Accounting for SaaS Companies: How to Get the Right Numbers

I like to use analogies because I think people relate to them. There’s the asteroid that wiped out the dinosaurs. So now we have technology that can detect asteroids. That’s because we want to find those asteroids when they’re out at the orbit of Pluto, not when they’re about to hit Earth. That’s the analogy I use when I talk about setting up Accounting for SaaS Companies.

Accounting for SaaS Companies: How to Get the Right Numbers

You need to address any problems with the back office or financial functions as soon as possible. The longer you wait to get your accounting set up correctly, the more money you’re going to pay to clean up the mess or you might run into a situation where you can’t even get the numbers that investors need, resulting in a lower value of your company. And the value of your business is what strikes right at the heart of why we start subscription businesses in the first place, because in many cases, it’s purely to design for an exit.

Starting from a Clean Slate

When starting as a new SaaS company, you first want to differentiate whether your company is a B2C or B2B company. These are two different SaaS creatures. B2C has a much higher volume and much lower average sales price. B2B is the opposite. It has lower volume and higher ASPs. The systems you put into place for one are not necessarily the same for the other.

When you’re doing a lot of self-service and credit card transactions, it all comes down to numbers. In the end, it’s producing the numbers you know you will need. That’s where companies start on the wrong foot. They don’t have a clear idea of the metrics and numbers they will need to show to investors and acquirers when the time comes. If you’re a first-time CEO or a first-time SaaS founder, there are a lot of resources out there. However, they’ll tell you what you need, but not necessarily how to put it together.

ARR and Accounting for SaaS Companies

Understanding which metrics matter is a crucial element of accounting for SaaS companies. You need to know your annualized recurring revenue and your monthly recurring revenue if you’re in a more of a consumer model.

In the B2B model, your metrics will focus on annualized, recurring revenue. That’s the number one metric. ARR is a metric that’s changing over time. It’s not a metric that can be manually calculated if there’s a certain level of customers, around 20 or more; at least not easily. There’s software out there that will do that for you.

While founders and business owners should understand ARR and other metrics, they’re typically not going to set systems up themselves. They will hire someone with extensive knowledge to set up systems to monitor core metrics.

Learn More: SaaS Metrics that Matter

Should Startups Use QuickBooks?

Many startups and medium SMBs wonder if it’s a good idea to use QuickBooks as they’re starting. The truth is, QuickBooks works fine. We ran a company with $80 million in ARR on QuickBooks. It’s not complicated if you know the path to take, and that’s what SaaS Gurus brings to our clients.

SaaS Gurus has been working with SaaS companies since 2007. We’ve had opportunities to refine the techniques. However, it can take a long time to learn how to set up your systems and processes if you don’t know how. A company that we just took on is a prime example. They’ve been around for about a year and a half. That company just reached a million in ARR. They’re a large-ticket ASP and earn $50,000 to $100,000 per client. So, they’re only talking about ten clients total. But we completely cleaned up their books, changed everything, and got their reporting structure set up in two weeks, including the data cleanup.

SaaS Gurus used a Recurly program for the front-end and processor systems. That covered B2C transactions and self-serve transactions, like credit cards. All transaction information went directly into SaaSOptics. We didn’t even go through QuickBooks; just the cash deposits ended up in QuickBooks.

All the B2B transactions were fed through the CRM. The CRM became the sales order machine. In this case, it was Salesforce. A Salesforce opportunity was sent to a particular stage, which triggered finance to say, “Oh, here’s the account, here’s the opportunity, the commercial.” All of it then feeds right into SaaSOptics and QuickBooks.

Why SaaSOptics and QuickBooks Pair Perfectly

SaaSOptics and QuickBooks Pair Perfectly with Accounting for SaaS

SaaSOptics excels at accounting for SaaS companies because it monitors your SaaS metrics and ASC 606 compliance. ASC 606 compliance is the gap number, which is the recognized and deferred revenue. You get that information out of SaaSOptics. Then, QuickBooks becomes the backbone of your accounting system. You need to have that structured right to determine CAC, which comes from your sales and marketing numbers.

You need to determine cost structures because you can benchmark those against Pacific Crest, Keybank, or any benchmark data to determine if your spending is correct. SaaSOptics and QuickBooks talk to each other. They speak to the sales ops systems, so you’re not doing multiple data entries. Instead, information flows in automatically.

Then off to the side, you have your budgeting tool that ultimately reflects and harmonizes with your accounting system so that you can do actual versus budget and cash forecasts all in the same circle. That system would be robust enough that we guarantee our clients that they can run this system up to about $100 million in ARR without it breaking. Once ARR is over $100 million, we switch them to a heavy-duty ERP system.

Fractional CFOs Provide Seamless Approach to Accounting for SaaS

The difference between a SaaS fractional CFO using QuickBooks and a first-time CFO is understanding how to strategically implement that technology. It goes back to knowing the basic metrics versus putting that information together seamlessly. What a fractional CFO for SaaS Accounting offers is the knowledge of: 

  • The path to take
  • Tech stacks
  • Processes to implement
  • Integration of systems and technology
  • The numbers or ARR needed

For SaaS Gurus, it’s a matter of providing a turnkey solution for business owners. You hire lower-level resources. Then the system runs itself, and you don’t need an expensive CFO to run it. The experience allows us to get the numbers right in a seamless, automated fashion.

Keep Reading:  SaaS Accounting for Startups: Profit and Loss 101

Contact Anthony Nitsos for Your SaaS Accounting Needs

With a background in medicine, total quality management process re-engineering, IT, and finance, Anthony’s unique professional experience has shaped his professional approach into a disciplined, rigorous, and scientific approach focused on maximum efficiency, minimum cost, and strategic outcomes. He believes treating the symptoms and not root causes is just as big a miss in commerce as it is in medicine. Anthony Founded SaaS Gurus from his years of experience building B2B SaaS finance and admin ecosystems for many companies including Duo Security (exit to Cisco $2.35Bn), LLamasoft (exit to Coupa $1.5Bn), and dozens of other start-ups.

 

Share This Story, Choose Your Platform!

SaaS Topics

Most Recent