SaaS Profit and Loss Statement Tutorial for Startups
We’re going to take a deep dive into a SaaS Profit and Loss statement and explain how to use roll up accounts to do an actual versus budget, department by department.
I’ve used classes in QuickBooks, and I generally treat them as probably a medieval person would treat the bubonic plague. When you use classes, presenting financial statements and trying to do an actual versus budget becomes problematic. This is because classes consolidate multiple transactions but don’t retain the granularity of actual versus budget by department.
I go to what I call the row method of reporting, or roll up accounts. From a presentation view, say to a board or to an investor, this is a high level financial statement. This format makes it very easy to do an actual versus budget, department by department. You can get it down into the detail by the account as well.
Separate Bookings Income from GAAP Revenue Adjustments
Always list bookings income separately from GAAP revenue adjustments. A lot of investors want to know the volume of invoicing going through the SaaS company, because that turns into cash. But at the same time, they want to see what the GAAP net income and the GAAP gross margins are.
When generating invoices, instead of booking deferred revenue and debiting accounts receivable, you actually book revenue and accounts receivable directly. So whether it’s recurring or non-recurring or services, break those out.
Non Recurring Software
Your recurring software will be subscriptions. Non-recurring software could be user fees, such as one-time set up fees. Services would be implementation or other delivery services that you charge for. You’re going to want to differentiate the gross margins at these levels and not treat them all the same.
Then do the GAAP adjustment. SaaS Optics makes this super easy. All you have to do is run a contracts report and it will tell you what your deferred revenue, short term, long term and unbilled AR balances should be. Then you just force your balance sheet to be correct and everything else flows back to net income and goes into the GAAP.
Cost of Sales
It’s best to break out cost of sales into three buckets since there are three different activities going on.
Cost of Production
Cost of Delivery
Cost of Support and Retention
Cost of Production. What does it take as far as hosting, any security applications, anything else that is directly related to delivering the software to the customer.
Cost of Delivery. This is your team that’s specifically tasked with getting a customer up and running.
Support and Retention. These are the people on your customer success team. They are responsible for fielding bug reports, answering questions on the support desk, getting feedback from the customers and feeding it back into product or dev as far as feature requests.
At the time of renewal, these are the folks that have the relationship with the customer. They should be the ones that are front and center saying, “Hey, it’s time for renewal.” They should know if there are any expansion opportunities, because they’ve been working with the customer. They should know what the renewal term should look like. And they either work independently or with sales to sign those contracts and get them going.
I like to break it into those three buckets because those are three distinct activities within the cost of sales, all of which I’d like to know, what’s my cost and what are we doing here?
The other benefit of breaking out delivery on its own, then your services and delivery, you can compute very easily a gross margin on your services portion in particular.
So again, no need for using classes, this is all based on what I call the rows or roll up accounts.
What if you have people with multiple responsibilities?
It is possible that the same people doing production are also responsible for delivery or retention. In cases like this a manual allocation may be required to push those numbers into the appropriate rows.
Most of your new payroll systems have an out of the box or a slightly customized export file created for you, that makes it a lot easier to do the journal entries. There are different ways to automate this as well depending on your payroll provider.
Research & Development (R&D)
For R&D I like to break out product and research separately. One reason in particular is, development allows R&D tax credits, whereas pure product research doesn’t. Separating those out on the income statement makes it easier for an accountants to pull out the development cost in particular.
Sales and Marketing
It’s also best to separate marketing from sales. For one, marketing allows you to do what’s called a return on marketing investment, or ROMI analysis. This allows you to review marketing from a lead generation standpoint and determine what your marketing spend is as well as how effective the advertising is.
General and Administrative (G&A)
For G&A, I like to break those out into various buckets as well.
Finance and Executive
Technology, in particular IT becomes more and more important, especially if you have customers that are SOC 2 or they need to go to SOC 2, then you’re going to want to see that spend.
Are your finance and executive, is that top heavy? Do you need to trim that back?
And finally occupancy costs. In the day and age of COVID this seems to becoming more and more rare. I have now three clients in a row, who’ve all said they’re not renewing their leases because they prefer the remote model. So that’s a cost savings to tech startups in particular.
Are you a SaaS CEO or founder looking for more guidance in setting up your SaaS profit and loss statement?
Anthony Nitsos scales B2B SaaS companies by setting up state-of-the-art Finance and Stakeholder Ecosystems, delaying the cost of hiring a CFO, and building internal competence to efficiently scale by leveraging a hybrid blend of medical. operations, IT, and finance professional skills.