other hand, measures how much money exits your revenue stream per month as a percentage of total revenue.
Measuring your churn rates can give you a sense of how well your SaaS is performing when it comes to customer retention. If your churn rate is too high and/or growing, take proactive action to ensure this trend doesn’t lead to financial disaster.
Why is SaaS accounting important?
Facilitates ease of business growth
Well-kept SaaS accounts provide a clear overall sense of your SaaS’ financial well-being. Knowledge is power; the more you know about your SaaS’ financial security and projected growth, the more informed your decision-making will be.
With accurate SaaS accounts and analysis, you’ll have a better idea of when to hire and to what extent you’ll want to expand your SaaS at different points in time. SaaS accounting can help you grow your business effectively and smoothly.
Accurate accounts can also generate confidence and trust in your investors and other relevant parties. It communicates your reliability as a business, and the proof is in the pudding if your accounts insights at least approximately reflect what follows in the quarters ahead.
To bring that level of reliability to your SaaS, you may want to consider using Founderpath. Our service can help bootstrapped founders get capital and turn monthly subscriptions into upfront cash!
Create budget projections
Good SaaS accounting can help you create a projection-based budget. With an accurate budget, you will know how much you can safely spend in different areas, particularly if it relates to growing your business.
Getting this right is key, as you don’t want to spend more than you can afford to lose investing in growth efforts. What’s more, you certainly don’t want to find yourself unable to pay expenses when due; thus, budgeting can help in more ways than one.
SaaS accounting best practices
Benefits aside, there are many essential practices to ensure your SaaS accounts are as accurate, useful, and legally sound:
Keep your personal and business finances completely separate
It should go without saying that personal and business finances must be kept separate. Neither you nor any of your employees should ever buy items for personal use with business funds.
Not only can this mistake hamper financial growth for your SaaS, but may result in tax complications and even legal consequences. Needled to say, the latter two can damage or even destroy a business’s reputation.
Select an accounting method
Be sure to choose a suitable accounting method from the start. More than likely cash-basis accounting will prove the best option for your SaaS.
However, a substantially large business may want to consider accrual accounting.
Create & maintain a chart of accounts
Using accounts charts can help you sustain an overall summarization of your SaaS’ financial health. These charts will tell you precisely where your business’s cash flow is originating from and any money you owe your creditors. These charts can prove useful when you want to review a breakdown of your finances rather than perform an in-depth financial analysis.
According to Personiv, these are the five main categories of accounts charts:
- Assets: Money that your SaaS is owed (i.e., the total amount of your outstanding invoices)
- Liabilities: Debt that your SaaS owes
- Equity: Ownership interest in your SaaS
- Revenue: How much your SaaS earns
- Expenses: How much you spend in efforts to generate revenue
Automate whatever you can
While many aspects of accounting require the nuance and ingenuity of a human being, some tasks can certainly be automated.
Processes that you may wish to automate include:
- Expense reports
- Threshold-based approvals
- Accounts payable
- Accounts receivable
Stay on top of your taxes
You must track all applicable taxes correctly to budget appropriately and ensure you pay your share of taxes. What taxes will apply to your SaaS can depend on the type and scale of your business.
Sit down with an experienced business accountant if needed to ensure your business is following all legal requirements and that you’re aware of the taxes you must pay and how they apply.
Ensure consistency in financial documents
As alluded to earlier, building trust with investors and other parties can play a role in shaping future earnings. Errors in key financial reports will reflect poorly on your business. These mistakes can ultimately harm your reputation and will likely lead to a loss of revenue over time.
Therefore, you must allocate sufficient time to ensure your financial documents are accurate and consistent. Double and triple checking can give you the peace of mind needed ahead of any shareholder meetings.
This guide has explored why SaaS accounting matters and the best practices you’ll want to employ. We also looked at the two key types of SaaS accounting and useful metrics you can measure through proper analysis.
If you’re eager to get your bootstrapped SaaS off the ground, Founderpath is here to help. Our service has helped over 3,000 SaaS founders (so far) turn their MRR into upfront cash without sacrificing equity or agreeing to predatory terms.
Try Founderpath today and see how much capital you could unlock!