The landscape of Software as a Service (SaaS) business operations and management is rapidly evolving, and accounting platforms play a crucial role in this transformation. These systems and tools are not just about bookkeeping; they are integral to strategic decision making and provide a cornerstone for sustainable growth. SaaS companies provide cloud-based solutions that allow users to access applications in the cloud without the need for local installations. SaaS businesses operate on a model where software is licensed on a subscription basis and is centrally hosted. This model has become increasingly popular due to its scalability and the ability to offer services globally without physical product distribution. Read on for an in-depth look at various accounting platforms and how they can help fuel SaaS growth.
Meaningful financial reporting for SaaS businesses includes several important hallmarks that are of particular importance to users of financials, including:
Revenue Recognition
One of the primary considerations for SaaS organizations is accounting for subscription-based revenue streams, which requires companies to recognize revenue over the subscription period rather than at the point of sale. This can be complicated by various subscription terms, complying with specific standards like ASC 606, and managing recurring payments and expenses in alignment with the revenue they generate.
Cost Capitalization
SaaS companies’ evaluation of which costs to capitalize and amortize over time (such as expenditures related to software development and costs of obtaining and fulfilling contracts) are other areas of focus that impact the financial statements and overall financial position and affect ratios such as return on assets, debt-to-equity, and results of operations.
Multi-Element Arrangements
Many contracts may contain multiple revenue streams in a single contract; revenue is required to be allocated to each element based on its standalone selling price, further increasing complexity to SaaS revenue accounting. Recurring revenue streams, nonrecurring or project-based revenue, one-time and initial setup fees, and contracts written with provisions that define terms of whether prepayments are with or without recourse and cancellable all contribute to the complexities involved in appropriate revenue recognition on a case-by-case and contract-by-contract basis.
Metrics & Ratios
The key performance indicators (KPIs) for SaaS businesses typically focus on metrics such as customer acquisition costs (CAC), customer lifetime value (CLV/LTV), monthly recurring revenue (MRR), annual run rate (ARR), and churn rate, which are essential for gauging the company’s financial health and growth potential. The ability to calculate and monitor KPIs based on historical performance, and also to allow management to build forecasting models with different drivers to help enhance ratios based on desired outcomes, is an important feature when deciding on an accounting platform.
To help address these needs, modern accounting platforms offer a range of features tailored for SaaS businesses. They support accrual-based accounting, which is critical for proper revenue recognition, evaluation of capitalization of costs, and breakout of recurring versus nonrecurring services’ revenue and cost components. Moreover, these platforms can facilitate the adoption of non-GAAP KPIs, which are often more indicative of a SaaS company's financial health and growth potential. A robust accounting platform for SaaS should also offer scalability to help support the company's growth. It should integrate seamlessly with other business systems, provide real-time financial insights, and automate routine tasks to help free up valuable resources for strategic activities.
These platforms are designed to help SaaS businesses manage their finances more effectively, automate routine tasks, and provide strategic insights into their financial performance. It is important for SaaS companies to choose an accounting platform that not only aligns with their current needs but also has the scalability to support future growth. Each of these platforms has its own set of strengths, and the ideal choice will depend on the specific requirements and preferences of the business.
A number of accounting systems have gained popularity among SaaS businesses due to their tailored features that cater to the unique needs of the subscription-based business model. While this listing is nonexhaustive, the platforms are intentionally ordered based on their suitability for businesses from the start of their life cycle through maturity. The first two solutions are a good fit for startups and small businesses, while the last two are often used by growing midsize to large companies.
Entry-Level Options
QuickBooks Online
QuickBooks Online is a popular, cost-effective accounting tool widely used by startups and early-stage companies. It offers essential accounting functionalities with cloud-based access and integration with various business applications.
- Benefits:
- Affordable and widely used, making it a familiar choice for many.
- User-friendly interface requires minimal training.
- Flexibility through third-party application integrations.
- Supports basic payroll, bill pay, and invoicing needs with the use of additional modules.
- Considerations:
- Basic functionality may not meet complex SaaS accounting needs.
- Customization and reporting capabilities are limited.
- Has very limited approval and access-rights features embedded within the platform, making it a less reliable source of internal controls and guardrails in the prevention of user error or fraud.
- Cannot accommodate multientity/multiple-business line organizations due to its lack of consolidation capabilities.
Xero
Xero is a small business accounting software package historically known more outside of the U.S., but quickly gaining popularity thanks to its reporting and cash flow forecasting features. Xero is praised for its revenue recognition software integrations and user-friendly interface. It provides robust accounting features that are essential for SaaS companies, such as tracking recurring revenue and managing subscriptions.
- Benefits:
- Capability to make and accept payments in multiple currencies.
- Supports many third-party application integrations.
- Considered to be an intuitive option with low barriers to entry for knowledge and training.
- Considerations:
- Limited customization options.
- No native support for multientity environment.
Mid-Tier Options
Sage Intacct
Sage Intacct is known for its advanced financial management capabilities, reporting, and high degree of customization. It provides real-time financial and operational insights and strong integration with other systems, making it suitable for SaaS businesses with complex accounting requirements. For example, Sage Intacct can be integrated with customer relationship management (CRM) solutions. Sage Intacct offers SaaS companies a “Digital Board Book,” with an additional subscription, for tracking metrics and KPIs customized to the industry. Pre-built dashboards present the metrics visually for easy sharing with stakeholders to aid in decision-making.
- Benefits:
- Native subscription billing and advanced capabilities to monitor customer activity and trends.
- Revenue recognition/amortization with visibility into recurring revenue to support ease of accurate recording consistent with contract terms and GAAP.
- Wide-ranging financial management tools to support complex needs.
- Integrations help streamline operations and improve data accuracy.
- Multientity-enabled system allowing for native consolidated reporting.
- SaaS-templated functionality pre-established within the platform can be tailored to suit a company’s specific requirements.
- Considerations:
- Can have a steeper learning curve due to its advanced features.
- Implementation may require specialized consulting services.
- Annual licensing fees are at a price point typically multiple times greater than the entry-level options.
NetSuite
NetSuite is an in-depth, cloud-based enterprise resource planning (ERP) software solution designed for complex businesses. It offers an integrated suite of financial management, CRM, and e-commerce applications. Known for its scalability and real-time operational visibility, NetSuite is ideal for growing and high-growth SaaS businesses seeking an all-in-one platform. NetSuite has modules or “Suites” that include finance and accounting, forecasting, inventory management, “OneWorld” for global multientity businesses, and other functions.
- Benefits:
- Integrated suite reduces the need for multiple software solutions.
- Real-time SaaS metrics aid strategic decision-making.
- Additional modules provide capabilities for managing recurring revenue streams and automating customer invoicing.
- Highly customizable platform options support organizational growth and scalability.
- Considerations:
- Complexity and breadth of features require significant training.
- Implementation may require specialized consulting services.
- Extensive customization might require additional IT resources for ongoing maintenance of the system and upkeep of the highly customized configurations that have been established and/or when product updates roll out. This might necessitate additional headcount or utilization of an outsourced managed technology support services provider.
- Annual licensing fees are at a price point that is typically multiple times greater than the entry-level options.
Other Considerations
Each of these accounting software solutions also works with accounting firms to offer clients access to their platforms leveraging an outsourced accounting services (OAS) model.
The OAS model provides SaaS organizations with strong, leverageable accounting talent and the ability to utilize the automation and general ledger platforms with which they have partnerships, often at a fraction of the price of implementation and licensing their own instance. With outsourced services greatly in demand by business owners who want to reduce time on work unrelated to their core business, Forvis Mazars can provide detailed comparisons and insights into an ideal fit for your SaaS business, not only in terms of an accounting platform but also considering in-house versus outsourced accounting functions. If you have questions or need assistance, please contact a professional at Forvis Mazars.