SaaS companies host an application created to provide services over the Internet. The provider, host, and creators are the same in larger companies. But in startups and small businesses, the independent software vendor (ISV) usually contacts a third party, the provider, to host the application. Applications are used by IT professionals, business users, and personal users, as SaaS includes all types of application software, from entertainment applications to advanced IT tools.
SaaS Explained
SaaS tools are marketed to both businesses and consumers. A few of the most prominent examples of SaaS companies are Netflix, Google, and Microsoft. Many companies are predicted to grow more because SaaS becomes increasingly profitable as the world becomes digital-based.
Accounting is tricky to manage, especially for startups or small businesses. SaaS accounting is challenging and different from standard accounting methods and processes. SaaS revenues are usually generated through monthly or yearly subscriptions that consumers must pay to avail of the services provided by the application. A business should have a robust accounting system from the beginning to record all the outflows and inflows.
Tracking sales for SaaS businesses differs from other companies as SaaS businesses use a subscription model. Maintaining records of all subscriptions and additional service fees is tricky as customers upgrade, downgrade, or opt in or out of different services. Accounting tools used by SaaS businesses are also other than standard accounting tools. A few tips SaaS business owners, especially startup business owners, should consider while managing their accounts are the following.
Always Remember Upfront Revenue
Upfront revenue is an advance payment on services yet to be provided. In this case, there will be customers who will opt out of the subscriptions earlier than their ending period, meaning that you will have to return them their extra paid fees. Therefore, you should always have some leftover, unused cash in the business to make these returns easily.
You are Choosing Between Cash Accounting and Accrual Accounting
Cash accounting is when the business records sales as soon as it receives the cash. This method does not include trade receivables or trade payables. The accrual accounting method records transactions or bookkeeping when the provider provides the service. This method is more complicated than cash accounting but more beneficial and efficient. You can also easily forecast your future income and expenses through accrual accounting, whereas cash accounting can be challenging to predict.
Include Tax According to the Growth in Your Budget
Growing a SaaS business is not that difficult, but they must plan their development accordingly. Growing for SaaS businesses typically means introducing their software to other locations or different states from its origin. The problem is that each state or foreign country has different tax laws that many companies ignore. Taxes can become a big problem for growing SaaS businesses as the owners will lose control over their finances. Hiring a tax professional in the industry is advised to keep all the tax laws and rules on track and ensure you are following them correctly.
Conclusion
To have a better accounting system in SaaS businesses, you can introduce accounting tools that are designed explicitly. You can follow the GAAP (Generally Accepted Accounting Principles) rules to standardize business accounting methods even when operating at separate locations. Startups usually do not use the GAAP principle initially, but it is beneficial to use it at an early stage. Using the bookings metric is also essential as it predicts the potential revenue and growth of the business.
Some companies use manual processes such as spreadsheets in SaaS business to manage their finances, which is not innovative. It is because these methods are used for everyday bookkeeping and revenues, and SaaS is different as the primary source of revenues for SaaS businesses is subscriptions. So, it is better to use software designed for SaaS businesses to manage your finances more accurately.
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