While much of the focus for technology leaders is solving the next “big problem”, this laser-sharp focus often leads to non-core tasks like bookkeeping taking a backseat. As a result, SaaS companies put themselves at risk of tax non-compliance, errors in revenue recognition and mismanagement of cash flow.
To prevent said errors, maintaining precise bookkeeping records while being on time with submissions is crucial.
To gain deeper insight into how bookkeeping for SaaS companies can make a big difference, this blog will take readers through some essentials of the bookkeeping process. This blog is a must-read for SaaS companies looking to transform their internal accounting. It also provides key metrics into what SaaS companies should do today to stay in compliance with regulations.
How SaaS Bookkeeping Differs from Traditional Businesses Bookkeeping
| Points | Traditional Bookkeeping | SaaS Bookkeeping |
|---|---|---|
| Revenue Recognition | Revenue is recorded at the point when a product or service has been provided to the customer. | Revenue is recognised throughout the entire subscription term. |
| Cash flow Management | The cash flow cycle is more straightforward. | It is a complex process. |
| Metrics Used | The focus is on sales. | Tracks KPIs like churn rate, customer lifetime value, and customer acquisition cost. |
Bookkeeping Mistakes That SaaS Companies Should Avoid
Mistakes can have huge ramifications on the financial performance and position of a SaaS company. These mistakes can also lead to costly penalties that should be otherwise avoidable. Here are some common mistakes that SaaS companies should spot early on and take decisive measures to avoid:
Using Traditional Bookkeeping Processes
It is important to understand that traditional bookkeeping processes are not designed for SaaS companies. These processes are unable to manage the intricate revenue models associated with SaaS subscription accounting. Additionally, these processes lack the capability of managing deferred revenue, VAT complexities, and SaaS metrics. These limitations of traditional bookkeeping processes result in inaccuracy, rework, and increase the compliance risk. Therefore, it is important to make sure that the company uses SaaS specific bookkeeping processes.
Poor Contractor Bookkeeping
SaaS companies usually hire contractors or freelancers for different kinds of tasks. So, this constitutes a major portion of spend for many SaaS companies. Poor Bookkeeping happens when contractor invoices are not reviewed properly, mixed with payroll expenses or posted inconsistently.
Contractor costs should always be separated from employee payroll. This is to ensure transparency and to support accurate cost analysis. Poor bookkeeping is unable to differentiate between contractors and employees. Along with it, poor bookkeeping can also lead to mis-posting employers for National Insurance. Mismanagement in handling IR35-related contractors can result in compliance with risks and tax liabilities.
Delaying Bookkeeping until Month or Year End
Delaying bookkeeping until the month or year-end can lead to errors. It can present a false picture of the financial performance and position of the company. It is because these factors majorly depend on real-time and accurate tracking of KPIs and deferred revenue. Mostly, SaaS companies involve advance payments for delivered over time. Inability to record them in a timely manner can result in misleading profitability and increase the risk of penalties, and poor decisions.
Delayed bookkeeping makes it difficult to track performance and respond to issues in a timely manner. Therefore, it is not a good idea to delay bookkeeping as it can require expensive fees to clean up the disorganized data.
Recording Subscription Revenue Too Early
This is one of the most common mistakes made by SaaS companies. Many SaaS companies treat subscription income as revenue when cash is received. This is against the IFRS 15 and UK GAAP. These standards state that the revenue is recognized over the period when the SaaS bookkeeping services are delivered. Recording subscription revenue too early can present a wrong picture of the financial performance.
Example: A UK-based SaaS company offers annual software subscriptions. The company invoices customers £12,000 upfront for a contract of 12 months. From the perspective of bookkeeping, this income cannot be recognised immediately. Instead, it must be recorded as deferred revenue and recognised monthly at £1,000 in line with UK GAAP or IFRS 15.
Poor Management of Deferred Revenue
Deferred Revenue refers to the money already billed but can’t be recognised as revenue because the service is yet to be provided. It must be listed as liabilities on the balance sheet.
A lot of UK SaaS companies mismanage deferred revenue. This can happen because of failure in tracking deferred revenue correctly. This happens when bookkeeping systems are not properly merged with subscription billing platforms. Poor management of deferred revenue can result in unreliable management accounts. It can make it difficult to assess the true financial performance and position of the company.
What Metrics Should SaaS Companies Employ to Stay Compliant
Below are some important SaaS metrics that every company must track to comply with the regulations and to know the true financial health of the company.
Booking
Bookings show the commitment of customers to pay money for the service provided. This metric represents the value of a contract signed with a prospective customer for a specific time. These are the major indicators of revenue growth in the future. Bookings assist CFOs and finance departments in managing cash inflows and outflows through effective planning. It aids finance teams in record bookings as committed money. Thus, the SaaS company can avoid the inaccurate calculation of ARR or MRR.
There are various types of bookings which are:
- New Bookings represents that portion of bookings which are allocated for new contracts having new or existing customers.
- Upgraded Bookings refers to the upgrades for the new SaaS bookkeeping services. These bookings generally fall under new bookings. For example, a customer wants to upgrade the growth plan from £500 to £1000. This will result in a new contract that will need to be signed, where the customer will pay a new annualised value.
- Renewal Bookings refers to that portion of bookings which include existing customers who renew their contracts with the company. These are major indicators of customer satisfaction.
- Non-Recurring Bookings refers to the bookings that include those charges which include non-recurring aspects like discounts, set up fees and more.
- Annual Contract Value Bookings refers to those bookings which have multi-year contracts and have at least one year’s committed revenue.
- Total Contract Value Bookings also have multi-year contracts. In these bookings, the revenue is calculated for the total duration of contracts rather than for a year.
Monthly Recurring Revenue
Monthly Recurring Revenue refers to the predictable and recurring revenue that a company can expect from its subscription-based customers. It provides a continuous measure of revenue, which is important for predicting future growth and aids in financial planning. Thus, it permits companies to make more accurate projections.
It is calculated by multiplying the customer numbers by the average revenue per account.
Annual Recurring Revenue
Annual Recurring Revenue refers to the annualised version of MRR. It refers to the predictable total amount of revenue that a company can expect from its SaaS subscription bookkeeping based customers. It is important for long-term financial forecasting and strategic planning. Thus, it makes it easy to plan growth, secure investment, and manage cash flow. It helps companies understand their position in the market.
Billings
Billing refers to the invoice amounts that are billed to customers. It includes the money that customers owe to the company.
In case a SaaS company is having a higher number of bookings but lower billings, it can lead to future cash flow problems. The SaaS companies should think of a way to get customers to pay upfront. This increases billing, which saves companies from future cash flow problems.
Customer Acquisition Cost
It refers to the total cost incurred to acquire a new customer. These costs include all sales and marketing expenses. It includes salaries for sales and marketing teams, advertising costs, and software tools used in the process of acquisition.
It is essential to understand CAC to evaluate the efficiency of a company’s customer acquisition efforts. It also helps in deciding the payback period.
In case the CAC is high, it might show inefficiencies in sales or marketing strategies which suggests a need for optimization. On the other hand, a low CAC shows that a company can acquire customers in a cost-effective way, which is important for scaling.
Conclusion
The trick to mastering bookkeeping for SaaS companies is understanding the nuances that make it different from other [non-tech] companies. This at some level requires a certain degree of expertise in accounting. While this blog does provide insights into what companies should consider in their bookkeeping efforts, it’s always advisable to speak to an expert on the matter.
AcoBloom has decades of experience managing accounts for companies in various industries, including tech-based businesses. To learn more about bookkeeping for SaaS companies, technology leaders are best advised to partner with an accounting firm that can guide them through the process. This will ensure that bookkeeping is done in a way that is both complaint and easy to decode for all stakeholders.
