Best Practice Guide to SaaS Accounting in 2023

However, it is the most complex of the three methods and requires a strong understanding of accrual accounting principles and SaaS business operations. The right SaaS accounting software can greatly facilitate this process, helping to ensure accurate and compliant financial reporting. When a SaaS company has delivered services, but a client has not paid, the contract will be thrown into accounts receivable. For these types of outstanding payments contracts are lumped into 3 different collection windows 30-days, 60-days, and 90-days.

However, it might not accurately reflect the financial health of a SaaS company due to its subscription-based model. For instance, a large upfront payment for a two-year subscription would be recorded entirely saas accounting in the month received, skewing the revenue for that period. The shift in financial management from traditional methods to Cloud-based solutions has introduced a unique set of challenges and opportunities.

SaaS Funding Options that You Can Access

MRI Software, a global leader in real estate solutions, has launched a new automated income verification offering for multifamily leasing. Now that you understand the possibilities of a SaaS accounting solution, get an in-depth look into Sage Intacct Construction for free in Bangert User Group. Simply put, Sage Intacct Construction is a cloud ERP built for the construction industry. We’ll look at why SaaS accounting is valuable along with the differences between it and traditional accounting practices. If you manage a business with a cloud-first strategy, you will have experienced the benefits of cloud computing. Cloud systems provide the elastic resources you need while reducing your total cost of ownership.

The term “SaaS accounting” may sometimes refer to using SaaS tools for traditional accounting workflows. And while that’s part of the conversation here, our main focus will be explaining how to run accounting processes for a SaaS business. These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”).

IFRS Perspectives Newsletter

We believe services provided by the SaaS provider that could be performed internally or by a third party other than the SaaS provider are generally distinct from the SaaS. Contractual restrictions requiring the customer to obtain the services from the SaaS provider do not alter this assessment. Considering customer commitments, your number of bookings gives you an idea of how much money you can expect to make over time.

Bookings are an important metric for SaaS businesses to understand the success of their sales efforts and potential revenue growth. Because GAAP requires organized, consistent, and comparable financials, your forecasting financial modeling and analysis are more accurate and reliable. For SaaS businesses, which rely heavily on financial projections to inform important business investments and decisions, working with accurate and up-to-date financials is crucial.

Income Statement

Companies earning revenue from contracts with customers must follow compliance measures when reporting revenue and filing taxes, to avoid penalties. In our experience, the accounting for SaaS (and other cloud computing) arrangements is of increasing importance given their growing prevalence. In the realm of SaaS accounting, understanding the accounting method used is vital as it influences how revenues and expenses are recognized. The three primary accounting methods businesses adopt are Cash-basis Accounting, Accrual Accounting, and Accrual Accounting for SaaS. Each method offers its unique perspective and can significantly impact a SaaS company’s financial reporting and analysis. The SaaS subscription model makes revenue recognition complicated for accounting teams.

For example, SaaS companies have to account for usage-based pricing models, subscription-based pricing models, and trial periods—all of which require specialized accounting solutions and tools. AI revolutionizes finance and accounting by automating repetitive manual tasks such as invoice processing and data entry. This unlocks significant financial savings over time and eliminates manual errors. SaaS finance involves optimizing financial transactions and cash flow as opposed to simply recording them. It ensures effective financial planning and analysis (FP&A) and seeks to improve and protect your company’s long-term profitability.

It’s important to carefully consider the pros and cons of each method before making a decision, and to consult with a qualified accountant or financial advisor if you’re unsure which method is right for you. One of the top options for the best accounting software for SaaS companies is QuickBooks Online. This includes things like MRR, ARR, COGS and churn rate—all of which are important for understanding how successful your business is (and where you need to improve). For SaaS companies with a lot of subscription revenue (i.e., almost all), platforms that were specifically designed for subscription accounting can be really helpful. On top of your accounting method, you’ll also need to keep track of a few key accounting metrics and KPIs.

This model is advantageous in the sense that your business can better forecast revenue and expenses. Although complicated compared to cash-basis accounting, accrual accounting can better serve quickly growing SaaS businesses. SaaS accounting refers to recording, analyzing, and interpreting the financial information of your SaaS business.