Bookkeeping and Accounting for SaaS companies — ConnectCPA
There are other ways too - if you have any great suggestions - drop them into the comment box below!
Almost everyone knows about the discount that can be had if a product was paid for in advance. A popular model is to provide a discount when 12 months of services are paid for in advance, as opposed to paying month-to-month.
What customers rarely think about is the financial reporting that has to take place on the company’s side.
The basics of accrual accounting is to record transactions based on when services are provided rather than when the transaction occurs. For example, if someone paid $1,200 on June 1 to use a product for 12 months - rather than recording the full $1,200 into revenue on June 1 - accrual accounting ensures that the $1,200 received is smoothed out over the period that revenue is earned (i.e. 12 months). So, in this example, the company would record $100 per month of revenue for 12 months rather than $1,200 in one month.
This is important because in SaaS companies, there is usually a mix between monthly and annual transactions and it’s critical to ensure that revenue is recorded accurately and in the correct period.
How do you do it?
Spreadsheets - track all revenue-generating annual transactions in a spreadsheet and then create formulas to ensure the transactions are divided by the specific number of months the product/service is provided. A row for each annual transaction is a good idea, broken down by month, with a sum at the bottom.
Flowrev - You can connect your accounting system (Xero or QBO) to the Flowrev app and then map accounts and create schedules so that revenue is automatically populated in your accounting system based on the periods related to when services are rendered.
Zapier - We’re big fans of Zapier, can you tell? Depending on which portal you’re using for your SaaS product - you can try to automate deferred revenue rows and schedules into a Google Sheet where formulas then pick things up from there.
Although payroll accruals can be used for all companies in all types of industries, we’re mentioning it in a blog post about SaaS companies because this is where we see most requests coming from. Venture-funded SaaS companies can have stringent reporting requirements and one of those requirements is to have all the accounting completed on an accrual basis.
Expense accruals are the mirror image of the ‘Deferred Revenue’ example that was noted above. More specifically, the goal is to ensure that expenses are recorded in the actual month that they were incurred. For example, if pay day falls on June 1 but was for the working periods of May 17 to June 1, payroll accruals ensure that on May 31, a prorated amount of payroll related to May is entered in the corresponding month (May) and the rest (i.e. one day) is entered in June.
By matching expenses and revenues to the month that they are incurred/earned gives you a more holistic view of the company’s month-over-month performance.
Another topic to discuss is bi-weekly payroll - when a company has a bi-weekly pay period (i.e. every 14 days - let’s say - every other Friday) versus a company that has payroll on the 15th and last day of the month.
Due to the nature of bi-weekly payroll timing, there are two months in the year where there are three payroll periods. Over a full year, a company’s expense outlay is exactly the same but from a financial statement presentation standpoint, there are fluctuations in the payroll expense category on a monthly basis.
Adjusting for and accruing for payroll solves this pain-point or many companies just opt to switch to a semi-monthly payroll frequency.