The Ultimate Guide: how to do bookkeeping accounting for saas businesses
Introduction to SaaS Bookkeeping & Accounting
In the digital space, the software-as-a-service term is popular. Since SaaS startups are subscription based, they need a proper bookkeeping and accounting system that helps handle customer demands.
And this is the very reason SaaS startups in the majority are now moving towards making the selection of the right accounting and bookkeeping system.
Because SaaS businesses typically operate as subscription businesses, they definitely need an accounting system to better handle their needs.
But somehow accounting is frequently not given priority by SaaS startup owners. Their focus is more on developing a team and producing products. It is more important than ever for SaaS businesses to think about accounting and bookkeeping to lessen the stress they experience while running the business.
Let's examine in greater detail what accounting for SaaS businesses is unique and how to set up the appropriate accounting tools for your company.
Types Of Accounting For SaaS BusinessesThere are mainly two types of accounting for SaaS Businesses:
Cash basis AccountingWhen cash is received or paid, revenue and costs are recorded using the cash-basis accounting method. This type of accounting method is only used by SaaS companies with a traditional pricing model. Businesses looking for easy-to-maintain accounting systems can find this accounting method favourable.
Accrual AccountingRevenues and expenses are recorded in accrual accounting at the time they are earned, regardless of when cash is received or when expenses are spent. Businesses that use accrual accounting benefit from postponing reporting revenue on tax returns.
What Does “Recording Transactions” Mean?SaaS companies are required to keep proper track of their financial activities. It's known as bookkeeping. Businesses can make important choices about their operations, investments, and finance thanks to bookkeeping. It provides transparency of the transactions and the company's current financial situation.
Businesses can offer the information required by these parties through bookkeeping, which is essential to evaluate their ongoing operations. For instance, penalties may be assessed if records are not provided to the IRS. For lenders and investors to assess the health of their investments, bookkeeping works as the most crucial record-keeping tool.
Key Bookkeeping & Accounting Terminology For SaaS Businesses
But what if you have too many receipts and invoices to be able to do that? Keep an eye on all of your finances if you are managing a small business that generates revenue through subscriptions. Let's look at some of the fundamental terms used in bookkeeping before we discuss why you need them.
Accounts Payable:It is the account used to keep track of all the cash you owe suppliers.
Accounts Receivable:This term describes the total amount of money your customers owe you. One company's accounts payable are another company's accounts receivable.
Balance Sheet:The balance sheet provides information about your company's current financial position. The balance sheet, which lists your assets on the left and your liabilities and equity on the right, helps to illustrate what your company owns and owes.
Assets:As greater cash enables your business to be flexible when dealing with shifting market conditions, assets can be used to measure the financial health of your business.
All of your cash and other assets that can be easily converted into cash are considered current assets. This includes money on hand, investments, stock, and receivables.
All of your debts that must be repaid soon are considered current liabilities. Accounts payable and bank short-term loans are included in this.
Equity:It is the whole amount of money you put into the business and all accumulated gains. It is the main method of financing your business operations, together with liabilities.
Business Expenses:It covers all the things on which you spend money to better operate your business. Business expenses can be anything like rent, utilities, wages, etc.
Earnings Statement:It tells about the company’s financial health. It highlights all the revenues and expenses of that specific time.
Liabilities:These refer to debts you owe. It can range from due accounts payable to mortgages you will pay off.
Revenue:It is the total amount of revenue that is collected from selling the goods.
Why Does A Reliable Accounting System Important for SaaS Businesses?
When it comes to managing bookkeeping and accounting in your business, you have a few options:
- You may carry it out on your own, which is quite appropriate if you have a small business.
- As your business expands, you can decide to build a full-time internal SaaS accounting staff to handle tasks like payroll, monthly reporting, and bookkeeping.
- The outsourcing of your accounting tasks is a wise choice.
When it comes to handling finances, cloud-based accounting solutions are in wide use. Businesses are now stepping forward to access financial data online rather than installing software on their computers thanks to cloud-based accounting.
Here are some advantages of a cloud-based accounting solution for SaaS businesses:
It Saves You A Lot Of TimeThe ease of usage is one advantage of cloud-based accounting. You can set up a cloud-based account to allow transactions, sales, income, and other financial data to flow directly to your books.
Whereas desktop software can be cumbersome and force small business owners to manually enter bookkeeping data.
Entrepreneurs can virtually "go hands-free" using the cloud, which allows them to focus more time on expanding their businesses and less time on tedious accounting procedures.
It Offers Easy Access To DataThe benefit of cloud and SaaS accounting software is that all you need is an internet connection to access comprehensive business financials. Teams can share access from anywhere with different login credentials, enabling remote working, rather than considering the use of a machine with the software downloaded onto it.
With a few easy clicks, you may rapidly access crucial information while on the go, on the phone, or in a meeting. Accounting software in the cloud and as a service is ideal for collaboration among teams and workers.
Numerous SaaS platforms offer customizable dashboards that show crucial financial data without requiring team members to calculate it. It also allows for flexible working by allowing access to a third-party bookkeeper or accountant.
No More Upfront InvestmentsWith a cloud-based accounting system, SaaS businesses don’t have to feel the burden of higher upfront expenses. If we consider desktops, expenses increase because of the availability of subscription-based online accounting software. Even when businesses expand, the cloud-based accounting solution is an excellent option to bring into use.
User-friendly SolutionMany SaaS and cloud software have been designed with easy functionality to ensure that everyone can use them. Intuitive cloud systems may be right if you are a small business owner with limited accounting experience. In addition, the risk of using mismatched or outdated data is reduced as there is no manual handling of spreadsheets.
Added securityUsers of desktop applications should keep in mind to back up their accounts each day at the end of the workday. Additionally, downloading software updates every time a provider releases a new version might be challenging.
When one uses a cloud-based solution, the changes will automatically save as a result, and security will also be tighter. Instead of being stored on a hard disc that could become corrupt, be lost, or stolen, accounting data is encrypted at the source and saved to the cloud.
Our devoted team at FreeCashFlow.io handles all of your bookkeeping needs for your internet business. We offer clean books that satisfy you, including cash reconciliations, vendor setup, chart of accounts, monitoring inventory value, and depreciation reports.
SaaS Financial Reporting Metrics SaaS Business Need To Track
Recurring IncomeYou may forecast the revenue for your SaaS business using financial metrics like Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).
While MRR gives you the picture of total revenue generated from all the active subscriptions. An ARR metric tells SaaS businesses how much revenue they can expect.
So in simple words, monitoring your MRR and ARR is a simple approach to see how predictable your revenue stream will be, how and why it varies over time, and whether it is increasing.
Monitoring both the metrics will help you easily determine whether their revenue is increasing over time or not. MRR aids in forecasting the monthly income a SaaS company may expect to bring in, enabling subscription-based enterprises to project short-term revenue growth.
MRR and ARR assist in tracking and forecasting both short-term and long-term revenue growth, which enables your company to:
- Analyze the performance of your company
- Projected financial expansion
- Assess the health of the business
- To encourage corporate growth, make strategic business decisions
Customer Lifetime Value (CLV)The amount of money you may expect to make from each of your subscribers is known as the customer lifetime value (LTV).
This financial statistic enables you to determine whether the market is a suitable fit for your SaaS product, whether your customers are loyal to your business, whether you are losing money on client acquisition, and which customers are likely to be long-term or repeat customers.
Customer Acquisition Cost (CAC)The average expense your business incurs to acquire a new customer is known as the customer acquisition cost. Using CAC, you will easily determine whether or not the revenues you are generating are sufficient or not.
Churn RateThe percentage of customers who discontinue using your product or services within a predetermined time frame is known as your company's churn rate. You can figure out the customer churn rate in addition to your revenue churn rate, which is the amount of money that has changed hands over a certain period.
Your client retention, customer satisfaction, and the effectiveness of your marketing initiatives may all be understood by looking at your churn rate. Having a high churn rate can indicate that your customers are dissatisfied and that more can be done to keep them because it is less expensive to keep or upsell an existing client than to acquire a new one.
Burn RateKnowing your company's burn rate enables you to easily predict your entire cash flow, including how long you can continue to operate before you run out of money or how long it will take you to become profitable.
Gross MarginThe total revenue you receive from your customers less the cost of the items including costs related to web hosting, customer service, and account management, all come under the company's gross margin. The greater your company's gross margin, the greater portion of each sale you keep for yourself.
Keep Track Of All Your SaaS Metrics Ensure You With Accurate CalculationsUnderstanding how crucial all the metrics are is vital. Many SaaS businesses, both new and established, have fallen into the error of attempting to handle these numbers manually, which eventually results in sacrificing accuracy and consistency.
At FreeCashFlow.io, we provide the tools necessary to handle everything, including revenue recognition, invoicing and invoices, clients and renewals, metrics and analytics, and much more. We're here to make sure you have the necessary numbers at hand. Reach out to us right now if you'd want to know more about how we can assist you in running your SaaS business more effectively.
How To Do Bookkeeping and Accounting For SaaS Businesses?
With your small SaaS business, you’re faced with the decision to prepare your books by yourself or to outsource your bookkeeping for someone else to perform. There isn't one optimal solution that works for all organisations, but there are several things you should think about in order to make the choice you feel most confident in.
Managing Your Bookkeeping On Your Own Vs. Hiring A BookkeeperAlthough outsourcing your books might seem like the most straightforward and straightforward choice, it could not be the most effective. Depending on the complexity and size of your SaaS business, accounting and bookkeeping services may not even be worth the cost.
You can surely learn new accounting and financial business abilities by doing your own bookkeeping. Business leaders at any stage can be motivated by this information to make wiser choices regarding potential future expansion.Additionally, doing your own bookkeeping makes it possible for you to feel more involved with your money.
Whereas using the cloud-based accounting method can make bookkeeping a quick and easy operation. However, if bookkeeping is just not your thing, doing it yourself can end up costing you more money than hiring a professional.
One of the main reasons for hiring a bookkeeper is to save time, but development is also an important consideration. In addition to ensuring that your accounts are accurate, hiring a specialised bookkeeper will provide you a great deal of peace of mind.
Excellent bookkeepers will come to know your unique financial requirements and may even be able to give you professional insights on the financial situation of your company. While employing a bookkeeper does allow you to spend more time on other things, you should still keep an eye on your books occasionally.
Even if you have your books done by a third party, you should still routinely review your financial statements to maintain a current understanding of your financial condition.
Hiring a professional bookkeeper is the easiest way to handle bookkeeping for your SaaS business.
FreeCash Flow is a full-service financial company that offers SaaS companies bookkeeping, accounting, tax, and other services. We bring years of knowledge to managing every aspect of your finances or providing guidance on completing your yearly tax return.
Useful Tips To Optimize Your SaaS Bookkeeping Process
Below are some of the tips to optimize your SaaS bookkeeping process:
Cloud-Based Accounting To Manage BooksDepending on your business model, using spreadsheets to record financial transactions might be challenging when you are starting initially. However, as your revenue recognition and subscription management start getting complicated, you’ll need a properly managed SaaS accounting system that can scale with your company.
Keep All Your Receipts & Invoices In TrackIf you are running a SaaS business, keeping track of all your receipts and invoices is important. This is the essential step to bringing more visibility to your business cash flow. Having a cloud-based system in place helps you automatically allocate certain expenses to appropriate bookkeeping accounts.
Outsource Your SaaS Bookkeeping & AccountingHow well can you manage your financial reports on your own? Are you aware of all the challenges that come with bookkeeping and accounting? These things are important because accurate financial statements determine the duration of your business's success. Consider getting expert help only when they are already drowning in the sea of incorrect reports, messed up reconciliations, or are facing an audit.
Examples Of Businesses On SaaS-based Model
eCommerce Businesses:If you are running an eCommerce Shopify or Amazon store with several payment methods or a SaaS-based model, you need to have a complete overview of multi-channel cash flow, inventory, and other financial aspects. And for this, you need a robust bookkeeping and accounting system in place. It prevents one from getting stuck in excel spreadsheets, and manual entry and ends all the headache.
Subscription Companies:Bookkeeping isn’t easy one thinks to be for an owner of a subscription company. To have a true sense of business financial health, subscription businesses have to keep a track of every SaaS metric to ensure their growth. For this business category, accrual accounting is highly recommended where cloud-based software helps manage it automatically.
If you own a subscription company, read our article on how to do bookkeeping and accounting for subscription companies.
Final Key Takeaways
- SaaS businesses must have a solid bookkeeping and accounting system in place. With the system in place, they can better meet their demands.
- Revenue monitoring is important because most SaaS businesses use a subscription-based structure.
- Regardless of the amount of cash on hand, profit is not recorded under the accrual accounting system until it is earned. Even though this method of accounting is more complex, subscription-based SaaS businesses consider it.
- Any business that wants to survive must have a clear picture of exactly how much money is coming in and going out. This is particularly important in the case of SaaS because, despite being one of the main benefits of this financial model, recurring revenue can also vary greatly.