What Should a SaaS Income Statement Look Like? (2021 Update)
August 4, 2021
While cash accounting for Software-as-a-Service (SaaS) businesses has some merit, accrual-based accounting is preferred. However, the act of simply accruing and deferring expenses and revenues by itself doesn’t necessarily provide the information needed to understand the health and situation of the company.
A SaaS Profit & Loss (P&L) statement needs to be organized in order to be meaningful to both internal stakeholders and potential external partners, such as capital providers. As the SaaS business model has evolved, it is worth examining what an income statement should look like in 2021.
How Should a SaaS Income Statement be Organized?
Reviewing a company’s financials in a thoughtfully aggregated, trended format remains the number one goal for managers and investors, and the format proposed below accomplishes this concisely and simply. Stakeholders want to see:
- Monthly granularity.
- Detailed departmental breakout, but ancillary expenses can be aggregated.
- Customer Success allocated in Cost of Goods Sold (see below for considerations).
- Expensing all software development costs if possible and appropriate.
From a bookkeeping perspective, your company will no doubt maintain numerous detailed accounts to accurately track specific assets, liabilities, revenue streams, and cost centers. But at the managerial level, what should an effective subscription revenue income statement, or profit and loss (P&L) report look like? What’s the proper level of granularity in the accounts? Where should certain accounts be categorized? What’s the correct level of detail and organization to share with outside advisors and investors?
SaaS Income Statement Example
Below is a fictional, but realistic, SaaS company income statement organized correctly for understanding the drivers and trends in the business. (Note: you can download a SaaS Income Statement template at the end of this post.)
The Income Statement above incorporates the following concepts:
- Periodic Granularity. Monthly-level granularity, in a series. In SaaS, trends are key, so monthly is the right level of detail, especially for early-stage, fast-growing companies. As a manager, you’re likely reviewing some data on an hourly, daily, or weekly frequency. Revenue, expenses, and profit/losses are adequately tracked at the monthly level. Quarterly and Annual-level detail is insufficient to track meaningful trends, issues, and opportunities in a SaaS company that is only 2 to 5 years old. If you don’t close your books on a monthly basis, well, you need to start.
- Account Granularity. Notice that there are actually more line items under Cost of Goods Sold than in Operating Expenses! In SaaS, it’s all about the margins, baby! This P&L has a fairly detailed breakdown for COGS because those are the costs that ‘really’ matter in SaaS. You, as a manger, want to have a very clear understanding of gross margins, which direction they are trending and why, as your revenue grows, or when you make a strategic shift, etc. Individual expenses (postage? furniture?) under Operating Expenses tend to be more noise, whereas the aggregated data provides the managerial signal you’re after. Some additional breakout for marketing spend may be appropriate, but again, you’re likely tracking marketing performance in a much more detailed manner elsewhere. (Note: this post has more about COGS for SaaS businesses.)
- Payroll Granularity. Do note, however, that the operating expenses section IS granular with regards to payroll. Like COGS, staffing is critical to track over time, as the business goes through different phases of growth. In this P&L, exec and admin payroll are in the broader G&A section, but you could break those out as well.
- Customer Support. It is now established best practice to include the customer support and customer success department in Cost of Goods Sold. This view on the business can lead to appropriate goal tracking and incentives.
- Software Development Costs. Expense your software development costs, don’t capitalize them. Capitalization accomplishes very little and requires some mental gymnastics to fully understand the impact to cash.
- A small, last point: this export is in Excel, not a PDF, on a monthly level with all periods on the same sheet. Quickbooks’ default exports (PDF, with each period separated from the others) are a really difficult format to work with, so exporting into Excel with the correct date range and periodic granularity is key.
SaaS P&L Changes
The income statement example above incorporates a number of changes that have evolved over time.
- ASC 606. This accounting rule change doesn’t impact how you should format your P&L, but it certainly impacts revenue and even cost recognition, so it is definitely something to be aware of. So far, we haven’t seen a huge impact to most companies’ numbers, but in certain situations, like a professional services-heavy business or a company with significant sales commissions, it can change the trends. See this post for detail on the changes required by ASC 606.
- More granularity in the revenue accounts where appropriate. With a general trend towards more usage-based pricing, we’ve found it helpful to break software revenue into its component parts. These breakouts can be by product or feature name, by customer segment, by revenue type (e.g., usage vs. license), or any other categories that are relevant to your business. This granularity is particularly valuable if different areas of the business are trending in different directions or have different characteristics.
- Allocating Customer Success into “sales” and “support.” It is now fairly established that Customer Success activities fall into two different categories: more sales-oriented work, focused on renewals, upselling and cross-selling, and more support-oriented work, focused on user experience, training, and feature education. These work efforts might be undertaken by two totally separate teams, or by the same single employee, but the support-oriented expenses should be allocated in COGS, and the sales-oriented expenses should either be grouped with Sales expenses or have a separate line item next to Sales.
- Below the line items. ASC 606 has made tracking amortization more important. ASC 606 requires capitalization of sales commissions over the life of the contract. It may be worth breaking this out and, separately, any software development cost amortization specifically from a broader depreciation and amortization category.
- Bookings/Renewals/Churn at the top. You will likely have an entire section or at least a slide dedicated to MRR momentum in your board presentation, but if you are presenting or sharing just one snapshot of the business, a line above the P&L tracking bookings by month is very helpful. Even better, you can also show renewals and churn, as illustrated in the example. These are typically shown as ACV booked/renewed/lost in the month. (Note that these amounts won’t directly tie to the P&L revenue trend due to implementation, invoicing and revenue recognition timing, but again, it’s good trend data for the viewer.)
As noted above, a SaaS P&L statement requires organization to be meaningful to internal and external stakeholders. Consistent reporting helps business owners better run their SaaS companies and helps investors better understand the business, which leads to quicker decisions.
Note: A version of this post was first published in 2015, and this was updated in 2021 to reflect current best practices.
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