Guide to SaaS Accounting

5 things SaaS companies should think about when setting up their accounting system

Have you heard of Unearned Revenue? Recognizing your revenue? AP System? Bill.com? QBO? Xero, etc…?

In this post I will go over this terminology, and show you the top 5 things every SaaS company should think about when setting up their Accounting System

Topics are as follows:

1. Unearned Revenue
2. Maximize your Reports
3. Automate
4. Accounts Payable (AP)
5. Know your Expenses

1. Unearned Revenue

Or Deferred Revenue: Money collected upfront for services that have yet to be performed. Very common for SaaS companies (subscriptions) and prepaid insurance for example.

That will affect the way you will recognize your revenue.

You might say: “Hey, I sent out the invoice, and I got paid. This is revenue!”. NOPE! That is not revenue.

What you have to do is recognize the earnings throughout the period in which the services are performed. i.e. if you charge a customer for an annual subscription ($1200/year) and collect upfront, you have to recognize that income over the course of that year. It can be as simple as recognizing the revenue monthly ($100/month).

Although, sometimes, the contract terms can affect this.

2. Maximize your reports from the accounting system

Your accounting system is your database, so to maximize the effectiveness of your reports you should be fully utilizing all the tools that your system offers. 

That entails putting in all the data you have (from your vendors and customers): Payee, contact, description, reference… the more data that you put into the system the better information that you are going to get out of it. 

For your chart of accounts, for instance, you need to use accounts that better categorize your transactions. That will make recording transactions easy and it will allow you to break down all the transactions that your business made during a specific period into different subcategories.

A chart of accounts enables you to gain insight into the effectiveness of different areas of your business.

Using the class and department systems you can separate business activities. Let's say you have a #SaaSbusiness and #productservices if you want to see a breakout of the #incomeandexpenses from those 2 different business activities in the same accounting system you can when using those tools correctly.

3. Automate, automate, automate

Time is money and it should be used wisely! Technology is on our side folks! You can easily reduce human intervention in some of your accounting processes and use that extra time to grow your business ;) 

Set up the bank feeds in the accounting system - this will allow you to easily import the various transactions from the business's financial accounts.

Softwares such as QBO or Xero have AI (artificial intelligence) built-in as well as the ability to set rules to automatically classify recurring transactions from the same vendor.  

You can and should take advantage of the tools that the systems provide to make your life easier, BUT attention to detail and review are STILL needed as the AI may accidentally make an incorrect suggestion. We do recommend an overall review once you import all your transactions into the accounting system.

4. Implementing an AP (Accounts Payable) system

What it is: A system that helps you to keep your bills organized and paid.

An organized, easy-to-use system will save your company time and money. While this may not look very important at first you want to have a system in place, so that as the company grows you can efficiently handle more bills. 

Benefits:

• No angry ?? vendors because of late payments
• Better control over your cash flow
• Organization: ONE place where you can see ALL your liabilities list it out

AW recommendations:

1?? Set up an email account where you will only receive vendors' invoices, for example, [email protected]

2?? Use a software to record those invoices, like Bill.com

3?? or simply manually record invoices in QBO or Xero.com 

5. Know your Expenses

Know your EXPENSES! This is topic #5 of the 5 Things SaaS companies should think about when setting up their accounting system.

Not every expense is treated equally. Many SaaS founders have a misunderstanding of how expenses and assets are treated for accounting purposes. Just because you spend money in the business does not mean that it should be an expense in the income statement. 

For example software development fees - If you are building software to sell, all the different costs that go into building that software is considered an ASSET, so instead of going to the income statement or profit and loss, it must go to your balance sheet. 

Capitalization rules can be very complicated. If you have any questions we are happy to help!

We at Accounting Wise want to see businesses thriving. If you have questions about setting up the accounting system for your SaaS do not hesitate to contact us here in Linkedin or send us a message.