In my recent post we determined that while cash accounting for SaaS businesses has some merit, accrual-based accounting is preferred. I’d like to take that discussion one step further, because 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. Like all data, it needs to be organized correctly to be meaningful.
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, 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?
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 copy of this spreadsheet at the end of this post.)
Items of Note:
1. 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 a 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 level, well, you need to start.
2. Account Granularity: Notice that there are actually more line items under Cost of Goods than there are in Operating Expenses! In SaaS it’s all about the margins, baby! This P&L has fairly detailed breakdown for cost of goods, because those are the costs that *really* matter in SaaS. You, as a manger, want to have a very clear understanding of gross margins, and 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.
3. 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 is in the broader G&A section, but you could break that out as well.
4. Customer Support: It is now established best practice to include the customer support and customer success department in Cost of Goods. This view on the business can lead to appropriate goals tracking and incentives.
6. Structure: 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.
How Do SaaS Companies Perform in a Recession? - While predicting the start of the next recession is impossible, we know there will eventually be one. To enhance our understanding of the SaaS business model and better prepare ourselves and our portfolio companies for an eventual economic downturn, we wanted to learn how software-as-a-service companies performed through the previous recession... Click here to read the report.