How do you do SaaS accounting?
For subscription-based companies, SaaS accounting is the way they handle their finances, including recording income and expenses. This unique way of accounting is essential because it lets SaaS businesses properly show their financial situation by ensuring that their income and costs are recorded in a way that matches how the service is delivered. In traditional accounting, sales and expenses are usually one-time events. But in SaaS accounting, you have to deal with recurring revenues, delayed revenues, and the cyclical nature of subscription models.
Different words for the same thing: subscription accounting, software subscription accounting, accounting for SaaS income
Basic Rules for Accounting for SaaS
SaaS businesses use certain methods and procedures to picture their finances accurately. These rules ensure that financial transactions are recorded and reported correctly and that the financial statements show how the SaaS companies make money. Each principle supports SaaS billing and accounting, ensuring the business stays financially stable and follows the rules. These principles include picking the proper accounting standards, correctly recording income, and carefully managing expenses.
What Are the Most Important Types of Accounting?
Most SaaS companies use both cash-basis and accrual accounting. Each has its own rules for recording transactions and making reports. Accrual accounting records income and costs as they happen, while cash-basis accounting only looks at actual cash flow. Both of these methods affect how a company’s finances are shown.
For example, in cash-basis accounting, the cash flow statement shows income and costs as they happen when they are received or paid. This approach might be simple, but it might not give an accurate picture of a SaaS company’s finances, especially regarding payments with multiple periods, since it doesn’t always consider unearned revenue.
On the other hand, accrual accounting records income and costs as they happen, not when the money is received or paid. For SaaS companies, this could mean recognizing subscription income through the subscription period and ensuring revenue recognition aligns with the ongoing provision of services. This ensures that the financial statements correctly show how the business did during specific periods, which gives a better picture of its financial stability and viability.
Recognizing Revenue and Deferred Revenue
Recognizing income and managing deferred revenue are two of the most critical accounting ideas in SaaS accounting. Making sure that revenues are recorded when earned and keeping track of deferred revenues, which are income that has been received but has not yet been earned, are critical for accurately showing a business’s economic activities and financial success.
Keeping track of and organizing expenses
Expense management and cost categorization are critical for SaaS companies to understand their money going out. Ensuring that all of a business’s operational costs are correctly recorded and categorized makes it easier to do thorough financial analysis and make intelligent decisions, which helps give an accurate picture of the business’s economic activities.
How to Use Accounting Based on Subscriptions
The cyclical nature of contracts, renewals, and churn is closely linked to the financial management of SaaS businesses. For membership models to stay financially healthy and stable, money management needs to be planned in a way that considers both current and future financial situations.
Taking Care of Signups, Renewals, and Dropouts
In the SaaS industry, subscriptions, renewals, and subscription churn are all essential to recognizing income and tracking finances. Keeping accurate records is essential to understanding a SaaS company’s financial health. In general, they are accounted for like this:
Signups for
Subscriptions are counted as income during the subscription period, which is usually once a month or once a year. One of the following can be used to figure out how much money was made:
Straight-line method: Over the subscription term, revenue is spread out evenly.
Usage-based or consumption-based method: The service is charged based on how much it is used.
Getting paid upfront: Some SaaS companies offer multi-year contracts with upfront payments. This way, revenue can be recorded partly upfront and partly over the subscription term.
Most of the time, subscription income is shown on the balance sheet as “deferred revenue” until paid. As time passes and the service is given, the deferred revenue is shown on the income statement as earned revenue.
Paid again
Revenue from a subscription renewal can be recognized at the same time that it happens, as long as the criteria for revenue recognition are met. Most of the time, renewals are viewed as separate contracts, and their income is counted over the length of the renewal.
Like with the first subscription, renewal income can be recorded immediately if the customer pays for the period in advance.
Churn in Subscriptions
People who lose customers or cancel orders are said to “churn.” This affects revenue and is recorded as a drop in revenue.
The leftover deferred revenue from customers who have already left may need to be changed or written off. For instance, if a customer cancels a membership during a billing cycle, the part of the subscription fee that wasn’t earned is usually returned as a loss.
Companies also use monthly recurring income (MRR) and annual recurring revenue (ARR) to track how churn affects their total subscription income.
SaaS companies must carefully track and handle subscriptions, renewals, and churn because these significantly affect their growth and revenue. Accounting rules, like ASC 606 and IFRS 15, tell businesses how to correctly record income that shows how well they’re doing financially and providing services to customers. SaaS companies often use software for managing subscriptions and billing to simplify and speed up these tasks.
Taking care of money in subscription models
Companies using a subscription business model to show their economic activities must accurately record and report their financial transactions. To do this, you must be very careful about handling recurring revenues, customer upgrades, and downgrades and ensuring that the financial records show how the subscriptions work.
The following are some of the ways that payments affect a business’s finances:
Statement of Income: The income account is affected by the money made from new customers and customers who leave. Renewals bring in money that goes to the top line, while customers leaving means less money coming in.
Sheet of Balances: Deferred revenue is part of renewal fees that haven’t been made yet. It goes down as revenue is recognized. Accounts receivable, which show income recognized but not yet collected from customers, may also be shown on the balance sheet.
Renewals and subscription cancellations significantly affect a SaaS business’s financial statements and key performance indicators. Proper accounting and reporting are needed to understand how income changes over time and make intelligent choices about keeping customers and growing the business.
Aspects of Law, Ethics, and Compliance
Following the law and its rules is very important in SaaS accounting to ensure that financial records are correct and show the actual state of the business’s finances.
Following the rules and standards set by the law
SaaS companies ‘ accounting departments must strictly follow legal standards and regulations, like ASC 606, to ensure that financial reports follow accounting rules and accurately show the company’s actual financial situation. This is not just a suggestion; it’s a requirement. This makes it easier for people to trust the financial information that SaaS companies give out.
Making Taxes Easy
Sticking to legal tax management practices is a big part of keeping the honesty and reliability of financial reports safe. The business is protected against financial problems by ensuring that its financial transactions and tax obligations are handled and reported correctly. It also protects its image in the market, which is essential for fair reporting.
Making sure that reporting and billing are done in an ethical way
To maintain ethical reporting practices, you must promise to keep financial statements accurate and factual, giving a true picture of the business’s financial health and situation. Paying attention to billing compliance and ensuring billing is done honestly and openly is another example of the multifaceted approach needed to follow ethical and legal rules in SaaS accounting.
Problems with accounting for SaaS
When it comes to the challenges of SaaS accounting, companies face several issues and problems that need strategic solutions to be solved.
Finding and Dealing with Common Problems
Businesses often face problems, such as keeping track of recurring income and customer turnover. Creating plans, like building robust systems for managing revenue and using predictive analytics for churn, can help deal with these issues and keep financial reports accurate and in line with the company’s economic activities. The following are some anecdotal examples of problems:
Managing recurring revenue is a challenge. For example, let’s look at CloudSave, a SaaS company that offers different levels of data storage. When customers change their minds about their subscriptions in the middle of the cycle, keeping track of their recurring income can be challenging. CloudSave needs to ensure that these changes are correctly mirrored in how they record revenue so that the revenue they record matches the service they provide. This needs dividing up payments and making sure that the financial records correctly show the changes to the subscription, which can be hard to do by hand and take a lot of time without automated tools.
Getting rid of churn is a problem for another SaaS company, SecureNet, which offers cybersecurity services. Its MRR and customer lifetime value are both affected by churn. When a long-term customer cancels their account, SecureNet not only loses a source of income but also has to deal with the financial effects of the customer leaving. To make up for the lost income, this means changing financial projections, reallocating resources, and planning how to get new customers, all of which can be difficult and involve many factors.
When you use SaaS accounting software,
SaaS accounting software is essential for streamlining and automating the financial management tasks of SaaS companies. As businesses switch to automatic accounting, choosing and using SaaS accounting tools becomes very important. Choosing the right tools is essential to getting the most out of automation, which improves the accuracy and speed of a business’s financial management.
Why and how is automated accounting essential?
For SaaS companies, automated accounting, made possible by specialized software, is not just a nice-to-have; it’s a must. Automated accounting makes managing money more accessible and ensures that all financial information is recorded and reported correctly, giving a true and accurate picture of the company’s finances and performance.
Trying out and setting up SaaS accounting tools
When a business looks at and decides to use SaaS accounting tools, it needs to be very careful that the tools meet its specific financial management needs. This means thinking about how well the tool can handle complicated billing models, how well it can work with other systems, and how well it can provide accurate and up-to-date financial data. This is done to ensure that the accounting solution improves the business’s ability to manage its money more efficiently and correctly.
The DealHub Billing Platform is one of these tools that has been very helpful in making automatic SaaS accounting possible.
The Billing Platform for DealHub
The DealHub Billing Platform is an example of a specialized tool that can handle all the different parts of SaaS billing. DealHub’s flexible billing lets finance teams oversee their whole income stream, from CRM to ERP, efficiently handling customer subscriptions, changes, tiers, and pricing based on usage. This keeps billing schedules correct and makes sure bills are sent on time. The platform lets you manage your subscriptions, make accurate billing schedules, and connect invoice and revenue recognition data straight to your ERP or accounting system. It also works with all price models, such as recurring, one-time, tiered, and consumption-based models. This gives businesses a flexible and complete way to handle their finances.
Main Points
SaaS accounting has become a specialized field with its approaches and accuracy to show subscription businesses’ finances. Many essential parts of running a SaaS business affect its finances. These include carefully choosing the suitable accounting types, figuring out subscription-based accounting, and ensuring all legal and moral rules are followed. Another important part is smartly using SaaS accounting software. So, promoting efficient and honest SaaS accounting practices is essential for protecting businesses’ financial stability and long-term success in the SaaS industry, making sure they can easily handle the challenges and navigate the complexities.
