Bookkeeping For SaaS Companies: The Best Measure For SaaS Revenue Recognition
Companies focused on a SaaS model need a proper accounting system even from the start of their operations. These businesses tend to use a subscription-based model that differs from a traditional business’s. All charges that are billable to clients are set up into subscription fees paid in a specific set of time stipulated in contracts.
Bookkeeping for SaaS Companies is invaluable in recognizing revenue generated in a given timeframe. Recording the transactions relating to operations, finances, and even investments gives the business a clear view of the organization’s financial health.
With those in mind, Bookkeeping Services can be an excellent choice for SaaS Companies that must commit their workforce to distribute their products and services. An organized Bookkeeping and Accounting Firm can ensure 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 use a particular SaaS service.
When a SaaS company gains a new client, its profit is still not categorized as revenue, as it’s only recognized at the end of the contract. Before the end of the agreement, it is known as a liability. Now, this comes with its complications regarding revenue recognition, as there’s the chance that clients 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 grandly impact income statements.
Guidelines for Revenue Recognition
A set of guidelines is in place for 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 a contract stipulating enforceable rights and obligations to be met 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 helpful if it contains commercial substance and if a specified exchange of goods and services is transferred to the client.
- Identify the Performance Obligations In The Contract
Firstly, what is a “performance obligation”? This is the promise to distribute a product or service to a client. These performance obligations must be distinct by benefitting 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 from the other contract services.
Should one service not be ruled as distinct, the business should bundle it with other promised services until the combined bundle meets the requirements of being identifiable and distinctive.
- Set The Transaction Price
This is the payment the business can expect in return for providing services to the client. SaaS businesses should consider whether or not this transaction price is variable with the expected value in mind. They should also look into Non-cash consideration promised by the client, estimating the value of such and putting that into their estimations.
Vouchers and Discounts are examples of Consideration payable to the customer. The business should account for the reduction in the transaction price and 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 for each distinct service and product 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 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
The business satisfies each performance obligation if the client receives the necessary benefits from the product within the contract’s timeframe. Not only that, but the client must also have an asset created or enhanced by the business’s development. With that in mind, the SaaS service provider has an enforceable payment right.
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 in 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 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 displayed on the balance sheet as an automatic profit increase, raising equity.
The Accounting Equation
Tracking Spending and Financial Resources
Bookkeeping is a great asset, not only during critical times such as tax season. Responsible tracking of your SaaS business’s records can give you the financial insight required to steer your organization to your financial goals. Companies that employ professional bookkeeping services have the advantage of a clear description of transactions, giving them access to a clear view of their business’s financial position.
For SaaS companies experiencing rapid growth, the massive amount of data from your transactions can confuse you 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 understand the actual 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, but it can also be an essential part of selling the business to investors or undergoing financing operations. A suitable bookkeeping procedure can help manage this endeavor, making the whole process more accessible in the long run.
Should you use digital software for Bookkeeping for SaaS businesses, you can use automation to streamline specific tasks. Even the most experienced accountant or bookkeeper knows the issues 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 labor costs. You may also fit your pricing and billing plans according to how your system is set up to optimize the cash flow recording. Revenue and Expense recognition can be made simpler with automation as well, so check whether you or your accountant know to use 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 also good for the business since not providing these records, especially to the IRS, can lead to financial penalties.
Conclusions and Thoughts
For SaaS businesses, it is essential always to have information on performance metrics and financial data. This will allow the owners or shareholders to adapt their plans for the company, granting them a clearer view of the whole picture. Pricing decisions, the current business model’s state, and general operations clarity can benefit from creating organized financial statements and records.
Using bookkeeping services for your SaaS business can be a great way to keep your business oriented toward 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 can access can be a great asset in your financial endeavors.