Pass 90% of Your SaaS Peers with These 4 Finance Steps | SaaS Metrics School | SaaS P&L
Greetings, SaaS founders, CFOs, and finance professionals! Welcome back to another insightful edition of SaaS Metrics School, where we dive deep into the key metrics and strategies that drive financial success in SaaS businesses. In today’s episode, I’m sharing the four essential finance steps that will help you surpass 90% of your SaaS peers when it comes to financial maturity and operational efficiency.
After working with hundreds of SaaS companies, I've repeatedly seen these critical steps overlooked in finance and accounting setups. These four steps are the cornerstone of a solid financial foundation for any SaaS business, ensuring you have a clear and accurate picture of your company’s financial health while setting yourself up for success as you scale. Let’s dive in!
1. SaaSify Your Chart of Accounts
The first step is to SaaSify your chart of accounts. What does this mean? Your chart of accounts, which is essentially a numerical listing of all the general ledger accounts in your financial statements, should be tailored to fit the needs of your SaaS business. You can’t rely on a generic, out-of-the-box chart of accounts from your accounting system. Instead, you need to customize it to handle the specific demands of your business model.
This customization allows for more detailed financial reporting, such as tracking SaaS-specific metrics like customer acquisition costs (CAC), gross profit by revenue stream, and OPEX for various departments. One crucial area to focus on is the coding of people and contractors. Having detailed coding ensures that you can accurately allocate costs related to personnel, which plays a significant role in understanding your company's overall financial health.
2. Proper SaaS P&L Setup
Next, we must set up a proper SaaS Profit and Loss (P&L) statement. This isn't your ordinary P&L—it’s designed specifically for SaaS companies and should include distinct revenue streams and an accurate reflection of your revenue model. Your SaaS P&L provides a wealth of useful information that informs your strategic decision-making.
Some key elements to include in a SaaS P&L are:
Revenue streams: Clearly define your revenue sources, whether it’s subscription, one-time, or services revenue.
COGS (Cost of Goods Sold): Ensure your COGS is organized by departments that support revenue delivery (e.g., tech support, customer success).
Accurate gross profit margins by revenue stream.
OPEX (Operating Expenses): Profile your operating expenses clearly and break them down by department to get a better understanding of your financial performance.
EBITDA: Calculate your earnings before interest, taxes, depreciation, and amortization (EBITDA) to assess your business’s profitability.
All of this ultimately flows into your SaaS metrics, which are derived from the foundation built within your P&L.
3. Department-Level Expense Coding
One area where SaaS companies often fall short is department coding. To run a successful SaaS business, you need to track expenses at the department level, ensuring that every single expense is tied to the correct functional area of your business. This is crucial for understanding departmental efficiency and profitability.
Department coding should include functions like:
Technology/Development
Support
Customer Success
Sales
Marketing
General and Administrative
Without this level of detail, it’s difficult to assess how well each department is performing financially and what kind of ROI you’re getting from your investments.
4. Revenue Recognition (RevRec)
Finally, as you grow to $3-4M ARR and beyond, it's time to put Revenue Recognition (RevRec) in place. This is especially important if you're invoicing customers annually. Recognizing revenue as it's earned, rather than when the invoice is issued, will provide a much clearer picture of your company's financial health.
Without proper revenue recognition practices, SaaS companies often see fluctuations in revenue, gross profit, and OPEX, leading to confusion around their financial performance. You might see spikes in revenue when invoicing, followed by sharp drops, without understanding the actual economics of your business. Implementing RevRec will smooth out these fluctuations and give you a more consistent understanding of how your company is performing.
By implementing these four steps—customizing your chart of accounts, setting up a proper SaaS P&L, coding expenses by department, and establishing revenue recognition—you’ll be ahead of 90% of your SaaS peers. These are critical steps for any SaaS company looking to mature its financial processes and scale efficiently.
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