The SaaS industry has exploded with over 11,000 new companies in the last decade and is constantly changing as more and more founders are actualizing their SaaS ideas. I talked with Nicolas Falbo, Senior Manager of Finance Strategy and Client Delivery, who has on-boarded over 8 clients by cleansing and aggregating their existing data and financial statements. From his experience, whether it’s a newly formed or matured SaaS company, there’s always some basic logistical problems he sees right off the bat. He has a few ideas to combat these common issues to help you improve your P&L statements, payroll accounts, revenue recognition, and subscription model.
Problem #1: Condensed P&L Statements
Your Profit and Loss (P&L) statement says a lot about your company. Not only does it indicate your company’s financial health and monetization, but it also shows its maturity and foundation. Condensed P&L sheets do the opposite.
Solution: Expanded P&L Statements
When we onboard new customers, the very first thing we see is a very condensed P&L sheet that is missing crucial data points. This sheet is not something you want condensed. Rather, an expanded P&L sheet shows the crucial data points that better serve your company.
Your P&L tells a story about your company so don’t leave out any details. Whenever a fresh pair of eyes sees your P&L, they should immediately be able to determine the financial health and monetization of your company.
Here are the basic sections you will need for you P&L:
Depending on the nuances of your company, the subsections for each section will differ. Taking time to perfect your P&L is crucial when making decisions for your company, and also during fundraising rounds.
Problem #2: Clumped Payroll Accounts
Another common error we see is that SaaS companies tend to clump all their payroll accounts under one account. The clients themselves are not to blame necessarily, mostly their payroll providers who send over the payroll, but still clients do not expand their accounts once received.
Solution: Expanded Payroll Accounts
You’ll want to make different tabs for each of your headcount categories since each individual department in your company has different sets of salary plans. This will ensure accurate reporting in the rest of your financial model such as metrics and your P&L sheet.
Formatting it this way will let you clearly see how your payroll is laid out. Your payroll account is a major part of your expense forecasts as well, so you want to make sure these data inputs are as accurate as possible to guarantee dependable forecasts.
For example, if you plan on hiring three new developers for your product, inserting this new data into your model will forecast what your expenses will look like if it takes into account three new developers’ salaries.
Problem #3: Non-compliance with GAAP Regulations
Recognizing revenue in SaaS is different because of the subscription-based model. As a result, many founders and CEOs are not recognizing revenue correctly. After receiving a 1-year upfront payment, founders will recognize the entirety of that payment as an asset. In reality it is still a liability until the service is delivered.
Solution: Recognize Revenue according to GAAP Regulations
Revenue can only be recognized once it’s actually earned. For example, if you have a 1-year contract that paid upfront $12,000. Only $1,000 of the cash is considered recognized revenue during the end of the first month of your product being delivered. The rest of the $11,000 is deferred revenue.
For more information on revenue recognition, check out this blog that shows you all the unique quirks of the SaaS business model.
Keeping track of when revenue is actualized is just as important as keeping track of how much cash is given during a payment. On your invoices, make sure to have memos about your subscription revenue and when revenue becomes recognized. This is essential in order to correctly implement this data into your revenue forecasts.
Here’s what we recommend: have a deferred revenue account on your balance sheet. This shows exactly what revenue is actually available and not available for you to use.
Problem #4: Monthly Contracts
Monthly contracts in SaaS aren’t truly a part of the subscription-based model because customers can churn easily on a month to month basis. They also require a lot of effort on the part of your sales team and customer success team. Annual contracts, on the other hand, are the more genuine form of subscriptions.
Solution: Annual Contracts
The beauty of SaaS is its subscription-based model that gives insight to what revenue you will have in the future from subscription renewals. Annual contracts allow you to know how much cash you have for the year, whereas monthly contracts only give insight for the short term.
Overall, annual contracts with upfront cash payments are better because customer retention for the year is guaranteed; no need to chase down customers month after month to renew. Not only will this help keep churn low, but it will also make your LTV much higher compared to monthly contracts.
Of course, each company and its product is different. If your company thrives on monthly contracts, go for it! But if there is an opportunity to switch over to annual subscription plans, make this a priority!
The financials in your company set the stage for the prosperity of your product. But with so many documents and excel sheets, everything can start getting out of hand. Here’s where we come in. KPI Sense helps all companies, big or small, clean and organize their data to set them up for success. If you’re ready to maximize your companies potential, here’s how.