The early days of SaaS accounting are simple enough—without revenue pouring in, a founder who has created a dedicated business account, gotten a credit card and set up a business management suite like QuickBooks is in a solid position.
But things get complicated quickly, and it’s easy for founders to stay in the spreadsheet-accounting realm for too long. Doing so can lead to errors, tax issues and hazy forecasting. When it comes time to prepare for fundraising, it’s also important to have the metrics VCs will look for—including the B2B SaaS ratios, like Lifetime Value (LTV) to Customer Acquisition Cost (CAC)—that your accounting suite won’t handle.
Getting in line with GAAP
For an SaaS business preparing for fundraising, GAAP-compliant metrics are a must. Generally accepted accounting principles (GAAP) are an accounting standard used by the Financial Accounting Standards Board. Essentially, they set up parameters for different types of businesses to handle accounting the same way, using the same methods, terms and assumptions, no matter the industry. This makes it simpler for stakeholders and potential investors to understand financial statements. With GAAP, everyone speaks the same financial language.
If your business hasn’t reached GAAP compliance, it’s critical to get caught up before you push for funding. VCs require GAAP-compliant metrics, including the three core GAAP requirements:
- Income statements (or profit and loss statements): your company’s revenues and expenses over a period of time
- Balance sheets: your company’s assets, liabilities and shareholder equity at a particular point in time
- Cash flow statements: your company’s cash inflow and outflow
Due to the nature of what they sell, SaaS firms have certain accounting complexities. Charges might vary over a customer lifecycle, with extra costs like licensing, customization, upgrades, or maintenance sprinkled in among the bread and butter subscription fees.
To comply with GAAP, a SaaS firm must have a lock on its bookings, billing and revenue metrics. They’ll not only keep you on track with growth, they’ll help identify potential weak spots in your business.
- Bookings are customer commitments. Your business has contracts signed, whether for new subscriptions, or for additional services. While you can’t yet count this as revenue (doing so would distort your monthly recurring revenue (MRR) and annual recurring revenue (ARR) numbers), your bookings do give you a good sense of your company’s health and future.
- Billings are what you’ve invoiced. For a rapidly growing SaaS firm, it’s common that your bookings will outpace your billings, requiring extra employees to service all your new customers but leaving you with cash flow problems. Having a solid sense of your bookings vs. billings will help you tweak your subscription model to improve business health.
- Revenue is your recognized billings after you’ve delivered your service. Focusing solely on bookings and billings can provide too rosy a picture. GAAP defines revenue as what you’ve actually earned, not what you expect to earn.
With so many variables, it’s easy to make errors in SaaS accounting, even with a reliable software system. FinStrat Management’s financial experts specialize in working with B2B SaaS firms, helping achieve GAAP compliance and preparing businesses for growth with sophisticated modeling and reporting packages.
At FinStrat Management, our professionals will handle it all
FinStrat provides accounting, finance and reporting services for B2B SaaS companies. We’re organized to do all the heavy lifting, so you get accurate accounting, financials and reporting—on time, every time and without any of the hassle. Let’s get started with a free consultation today.