Software as a service (SaaS) companies are dynamic online businesses that sell software subscriptions instead of one-time purchases or digital downloads. If you’re thinking about starting—or growing—a SaaS business, it is essential to understand the accounting principles unique to this business type. These principles can help you streamline your financial processes so you can focus on growing your business and generating revenue. Keep reading to understand the essentials of accounting for a SaaS company.
SaaS businesses have unique requirements for accounting
SaaS companies represent a unique type of business, requiring accounting practices tailored to their specific needs. These companies generate revenue from subscriptions rather than one-time sales and operate with a different approach to capital, cost of goods sold, and other vital metrics.
For example, since SaaS businesses don’t sell tangible products, they don’t have inventory costs. SaaS companies also generate revenue up-front and have relatively low cash flow, which means they don’t have many expenses due at the end of each month.
Understanding the basics of SaaS accounting
The specific metrics and considerations that go into accounting for Software as a service company are numerous and nuanced, but they can all fall into a few core concepts.
SaaS companies sell subscriptions, so they have recurring revenues and customers who pay them regularly. These subscriptions are typically listed as assets on the business balance sheet. SaaS companies have high gross profit margins, meaning they have a high percentage of profit from each sale. They also have low inventory.
When you tie these metrics back to the core concepts of SaaS accounting, you see that the company has high gross profits because it doesn’t have any inventory sitting in a warehouse or other storage facility.
Be Smart with Your Cash Flow
SaaS companies have relatively low cash flow, which means most of their expenses don’t occur at the end of each month. As a result, they often have large amounts of cash in their bank accounts at any given time.
While it may seem to be a good thing to have a lot of cash on hand, it presents a few challenges for SaaS companies.
First, the company can’t earn interest on the cash it has sitting in the bank.
Second, if your cash balance grows too large, it can make investors and lenders skittish, since they don’t like to see large amounts of cash on a company’s balance sheet.
The solution to these issues is to spend the cash by investing in marketing, employees, or new equipment.
You Don’t Own Your Customer Data
One final accounting distinction unique to SaaS companies is that you don’t own the data your company collects from customers.
You collect this data and analyze it to determine which features or products your customers prefer and how much they’re willing to pay for each subscription. However, it’s the customers who own their data. So if they decide to cancel their subscriptions, you have to delete their data immediately because it’s no longer yours to keep.
In summary, SaaS companies have accounting requirements that differ from other business types. These companies sell subscriptions, not one-time sales, and generate revenue up-front. They have high gross profit margins, low inventory, and low cash flow. When you collect data from customers, you don’t own it because customers own the data once they subscribe.