SaaS Accountants and Their Bookkeeping StrategiesSadaf Abbas
SaaS Accountants and Their Bookkeeping Strategies
SaaS accountants are a valuable resource for small businesses and startups. Using cloud-based software, SaaS accountants can remotely provide bookkeeping and other financial services to their clients. This allows business owners to focus on their core competencies and leaves accounting to professionals. Chart of accounts, double-entry bookkeeping, and accrual basis accounting are just a few of SaaS accountants’ strategies to keep their clients’ finances in order. In this article, we will discuss SaaS accountants and their bookkeeping strategies.
SaaS Accounting has specific industry requirements despite having a simple description. A bookkeeper is in charge of maintaining accurate and current records of your company’s financial situation. However, bookkeepers and accountants perform some of the same tasks, such as providing end-of-year income reports or tax returns. A SaaS accountant’s primary responsibility is maintaining the fundamental daily finances. So like any other industry, charts of accounts and bookkeeping for SaaS are also crucial. Your SaaS accountant’s chart of accounts methods and bookkeeping techniques depends on your business model, average turnover, working capital, fundraising methods, and more. Utilizing an accounting company with knowledge to help early-stage SaaS firms scale up safely is beneficial as your business expands.
What are Accounting and Bookkeeping?
Although bookkeeping refers explicitly to the everyday recording of cash operations and transactions, many people mistakenly believe that accounting and bookkeeping are interchangeable. It is a branch of accounting that calls for the completion of the following tasks to develop a financially sound company:
- Taking notes on financial transactions.
- Making debits and credits public.
- Generating invoices
- Maintaining and balancing general ledgers, historical accounts, and current accounts.
- Finishing the payroll
Regular monitoring of a general ledger is one of SaaS bookkeeping’s primary duties and helps with financial budgeting. This document mostly keeps all the information, expenses, and receipts. Posting is the act of making an entry in the ledger.
The complexity of SaaS bookkeeping software depends entirely on the person using it and their preferences, but the company’s size and demand can also influence it. Like all other industries, bookkeeping also plays a very important role in the SaaS industry.
What is SaaS Accounting?
The term “SaaS accounting” has recently gained popularity among the younger demographic of SaaS accountants on a worldwide platform. SaaS accountants use certain accounting software to render their services of financial modeling and analysis to SaaS companies. In fact, these programs can be utilized globally on any PC via a cloud platform. So, the SaaS accountant in any part of the world can utilize this technology and do financial reporting.
Specialized SaaS financial models are effective for security access and utilization of virtual accounting.
How is Accounting Essential for SaaS Companies?
For at least the past ten years, SaaS has been one of the most popular business models. SaaS accounting, however, is anything but straightforward.
SaaS business owners rely on SaaS accountants to manage their business finances, from recognizing revenue to analyzing R&D and client service expenditures.
For the following reasons, a high-growth SaaS company needs excellent accounting:
- Significant changes in working capital can occur by minor changes in turnover or other user metrics.
- When leaders use reliable data, they improve their decisions.
- If properly managed, understanding and predicting working capital, especially when it pertains to deferred revenue, can assist a company in lowering its need heavily on external venture capital.
- Professional accounting is necessary for sales, state, and federal taxes.
- Although it might be annoying, revenue recognition is crucial, especially when moving the company to a major player or seeking millions of dollars in venture capital financing.
How much Important is Bookkeeping for SaaS Industry?
By collecting your first external investment, you should have your accounts organized if you’ve not been doing so in the past. Generally, we advise organizations to switch from spreadsheets to accounting software as soon as possible. Bookkeeping for SaaS helps in making financial budgeting so much simpler. Bookkeeping helps organize income and expenses appropriately. It also helps budget for upcoming expenses and the company’s growth. It’s far more difficult to obtain an accurate financial analysis if you don’t maintain accurate records. SaaS accountants must follow the international accounting standard for catering to the bookkeeping process.
What is a Chart Of Accounts?
Chart of accounts arranges accounting records of every account. It displays the accounts required for managing a company and creating financial models. Your company’s financial records will be more organized if you use a chart of accounts. The account names, brief descriptions, and unique account identification codes are all provided in the chart of accounts.
Assets, liabilities, and shareholders’ equity comprise the balance sheet accounts, further divided into numerous subcategories. Finally, revenues and expenses are broken down further into subcategories in the income statement accounts.
Chart of accounts for the SaaS Industry
You must first be familiar with general ledger accounts to comprehend a chart of accounts for a SaaS company. Simply put, a general ledger (GL) account is a group of operations. For instance, most companies have separate GL accounts for their payroll spending, administrative cost, etc. A chart of accounts, or COA, is a listing of all the financial accounts you employ to classify the operations in your company.
Chart of accounts must balance providing too much and not enough information to make accurate financial models for the SaaS industry. Depending on the company’s data requirements, the chart of accounts should be as detailed as necessary. Remember that you can always aggregate data if you need less detail.
Essential Components of Chart of Account
SaaS accountants use accounting software available to assist them in efficiently preparing a chart of accounts. We’ll go over the essential components for creating a chart of accounts.
Each general ledger account’s title refers to the transactions referring to business operations. Account names should understand your SaaS business financial transactions and be clear to your finance team immediately. You can allocate operations to the appropriate account using the different numbers allotted to each general ledger account. Such as:
- Computer & Office Equipment: 201-204
- Furniture & Fixtures: 205-208
- Leased Computer Equipment: 100-102
- Accumulated Depreciation – Computers: 104-108
- Accumulated Depreciation – Furniture: 109-110
- Intangible Asset – Domain: 114-118
- Accumulated amortization: 119-122
The COA divides the general ledger accounts into account types, which are big categories. Because they relate to the important sections of the income statement, also known as the profit and loss statement and the balance sheet, the account types will be comparable for most organizations. There are five fundamental account kinds, important for financial budgeting, while some firms prefer to utilize more specific categories:
Assets accounts are significant resources in running the operations of any SaaS company. The following is included in the assets account of a SaaS Company:
- Cash On Deposit
- Cash On Hand
- Certificates Of Deposit
- Debentures held
- Federal agency securities
- Federal treasury notes
- Guaranteed investment accounts
A company’s liabilities are vital because they finance operations and pay for large expansions. They can also make transactions between businesses more efficient. The following is included in the liability account in the SaaS Company.
- Accounts and bills
- Interest payable
- Short-term loans
- Bank overdrafts
- Income taxes payable
- Any accrued expenses
Equity is substantial because it represents the value of an investor’s stake in a company, represented by the proportion of its shares. The following is included in an equity account in a SaaS Company.
- Retained Earnings
- Outstanding Shares
- Treasury Stock
- Additional Paid in Capital
Revenues are a company’s earnings and aid in earning the company’s profit. The following is included in revenue accounts in the SaaS Company.
- Subscription License Revenue
- Usage-Based Revenue
- Professional Services Revenue
Expenses are costs incurred for running the operations of the business. They are important for a company’s growth. The following is included in the Expense account in the SaaS Company.
- Hosting Expenses
- Internal Engineering
- Customer Success
- Direct and third-party cost
- Professional Services
- Product Development
- Software Amortization
Why Does Chart Of Accounts Matter for a SaaS Company?
Chart of accounts aids SaaS companies in financial planning and reporting. Correctly documented transactions make it considerably simpler to satisfy GAAP accounting requirements and give SaaS companies a better picture of their financial health. SaaS accountants follow both the cash-based method and the accrual concept for making entries in the ledger.
Cash Basis Accounting
Cash accounting is an accounting method where payment receipts are recorded during the period in which they are received, and expenses are recorded in the period in which they are paid. Unlike the accrual concept, which recognizes income at the time the revenue is earned and records expenses when liabilities are incurred, regardless of when cash is actually received or paid. Small SaaS companies and independent contractors with little inventory frequently employ cash-basis accounting. Cash accounting gives an accurate depiction of cash flow but is not suitable for long-term financial budgeting.
Accrual accounting records revenues and expenses as they happen rather than always when money is received or paid out. In general, accrual accounting is used by most corporations, whereas individuals and small businesses use cash accounting. According to the Internal Revenue Service (IRS), eligible small business customers may select either approach, but they must persist with it. The method of choice must also truly represent business processes.
The accrual concept will help SaaS companies in performance management, accuracy, and future planning. In addition, it helps growing businesses in tax calculations and keeping an accurate record of taxes.
Because of its subscription-based business model, bookkeeping for SaaS companies is a little complex. The revenue includes additional payments, one-time fees, and routine modifications (such as plan expansions and devaluations). Months Prior Revenue (MRR) is a crucial measure for SaaS companies, and subscription firms benefit from accrual accounting since, when done correctly, accrual revenue resembles MRR. It offers equivalent patterns for SaaS companies because it enables tracking sales and expenses concurrently.
Bookkeeping Strategies of SaaS Accountants
Keeping correct records is crucial if you and your team want to raise money or take advantage of government tax credit schemes. In reality, by putting in place a reliable SaaS bookkeeping system at the outset of your company, you can:
- Anytime you need it, produce accurate financial reports.
- Obtain financial information and cash flow awareness to help you make smarter decisions.
- Access to current balance sheets and other financial models of the SaaS industry.
We will discuss the bookkeeping strategies of SaaS accountants in the coming section:
Use cloud-based Accounting Software
Using sheets to keep track of financial operations may be sufficient if you’re only beginning out, depending on your business strategy. However, you’ll require a well-managed SaaS financial model that can scale with your business when your revenue recognition and subscription management become more complex.
The information can help your business to gauge and track crucial SaaS growth KPIs like:
- Monthly Recurring Revenue (MRR)
- Customer Acquisition Costs (CAC)
- Customer Churn
Meanwhile, integrated systems for payroll, billing, payment, and confirmation capturing help cut down on manual procedures and mistakes. You can even link your accounting program to your bank account to make monthly SaaS bookkeeping easier.
Create regular Payments for a Recurring Monthly Invoice
If you run a SaaS company based on a subscription model where clients pay monthly fees, it might be worthwhile to set up and pull regular, pre-authorized transactions from client accounts using a multiple payment service. Then, your SaaS accounting software can automatically create and distribute monthly invoices.
You’ll save time collecting accounts receivable management and get a more accurate picture of your company’s cash flow.
Automate Recurring Payment Processes
You can set auto-billing through pre-authorized payments on your SaaS company’s debit and credit cards. As a result, decrease the money and effort spent writing recurrent check payments. In addition, automate the synchronization and comparison of accounts payable and receivable in your accounting program.
Your SaaS accounting software can help you expedite the accounts payable procedure and make it simpler to manage and estimate your cash flow by allowing you to set up recurring expense coding criteria.
Use project codes to track longer SaaS Projects
Use project codes to record income and ensure investment and progression invoices are associated with the correct projects if your SaaS company works on relatively long contracts (where deposits are collected upfront and revenue recognition occurs after work closure).
Create a COA to keep track of your SR&ED Spending
Ensure your account chart is structured to handle Scientific Research and Experimental Development (SR&ED) expenses separately for tax returns and reporting if your SaaS firm expects to take advantage of SR&ED incentives. You can choose between the conventional direct cost technique and the surrogate method when deducting SR&ED costs. Streamlining your bookkeeping will simplify the claims procedure.
- For all SR&ED-eligible expenses, establish a capstone account in your SaaS accounting program.
- Create sub-accounts for specific expenses like supplies and labor that qualify as SR&ED
For instance, if you have staff members who record your SR&ED activities, you should keep track of their pay and benefit expenditures independently when they arise.
Record your Invoices and Receipts
Whether you’re compiling cost records for SR&ED claims or want improved visibility into your business cash flow, monitoring receipts and invoices is essential.
- Please take pictures of their actual bills and receipts.
- Add them to the app store, then access their documents as necessary
Outsource your SaaS Bookkeeping
If you frequently find yourself weighed down by non-revenue producing duties like bookkeeping. Then you should be aware that worldwide business processes are now highly outsourced as a proven approach for assisting companies in refocusing on their main purpose.
Outsourced bookkeeping services are particularly useful for SaaS companies who want to:
- More time devoted to sales and other growth-oriented pursuits
- Get expert, knowledgeable bookkeeping assistance.
- Utilize effective cloud-based accounting tools
Understanding a company’s revenue and operations is possible through bookkeeping and a chart of accounts. The future of a rapidly expanding SaaS firm is somehow dependent on having access to efficient financial analysis techniques. In addition, having organized finances makes it easier to raise venture capital or become a ready-to-sell company.
However, your software company may find it challenging to raise money, or you may experience a decline in profits in the event of an exit only if you don’t have clear, trustworthy financial records and current financial statements. In addition, maintaining precise accounting and bookkeeping practices helps avoid unintended tax violations. In this regard, SaaS accountant plays a major role in preparing financial accounts.