Companies focused on a SaaS model have an absolute need for a proper accounting system even from the start of their operations. These businesses tend to use a subscription-based model which differs from that of a traditional business. All charges that are billable to clients are set up into subscription fees that are paid in a specific set of time which is stipulated in contracts.
Bookkeeping for SaaS Companies is invaluable in the process of recognizing the generated revenue in a given time-frame. Recording the transactions relating to operations, finances, and even investments give the business a clear view over the financial health of their organization.
With those in mind, Bookkeeping Services can be a great choice for SaaS Companies who need to commit their workforce to the distribution of their products and services. An organized Bookkeeping and Accounting Firm can make sure that the proper transactions and expenditures are all tallied for use during tax season and vital business decisions.
The Process of Revenue Recognition for SaaS Companies
In the case of SaaS companies, they field a business plan wherein customers pay upfront in either monthly or annual contracts. Within this payment period, clients can make use of a particular service that the SaaS offers.
When a SaaS company gains a new client, the profit gained from it is still not categorized as revenue as it’s only recognized at the end of the contract. Before the end of the contract, it is known as a liability. Now, this comes with its own complications when it comes to revenue recognition as there’s the chance of clients that might terminate their contracts while still in the payment period.
There is also the aspect of deferred payment which is a value that needs to be recognized as an advance payment whenever an invoice is created. This lasts for the entirety of the service period and can impact income statements in a grand way.
Guidelines for Revenue Recognition
There is a set of guidelines that are set in place for the purposes of revenue recognition, named the “Guiding Principles of Revenue Recognition”. Also known as “ASC 606”, it covers various contractual situations which involve the sale of goods and services. There are 5 main provisions stipulated in the document:
- Identify the contract(s) with a customer
This involves creating the contract which stipulates a set of enforceable rights and obligations to be met all throughout the contract period. It is deemed valid if it has the approval and commitment of both parties, as well as the identification of both rights and payment terms. The contract is also valid if it contains commercial substance and if there is a specified exchange of goods and services that are transferred to the client.
- Identify the Performance Obligations In The Contract
Firstly, what is a “performance obligation”? This is the promise made in order to distribute a product or service to a client. These performance obligations must be distinct by being a benefit to the client on its own or with the help of resources available to the client. Performance obligations must also be identifiable, where the specific service is separate to the other services offered in the contract.
Should one service not be ruled as distinct, then the business should bundle it with other promised services until the whole combined bundle meets the requirements of being identifiable and distinct.
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- Set The Transaction Price
This is the amount of payment which the business can expect in return for providing services to the client. SaaS business should take into deep consideration whether or not this transaction price is variable with the expected value in mind. They should also look into Noncash consideration promised by the client, estimating the value of such and put that into their estimations.
Vouches and Discounts are examples of a Consideration that is payable to the customer. The business should account for the reduction in the transaction price, as well as whether variable consideration will affect the constraining estimates made.
- Allocate The Transaction Price To The Performance Obligations In The Contract
The transaction price set on the contract should be allocated to each performance obligation with an amount that reflects the payment expected by the SaaS Business. This involves finding the standalone selling price of each distinct service and product offered in a performance obligation.
If there is no set selling price, estimations must be made to its value. It may also be subject to reductions and discounts which are allocated to one performance obligation stated in the contract. The amounts allocated to a completed performance obligation can then be recognized as either revenue or loss, depending on the changes in transaction price during the contract period.
- Recognize Revenue When (or As) the Entity Satisfies A Performance Obligation
For each of the performance obligations satisfied by the business if the client receives the necessary benefits given by the product within the contract’s timeframe. Not only that, the client must also have an asset either created or enhanced by the businesses’ product. With that in mind, the SaaS service provider then has an enforceable right to payment.
The Importance of Bookkeeping for SaaS Companies
Within the realm of Bookkeeping, revenue is seen as credits as they increase either owner’s or stockholder’s equity of a business. Owner’s equity is stated within a balance sheet and represents the investment made by the owner subtracted from withdrawals made and with either net income or loss added in.
Owner’s equity is but one element of the accounting equation, which states revenues as an increase due to it eventually being transferred to the owner’s or shareholder’s account. This is also stated on the balance sheet as an automatic increase in profits, which then raise equity alongside it.
The Accounting Equation
Tracking Spending and Financial Resources
Bookkeeping is a great asset to rely on not only during critical times such as tax seasons. Responsible tracking of your SaaS business’s records can give you the financial insight required to steer your organization to your financial goals. Business that employs professional bookkeeping services have the advantage of a clear record of transactions, giving them access to a clear view of the financial position their business is in.
For SaaS companies experiencing rapid growth, the massive amount of data coming in from your transactions can cause confusion when figuring out the direction of your cash flow. The deferred payments scheme can also be a problem when figuring out the amount of capital available to the business, so accounting and bookkeeping service providers can help in understanding the true amount available.
This can be a lengthy process, as seen with the steps we’ve discussed above. Not only is Revenue Recognition important in figuring out the working capital, it can also be an essential part of selling the business to investors or if undergoing financing operations. A good bookkeeping procedure can help in managing this endeavor, making the whole process easier in the long run.
Should you be making use of digital software meant for bookkeeping for SaaS businesses, you can use automation to streamline certain tasks. Even the most experienced accountant or bookkeeper knows the issues that can be caused by a small accounting error, which is even more prevalent in manual data entry and bookkeeping.
Automating your bookkeeping procedures can help save you money by cutting down on labor costs. You may also fit your pricing and billing plans according to how your system is set up in order to optimize the recording of cash flow. Revenue and Expense recognition can be made simpler with automation as well, so make sure to check whether you or your accountant have the knowledge to make use of automation in your business.
Investor Confidence and Tax Compliance
Having accurate bookkeeping can imply to potential investors that your business is in good financial health, enabling them a quick and easy way to check on their investment. Government institutions and tax agencies also appreciate good bookkeeping as businesses can provide the information they request within a shorter amount of time.
This is good for the business as well since not providing these records, especially to the IRS, can lead to financial penalties.
Conclusions and Thoughts
For SaaS businesses, it is essential to always have information over performance metrics and financial data. This will allow the owners or shareholders to adapt their plans for the business, granting them a clearer view of the whole picture. Decisions on pricing, the state of the current business model, and general clarity of operations can all benefit from the creation of organized financial statements and records.
Using bookkeeping services for your SaaS business can be a great way to keep your business oriented towards your goals. Whether those goals are meeting a certain threshold, or expanding to a new market, you can expect that the accurate and up-to-date information you have access to can be a great asset in your financial endeavors.