This post is the first post in our two-part series on bookkeeping for SaaS businesses. The second provides guidance on growing a SaaS business.
Bookkeeping may not be the biggest priority for SaaS founders. But if you and your team members are planning to fundraise or tap into government tax credit programs, maintaining an accurate set of books is essential.
A proper small business accounting system is the only way to keep control over important SaaS bookkeeping tasks like:
- Expense management
- Subscription billing and sales tax filing
- Revenue tracking and cash flow management
Unfortunately, many SaaS business owners neglect their bookkeeping outright or waste valuable time trying to manage their books themselves in an effort to preserve headcount and avoid hiring costs.
Establishing a strong SaaS bookkeeping system early on helps:
- Generate accurate financial reporting whenever you need it
- Gain cash flow visibility and financial insights that will yield better decisions
- Speed up month-end closing procedures for faster access to up-to-date balance sheets and other financial statements
Set Up a Strong Bookkeeping System
Use cloud-based accounting software to manage your books
Depending on your business model, using spreadsheets to record financial transactions might suffice when you’re just starting out. However, as your revenue recognition and subscription management starts getting complicated, you’ll need a properly managed SaaS accounting system that can scale with your company.
Cloud-based accounting software integrates easily with other apps to create a seamless flow of financial information.
Your company can then use that data to measure and monitor important SaaS growth metrics like:
- Customer Acquisition Costs (CAC)
- Customer Churn
- Subscription billing and invoicing
- Tracking and reporting MRR (Monthly Recurring Revenue)
- Forecasting cash flow
Integrated payroll, billing, payment, and receipt capture tools, meanwhile, can reduce manual processes and errors. You can even connect your accounting software to your bank account to make reconciling your books every month easier.
Set up recurring payments for fixed monthly billing
If your business has subscriptions with monthly client charges, it might be worth using a recurring billing tool to set up and pull recurring, pre-authorized payments from client accounts. You can automatically generate and send out monthly invoices using your accounting software. Then use automated payments software to collect customer payments when they’re due.
Not only will you gain a more accurate view of your company's cash flow, but you’ll also save time on collections and accounts receivable management.
Automate payments for recurring expenses
Automating outgoing and incoming payments (and the reconciliations that go along with them) is a great way to speed up your accounts payable and receivable functions, improve cash flow management, and ensure you never miss a payment. Does your company subscribe to other software with a fixed monthly fee?
If so, you can also use accounts payable and receivable software to:
- Set up auto-billing through pre-authorized payments on your company debit or credit cards
- Reduce the time and costs involved in paying recurring expenses by cheque
- Automatically sync and reconcile vendor payments in your accounting software
By setting up recurring expense coding rules in your SaaS accounting software, you can streamline your accounts payable process and more easily manage and forecast your cash flow.
Use project codes to track longer SaaS projects
Not all SaaS financial models are driven by or limited to recurring income. If your SaaS company engages in longer-term projects (where deposits are collected upfront, and revenue recognition happens as work is completed), it may be worth using project codes to track income and ensure deposit and progress invoices get linked to the appropriate projects.
Set up your chart of accounts to track SR&ED expenditures
If your SaaS business plans to leverage Scientific Research and Experimental Development (SR&ED) tax incentives, you’ll want to make sure your chart of accounts is set up to track SR&ED expenditures separately for tax returns and reporting.
There are two ways to claim SR&ED expenses: you can use the traditional direct cost method or the proxy method. Whichever method you choose however, optimizing your bookkeeping will make the claims process easier.
To capture and track the real costs your company incurs during SR&ED project execution separately from your regular business expenses, you can:
- Set up a capstone account in your SaaS accounting software for all SR&ED-eligible costs
- Set up sub-accounts for individual expenses like SR&ED eligible wages and supplies
If, for example, you have employees who are 100% dedicated to your SR&ED projects, you should track their wages and benefit costs separately as and when they occur. If you’re using the proxy method, you should follow claim allowances set out by the CRA.
Either way, separating out SR&ED costs as part of your day-to-day SaaS bookkeeping process will make it easier to complete your T661 form.
Capture your receipts and invoices
Tracking receipts and invoices is crucial whether you’re compiling expense records for SR&ED claims or need better visibility into your company's cash flow.
While manually tracking and entering receipts and invoices can be time-consuming, leaving it undone means constantly playing catch-up with your books - and never knowing for certain what your liabilities or cash flow actually look like.
The good news is that expense management is easily automated with accounting tools for SaaS companies that track expenses and speed up the monthly reconciliation process.
Expense management tools make it easy for small businesses to:
- Snap photos of their physical receipts and invoices
- Upload them to the app
- Store and retrieve their documents as needed (like during an audit, for example)
OCR technology in expense management tools extracts pertinent information from paper documents to help you create transactions that can be exported directly to your cloud accounting software. You can even set up rules in the app for automatically allocating certain expenses to the correct bookkeeping accounts.
Here’s an example.
Let’s say you subscribe to dedicated software on a monthly basis for use in your company’s SR&ED project. If you’ve structured your chart of accounts to include a Subscriptions sub-account, you can set up a rule in your expense tool to automatically allocate your monthly payment transaction to that sub-account in your accounting software.
Outsource your SaaS bookkeeping
If you regularly find yourself bogged down by non-revenue generating tasks like bookkeeping, you should know that, as a proven method for helping entrepreneurs refocus on their core purpose, global business process outsourcing is set to hit an all-time high of $405 billion by 2027.
SaaS founders, in particular, can benefit from outsourced bookkeeping services when they’re looking to:
- Spend more time on sales and other growth activities
- Gain access to professional, experienced bookkeeping help
- Take advantage of efficient, cloud-based accounting tools
Improve your SaaS Cash Flow
New customer subscriptions are the number one growth activity for almost all SaaS business owners. To grow sustainably, businesses that rely on annual subscriptions or monthly recurring revenue must work to improve cash flow so they can switch from relying on VC-funded capital (for example) to becoming cash flow positive.
Here are five tips to improve cash flow for your SaaS business.
Invoice regularly
As a subscription-based SaaS company, you can improve cash flow simply by invoicing regularly with the help of accounting software. Not only does accounting software let you send digital invoices on the same date every month, but you can also include a payment link for your client’s convenience.
For long-term projects, you might consider billing on a ‘percentage of completion’ basis rather than issuing one hefty invoice. Billing at incremental milestones like 25%, 50%, 75% and 100% of project completion helps your customers pay smaller amounts – and assists your business with better cash flow predictability.
Set up recurring payments
Setting up and automating recurring customer payments can make planning around your business’s cash flow easier. And it’s doable even if you’re just starting out and can’t afford a subscription management tool.
Here’s how:
- Set up your recurring payments through your accounting software
- Have customers sign an authorization allowing you to charge their credit or debit cards automatically
- Schedule their payments for the same day each month
One downside of credit card payments for businesses is the possibility of exceeding customer credit limits or incurring excessive fees. To avoid these problems, you could use a payment processing platform to collect pre-authorized debit payments instead.
First, create your recurring invoices in your accounting software, then integrate them with payments software to automatically:
- Detect outstanding invoices
- Schedule withdrawals from customer bank accounts
- Reconcile payment transactions in your accounting software
The more painless you make it for subscribers to pay for your product or service, the better your retention will likely be.
Find ways to reduce customer churn
It usually costs less to retain existing customers than it does to acquire new ones. That said, you can avoid certain cash flow problems by seeking client feedback and analyzing metrics like churn and CAC (customer acquisition cost) to help:
- Identify the reasons behind customer churn rates
- Make improvements before upping your sales and marketing spend
- Increase retention rates and improve cash flow directly
Remember: every customer you lose to churn reduces revenue, impacts cash flow, and makes it harder to cover costs like marketing expenses.
Manage your cash flow mindfully
Relying on 30-day customer credit terms when your expenses are due bi-weekly is a recipe for negative cash flow. Ideally, you should schedule revenue to flow in before accounts payable amounts are due to flow out – especially if you have minimal working capital or struggle to collect unpaid invoices.
One way to avoid being strapped for cash is to beef up your cash flow statement with shorter payment terms or offer discounts early payment discounts. Terms like 1/10 net 30, for example, encourage accounts receivable clients to pay within 10 days in exchange for a 1% reduction, helping increase your cash flow.
Build cash flow forecasts
Your business is more likely to succeed if you use forecasting as a proactive cash flow management tool. Cash flow forecasts help pre-empt worst-case scenarios by showing whether you have sufficient capital to keep running and growing.
Building a forecast lets you:
- Identify potential shortfalls in advance so you can optimize cash flow (by finding areas to reduce spending, for example),
- Strategize around certain bill payments without damaging supplier relationships,
- Understand your cash flow runway so you can determine whether and when to raise funds, extend your line of credit, or explore business loans.
Cash flow forecasts can also help you get the most from anticipated surpluses or positive cash flow—even if it just means keeping rainy-day cash in a savings account.
Struggling to understand or improve cash flow for your SaaS business? Contact us today!
Success! Now What?
Wondering how to structure your back office so it will support your SaaS company through exponential growth? You’re not alone. Many SaaS business founders struggle to understand the type of financial accounting assistance they need and when they need it.
- When does it make sense to hire full-time help?
- How senior should you hire?
- What type of finance leader do you actually need?
To help you build accounting functions that scale with your SaaS company, let’s consider three key startup milestone moments: hitting $1 million, $5 million, and $10 million in annual recurring revenue (ARR).
Milestone 1: $1 million ARR
Recommended accounting functions: Bookkeeper
If you’ve reached this growth milestone, your financial transactions likely revolve around:
- Recording revenue and expenses
- Invoicing customers and paying bills
- Reconciling bank and credit card statements
Since your books will only get more complex as you scale your SaaS company, streamlining day-to-day processes for consistent tracking, billing, and financial reporting is a must.
Proper bookkeeping is essential to clarifying your financial position, cash flow, and business performance and generating the financial statements required (like balance sheets and income statements) for bank loans or tech grant fund approvals.
You could hire a full-time accounting professional at this point. But if you’d rather reserve your headcount for sales and marketing, outsourcing your bookkeeping function is a great alternative.
Trained, experienced external bookkeepers can:
- Uncover inefficiencies in your existing accounting processes
- Suggest tools for automating or improving your system
- Generate the necessary financial reports for tax filing and external funding
If you need additional support with fundraising or budgeting, you might also consider hiring an outsourced, fractional controller.
Milestone 2: $5 million ARR
Recommended accounting functions: Bookkeeper + Controller
With millions of dollars coming in now, you probably have millions going out as well and could benefit from strategic financial planning activities like:
- Forecast and budget building
- Calculating and reporting on churn, retention, and other key growth metrics
- Evaluating profitability by product or vertical
Hiring a controller now will improve your cash flow planning and provide greater financial oversight. Ideally, your hire will be capable of handling day-to-day work when necessary but senior enough to drive financial strategies through managerial accounting.
Maintaining internal or external bookkeeping support at the same time, meanwhile, will:
- Divert time-consuming transactions away from your controller
- Allow them to focus on financial data review and analysis
- Make it easier to use your financial information to make better business decisions
If you’re considering hiring a CFO or Director of Finance instead, note that they’re unlikely to engage in routine accounting, and you’ll need to rely on in-house staff or an outside firm for your bookkeeping, AR, and AP.
Milestone 3: $10 million ARR
Recommended accounting functions: Bookkeeper + Controller + CFO
At this point, you’ve likely moved beyond simple management accounting and will need to hire a Director of Finance or CFO to increase focus on:
- Financial analysis and modelling
- Redirecting your team toward more high-value work
- Governance or compliance requirements
For example, if you’re looking to expand operations to the US, you’ll need a CFO to spearhead this process.
At the same time, your collections, receipt management, and monthly reconciliations may have grown beyond what your staff accountant or accounting department can handle. Outsourcing your accounts receivable will make it easier for your team to stay on top of their responsibilities and will prevent your company from falling behind on collecting the client payments that are so vital to cash flow.
A word about raising capital
Since many investors require financial reviews or audited financial statements, it’s worth having a senior accounting professional you can turn to for advice when you start raising funds.
As fundraising initiatives grow, however, it can be more beneficial to have a full-fledged CFO or Director of Finance on staff who can:
- Inspire confidence in investors
- Think strategically about how to best apply for funding
- Report directly to your board of directors
Whatever stage you’re at as you scale your SaaS company, remember that it’s never too early to invest in accurate bookkeeping as a fundamental accounting function.
