An intro to bookkeeping for SaaS companies

When you’re in the thick of running and expanding your SaaS business, bookkeeping may not feel like a priority, since you’re probably spending much of your time finding new customers and improving your product — two essential pursuits for building your company. However, the financial processes that you establish early on will shape how well you’ll be able to understand and control your business moving forward.

Founders and operators of early-stage SaaS companies have unique accounting and bookkeeping considerations, specifically when it comes to handling recurring subscription revenue, revenue recognition, deferred revenue, and software expenses. If you get these fundamentals correct now, you’ll set your business up to maintain clear financial records and a strong foundation for budgeting, tax preparation, fundraising, and future growth.

In this article, we’ll explore SaaS bookkeeping, including tracking revenue, expenses, and metrics. By the end, you’ll feel confident about what you need to record in your books, as well as when and how to do so.

Bookkeeping for SaaS companies is the process of recording, organizing, and maintaining the financial transaction records for a software-as-a-service business, following standard bookkeeping principles and also factoring in the unique considerations of a recurring-revenue model. This includes accounting for subscription payments, deferred revenue, SaaS revenue recognition, recurring expenses, and customer billing cycles.

When managing the books for a SaaS business, you’ll follow the same basic bookkeeping principles that you would for another type of business. That said, the recurring revenue model that’s typical for SaaS companies does add a few unique complexities.

Here are a couple examples:

• Revenue recognition: Subscription revenue may need to be recognized over the period when your company provided the software service, instead of when you received the payment.
• Deferred revenue: This is another consideration. Payment that you collect in before delivering the service may need to be recorded as a liability until your business actually delivers the service.

A key point that SaaS founders need to understand is that when your company gets paid and when it recognizes that revenue in your books won’t always be the same timeframe.

Cash vs. accrual accounting for SaaS companies

For founders and operators, it’s important to know the difference between cash vs. accrual accounting, so you can decide which approach is right for your SaaS business. Here’s how these types of accounting differ:

• Cash accounting: Revenue is recorded when the payment is received and expenses are recorded when they are paid.
• Accrual accounting: Revenue is recorded when it’s earned, and expenses are recorded when they’re incurred.

Cash accounting is a simpler approach, but it can often give SaaS companies an inaccurate financial picture. Accrual accounting can be more complex, but can provide a clear and accurate picture of a SaaS business’ performance over time. Many early-stage SaaS companies use cash accounting as it’s a basic option, but accrual accounting may be the better choice once your recurring revenue and operations grow.

Billing a customer, collecting the money, and recognizing the revenue can happen at different times for SaaS businesses. So, how should you track subscription revenue? Here’s what you need to know:

• Record the details of each subscription payment. You’ll need the amount, customer, subscription term, billing frequency, and service start and end dates.
• Determine whether you earned revenue. If a customer pays for a service in advance, that payment isn’t treated as earned revenue; it’s deferred revenue until you have delivered the service (under accrual accounting practices).
• Recognize revenue over the subscription period. For example, if the annual subscription fee is $12,000, then you’ll recognize $1,000 of revenue for each month.

Bookings, billings, revenue, and deferred revenue. These may seem like interchangeable terms, and they are related, but they’re actually distinct concepts. The difference between them comes down to when each occurs. Here’s how these concepts differ:

• Bookings: Bookings reflect the value of the customer commitment or the value on the customer contract. For example, if the total amount on the contract is $12,000, that’s what you’ll record under bookings as an operational metric.
• Billings: This is the amount on your invoice to the customer. To continue this example, you might invoice for the entire $12,000 at once or $1,000 per month for a year, for instance.
• Revenue: This is the amount you’ll earn by providing your service. In this example, it would be $1,000 monthly for a $12,000 annual booking.
• Deferred revenue: This is the money you’ve collected for services you haven’t yet rendered. For example, if you bill the whole $12,000 upfront, it would be deferred revenue until you provide the services.

In accounting for SaaS companies, you must track the same basic expenses as other businesses, such as payroll, sales, marketing, and administrative expenses. There are also some expenses that are specific to the software subscription model. These may include:

• Cloud hosting and infrastructure (such as servers, databases, APIs, and storage)
• Software design, development, and QA tools
• Payment processing fees for collecting subscription payments
• Customer support tools
• Sales commissions (if applicable)

Although it’s not directly an expense, SaaS businesses should also track any free trials, credits, or discounts that they offer customers. This can directly impact revenue and provides useful insight into your customer acquisition and retention efforts.

Following small business accounting principles can help you build a strong financial foundation for your company. And you should also pay attention to a few operational and financial metrics that will provide insights into your performance, growth, and long-term viability. These include:

• Monthly recurring revenue (MRR)
• Annual recurring revenue (ARR)
• Customer churn rate
• Revenue churn
• Net revenue retention (NRR)
• Customer acquisition cost (CAC)
• Customer lifetime value (LTV)
• Gross margin
• Burn rate
• Cash runway

By following SaaS bookkeeping and accounting best practices, you’ll create a strong financial foundation for your business, and you’ll be able to clearly see your company’s revenue, expenses, assets, and liabilities. With this information, you can calculate gross margin, burn rate, and customer acquisition costs to understand how your company is performing.

In short, with accurate bookkeeping and metrics, you can get a clearer picture of your company’s financial health and make better-informed decisions.

Whether you’re using an automated SaaS bookkeeping tool or doing it by hand, there are a few key mistakes you should avoid.

Don’t get the timing wrong

Don’t assume that the cash you receive is always revenue earned. If the payment was made upfront before you rendered the service, it should be recorded as deferred revenue and be recognized over the service period. If you have rendered the service, it’s revenue.

Don’t misclassify expenses

Use a consistent classification method for your SaaS expenses, with categories like hosting, software development tools, and sales commissions. Keep in mind that some product development costs may require a different accounting treatment, such as being amortized over multiple accounting periods.

Don’t put off reconciling your financial systems

Be sure to reconcile your accounting software, billing platform, payment processors, and bank accounts. This way, you can weed out and duplicate transactions and find any missing ones.

Don’t use inconsistent bookkeeping practices

When you’re just starting out, simple spreadsheets may be all you need. As your company grows and acquires more customers, you’ll need to establish consistent and comprehensive bookkeeping practices that can enable your business to scale.

Early-stage founders often handle their own bookkeeping tasks. If you’re looking to grow your company, it might be in your best interest to hire an expert. You might not need to bring in a full-time bookkeeper or accountant. You could also consider fractional or contract support. Just be sure to carefully evaluate external bookkeeping partners.

Here are a few more signs that it might be time to hire bookkeeping or accounting help:

• Your transaction volume is growing and getting more complex. If recurring revenue is becoming harder to track on your own and transaction volume is growing, you’ll likely need to bring in an extra set of hands.
• You’re using accrual accounting. Accrual accounting is also more complex than cash accounting, so it will likely make sense to hire an expert to help you establish and maintain strong financial processes.
• You’re considering raising a round. You may also want to consider expert support if you’re looking to fundraise and will be undergoing due diligence. In this case, having clean and consistent books is a necessity.

Effective SaaS bookkeeping isn’t just about maintaining accurate records. When you make bookkeeping a strategic part of your business — and combine clean books with key operational and financial metrics — you’ll get a clear picture of your company’s financial health and viability. This is critical information, which is necessary for making the sorts of spending, hiring, and investment decisions that support sustainable growth.

Building your financial foundation also means choosing tools that make it easier to keep your processes and financial data organized as you grow. Mercury is a key part of the financial stack for SaaS startups that helps you keep clean, consistent financial processes so you can focus on your other priorities. With features specifically designed for SaaS, you can send money where and when you want, simplify your payables workflow, issue cards, and so much more.