The Ultimate Guide: how to do bookkeeping accounting for saas businesses
This guide is for SaaS businesses on how to do efficient bookkeeping & Accounting.
Get ready to learn:
- Introduction to SaaS Bookkeeping & Accounting
- Key Bookkeeping & Accounting Terminology For SaaS Businesses
- Why Does A Reliable Accounting System Important for SaaS Businesses?
- SaaS Financial Reporting Metrics SaaS Business Need To Track
- How To Do Bookkeeping and Accounting For SaaS Businesses?
- Useful Tips To Optimize Your SaaS Bookkeeping Process
- Final Key Takeaways
- Frequently Asked Questions
CHAPTER 1:
Introduction to SaaS Bookkeeping & Accounting
The SaaS economy is on expansion with bookkeeping/accounting practices evolving too.
Why Are Bookkeeping Systems Important for Your SaaS Businesses?
Should it be done from the beginning or once it becomes a business?
No matter what your business stage is, it is more vital than ever to keep track of cash inflows and outflows. This all makes accounting and bookkeeping essential.
Let’s dig into to learn more about SaaS bookkeeping and accounting:
One of the industries that is growing at a faster pace is “SaaS”.
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.
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.
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 Businesses
There are mainly two types of accounting for SaaS Businesses:Cash basis Accounting
When 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 Accounting
Revenues 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.
CHAPTER 2:
Key Bookkeeping & Accounting Terminology For SaaS Businesses
Thanks to good accounting and bookkeeping, an understanding of business revenue and other aspects are now possible.
SaaS businesses by having access to real data can enjoy sustainable expansion. Along with the key advantages of efficient accounting, having organized startup finances makes it easier to raise venture capital or become ready to sell your company.
This chapter explains to you the key bookkeeping/accounting terminology for SaaS businesses:
Without accurate, trustworthy financial records and current financial statements, your startup may find it difficult to raise money, the fundraising due diligence process may be delayed, or your earnings may suffer in the event. Last but not least, maintaining accounting practices help avoid tax violations and unexpected tax bills.
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.
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.
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.
Key Terminology
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.CHAPTER 3:
Why Does A Reliable Accounting System Important for SaaS Businesses?
A proficient accounting gives deep insight into business revenue and operations.
In addition to the benefits of good accounting, having all your finances in an organized manner helps streamline the processes and helps businesses prepare for the best.
So, let’s discover how SaaS accounting software can help your business drive digital transformation and stay on top of the finances.
A keep up of accurate records is crucial for SaaS companies. To make wise decisions at any time, you need to have access to trustworthy financial data. This is crucial if you're a business in growth mode and want to borrow money or raise capital. Investors and banks will ask to see current, correct books.
When it comes to managing bookkeeping and accounting in your business, you have a few options:
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:
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.
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.
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.
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 Time
The 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 Data
The 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 Investments
With 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 Solution
Many 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 security
Users 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.
CHAPTER 4:
SaaS Financial Reporting Metrics SaaS Business Need To Track
An understanding of SaaS finance helps improve a company’s financial health while preventing any business failure.
With knowledge of financial metrics at your fingertips, you can make wise decisions related to marketing, customer service, or your SaaS product.
Let’s discuss the essential financial reporting metrics that you should track to drive incredible business financial growth:
SaaS finance describes the financial strategies, KPIs, and other procedures that SaaS businesses use to measure their overall performance and financial health. For SaaS organizations, managing finances is a crucial effort, and getting it right can help you realize potential business growth.
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:
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.
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.
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.
Recurring Income
You 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 Rate
The 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 Rate
Knowing 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 Margin
The 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 Calculations
Understanding 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.
CHAPTER 5:
How To Do Bookkeeping and Accounting For SaaS Businesses?
A professional bookkeeper helps you keep your business financial health in top shape by providing you with accurate and up-to-date information.
Although bookkeepers have several duties; preparing tax returns, producing end-of-year financial statements, and the main is to keep daily finances in order.
As bookkeeping and accounting are essential keys to unlocking success, this chapter explains to you how to do it easily.
An essential component of any SaaS business is bookkeeping. Almost every business requires a bookkeeping service to keep track of where their investments and profits are going or how they are being spent.
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.
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.
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 Bookkeeper
Although 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.
CHAPTER 6:
Useful Tips To Optimize Your SaaS Bookkeeping Process
For most SaaS businesses, bookkeeping may not be the biggest priority.
To help you achieve everything that you want for your business, below are a few tips to optimize your SaaS bookkeeping process.
SaaS businesses must consider bookkeeping their biggest priority. By establishing a strong bookkeeping system, you can get on the route to generate accurate financial reporting, gain cash flow visibility, access to updated balance sheets, and speed up other aspects.
Below are some of the tips to optimize your SaaS bookkeeping process:
Cloud-Based Accounting To Manage Books
Depending 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 Track
If 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 & Accounting
How 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.CHAPTER 7:
Examples Of Businesses On SaaS-based Model
Just like every SaaS business is unique, so are the bookkeeping needs.
But the question here remains the same for everyone – why should every SaaS business type start worrying about their business finances?
It contributes to business success and you can’t handle it without a proper bookkeeping system.
SaaS technically falls into any category and the list would be massive. In this chapter, we will explain the most popular business examples running on the SaaS 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.
CHAPTER 8:
Final Key Takeaways
If you are struggling to handle your business operations, it’s time for you to consider outsourcing your bookkeeping and accounting to a professional.
Below are some of the key takeaways about how bookkeeping services for SaaS businesses. By having an understanding of these, you can bring a huge difference to your business.
- 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.
CHAPTER 9:
Final Key Takeaways
Let’s dive into the most frequently asked questions related to Bookkeeping & Accounting for SaaS businesses. If you have some other questions in your mind apart from these, feel free to contact us.
What Makes SaaS Accounting & Bookkeeping Different?
Because SaaS organizations use a subscription business model, revenue monitoring is the most important component in SaaS accounting. SaaS businesses require an accounting system in place to easily serve the needs of a SaaS business model because they typically operate as subscription businesses.How Do I Perform Bookkeeping For My SaaS Business?
Leveraging the potential of cloud-based accounting techniques is one of the finest ways to handle bookkeeping for your SaaS company. For your SaaS business, our devoted team handles all bookkeeping duties. We offer clean books, including maintaining inventory value and depreciation reports as well as cash reconciliations and vendor setup.Conclusion
Staying on top of your money is simple when you start initially with your SaaS business.
But if you expand, you will need an accounting solution that helps keep your cash flow in control and ensure compliance with IRS requirements.
In short, having an understanding of how much money comes in and out is necessary for a SaaS business to stay afloat.
Businesses out there must keep detailed records of the transactions to make informed decisions. That’s why you need to hire a trustworthy bookkeeper on your side.
We at FreeCashFlow.io, offer you a complete understanding of bookkeeping aspects while managing your finances in the best possible way. Our experts will provide you with the accounting solution that will enable your SaaS business to flourish.
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