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Accounting for Startups and SaaS Companies: A Complete Guide

Profit Jets offers superior-grade accounting services to startups and SaaS companies to help you build a solid financial foundation for your business.

In recent years there has been a surge in startup companies, and among them, SaaS companies have proudly taken precedence. And along with that, accounting practices have also seen a major shift. Software as a service (SaaS) is becoming a more common and successful business venture as we transition to a digital-based future. SaaS accounting can be overwhelming sometimes, and because of this, SaaS companies must set up the right kind of accounting system.

Many entrepreneurs often wonder about when to start having a robust accounting system. Whether they should have an efficient accounting system at the early stage of the business or when the company turns into an SMB or even takes an enterprise form, the bottom line is you must set up the right accounting system from the early stage of your business and maintain it as a priority along with building an efficient team, making your products/services better, and growing your business.


What is SaaS Accounting?

SaaS accounting consists of recording, interpreting, and analyzing all the financial data of a SaaS company. SaaS accounting is a specifically designed accounting service for companies that offer software-as-a-service. SaaS accounting considers the subscription-based billing model for recurring revenue generation while preparing the financial statements of such businesses. SaaS accounting can be daunting, and that is why most SaaS companies deploy cloud SaaS accounting software to manage their financial statements and reporting.

What Makes SaaS Accounting Different?

SaaS accounting differs from the accounting of companies in other industries as the cash flow dynamics are more complex. As opposed to traditional startup or small business accounting, SaaS businesses use different accounting technologies, such as subscription management software and recurring billing platforms, which require different skills and understanding of best practices. SaaS companies tend to have a higher gross margin compared to other companies. 

Because SaaS businesses use a subscription business model, revenue monitoring is the most obvious distinction in SaaS accounting. Customers of SaaS pay subscription and add-on service fees, which call for regular “maintenance” as users upgrade, downgrade, or choose to opt in or out of various services.

Why Do SaaS Companies Require A Reliable Accounting System?

SaaS Companies Accounting System

All SaaS companies need SaaS accounting because it produces accurate financial statements and offers insight into its operations to aid in corporate decision-making. Making educated judgments about the company’s direction would be challenging without precise financial statements. The future of a rapidly expanding SaaS firm can be made or broken by having access to this data.

Along with the practical advantages of efficient accounting, having organized startup finances makes it easier to raise venture capital or become ready to sell your company. Your startup may find it difficult to raise money, the fundraising due diligence process may be delayed, or you may experience a decline in profits in the event of an exit if you don’t have clear, trustworthy financial records and current financial statements (profit and loss, or income statement, balance sheet, and cash flow statement).

Accurate financial records are also necessary for compliance with state and federal tax rules. Keeping track of these accounting helps avoid accidental tax infractions and unexpected tax costs. Additionally, keeping meticulous financial records enables you to take full advantage of startup and R&D tax incentives.

Common SaaS Accounting Methods

There are two accounting options available to SaaS companies. There is accrual accounting as well as cash-basis accounting. The timing of when sales revenue is reported in the income statement is the main distinction between the two.

Cash-basis accounting

With this accounting technique, a company only records revenue and expenses after receiving payment or making a debt payment. Most businesses with traditional pricing patterns or a smaller inventory employ cash-basis accounting.

Cash-basis accounting does not handle receivables and payables because revenue and expenses are only recorded when paid. When a business desires an accounting system that is simple to manage, cash-basis accounting is advantageous. However, due in part to the subscription pricing model, it is not a workable accounting method for SaaS enterprises.

Cash Accounting
Accrual Accounting

Accrual accounting

In an accrual accounting system, a company records revenue as it is earned rather than necessarily as it is paid. Expenses are also reported when a contract is established rather than as they are incurred. With the help of this model, your company may more accurately predict revenue and expenses. Although more difficult than cash-basis accounting, accrual accounting can better support SaaS enterprises that are expanding swiftly.

Remember that the Internal Revenue Service (IRS) mandates the use of an accrual accounting methodology for any company with average annual gross revenues of $25 million or more.

Accrual Accounting for SaaS Companies

Because of its subscription-based business model, SaaS accounting is a little more complex. The revenue is a mixture of upfront payments, one-time fees, and routine modifications (such as plan upgrades and downgrades). 

Monthly Recurring Revenue (MRR) is a crucial measure for SaaS companies, and subscription firms benefit from accrual accounting since, when done correctly, accrual revenue really matches MRR. It offers comparable trends for SaaS companies because it enables tracking sales and expenses concurrently. Depending on when revenue is recognized, different accounting techniques are used.

Benefits of Accrual Accounting

Who Regulates the Accounting Standards

The Generally Accepted Accounting Principles are usually brought forth and, at the same time, regulated by the Finance Accounting Standards Board. It is true that not all businesses will need to comply with the GAAP. However, at the same time, having a precise idea to use them in the inception can be crucial. For a lot of investors, the GAAP is the standard to analyze whether they want to put money in a company based on the financial condition of the same. The principles are usually uniform, and this makes it easy to draw financial conclusions. There are three pillars that are important in the financial statements and include the income statement, cash flow statement as well as balance sheet. What is an income statement? It brings forth the expenditure of the business and makes it easier to understand the cost and the revenue. The income statement will make it clear for the owner to understand the margin of the profit or the loss.

By introducing standardization and transparency to financial reporting across businesses and industries, you may eliminate differences in how organizations in different industries manage to account for transactions that are comparable. Make it simple for stakeholders and investors to understand and compare financial statements across different businesses and industries.

The balance sheet, on the other hand, helps one to understand the expenses that a company owes as well as the amount that it will receive as well. Usually, one needs to report the assets, liabilities as well as equity for a detailed report. And finally, the cash flow statement helps you to understand the flow of the cash that you receive and spend as a business. It is the standing ground that helps you to mediate between the income statement and the balance sheet. 

For more help, you can get in touch with us at Profit Jets, and we will help you with the best solutions.

What is GAAP-Compliant Financial Management

The Finance Accounting Standards Board (FASB) regulates the Generally Accepted Accounting Principles(GAAP). All other accounting standards used by organizations are derived from GAAP. Even if GAAP is not mandatory for all businesses, it is nonetheless crucial to use them as the basis for your accounting standards.

Generally Accepted Accounting Principles (GAAP) is a set of rules and standards for accounting that helps in maintaining uniform business accounting practices across different industries. The purpose of having GAAP in place for accounting is to ensure consistency in financial reporting across all businesses. Although GAAP accounting standards are not mandatory for companies, adopting so from the beginning has advantages.

Your forecasts, financial modeling, and analysis are more accurate and dependable because GAAP mandates organized, consistent, and comparable financials. It is important for saaS businesses to work with accurate and current financials, as it significantly relies on financial projections to guide important business investments and choices.

In addition, accountants, lenders, and investors use GAAP to assess your company’s financial position. Having this in place will save time and work when it comes to restating financial data during these cycles if your company is looking for investment.

SaaS-Specific Financial Reporting and Metrics

Financial Statements

If you go by GAAP, there are usually three types of financial statements that each and every Saas-based startup company needs to focus on.

A. Profit Loss Statement: 
The profit loss statement is very often referred to as the income statement as well. It helps you to know the income as well as the cost for a particular period of time.

B. Balance Sheet: 
The balance sheet gives you a good idea about the liabilities, assets as well as equity that the company owns.

C. Cash Flow Statement:
And finally, the cash flow statement helps one to know the cash on a monthly basis and helps you in generating the profit and loss statement in a more intricate manner.

Financial Statements


The number of bookings that you have helps you to generate a good idea about the amount of money that you can generate as a company. It is more of a contract that is usually made before a client does the actual payment.

A booking is a very important measure that will help a SaaS business. It usually helps one to analyze the success of the sales as well as the amount of revenue growth that one can expect.


As you can understand from the title, billing is the formal anticipation of the money that you will collect from the clients. It is the complete actual figure representation and the amount of money that you owe as a company.

Revenue and Revenue Recognition

As you can make out from the name, the revenue is the amount of money that you collect as a business. The revenue generated from the sales of the products of your business is the real profit or loss of your business.

What is revenue recognition? It is the aid of accrual accounting that allows you to address the non-operating income as the pertinent revenue. For this, you usually need to list the prepaid options as liabilities. The unearned revenue is usually the amount of money that you have still not generated, and you will earn the revenue only after you have successfully been able to render the service.

The SaaS revenue recognition is somewhat difficult to analyze. For example, the amount of money that you get from the client for a yearly service before you provide the service or the products is referred to as deferred or unearned revenue. Once on a monthly basis, the client starts using your services, your company accountant needs to put it as the revenue that you earn.


The term MRR refers to monthly recurring revenue, and the term ARP refers to Annual Recurring Revenue. These are the two SaaS metrics that one uses on a very wide scale basis. In the simplest terms, these are usually the revenue that is probable and that too over a period of time. For the calculation of the ARR, you need to find out what your MRR is and multiply the same with the help of 12. Ideally, some of the most important factors that your MRR should project include the following:

  • The revenue is recurrent from the clients.
  • All the upgrades and downgrades are associated.
  • Discounts that you provide.
  • The revenue which you have lost due to customer loss.


Finally, the term KPI refers to key performance indicators. It gives you a better and most detailed understanding of the entire company’s revenue. Usually, the key financial metrics that you use tend to depend on the business that you are venturing in. However, at the same time, there are five important components that each and every SaaS- based startup tends to make good use of. These include;

  • The Top of Funnel KPI
  • Financial based KPI
  • Unit Economics KPI
  • Revenue Based KPI
  • Market or Product-Based KPI.

Revenue Recognition for SaaS Companies

When it comes to revenue recognition, it is very often referred to as one of the most crucial principles for Generally Accepted Accounting Principles. The major tenet is that it gives you a good idea about where you need to recognize the revenue and how you can choose to account for the same as well.

According to the accrual accounting method, revenues must be recorded on the income statement in the period in which they are realized and generated, not necessarily when cash is received. Earned revenue represents the money that a company spends on goods or services. The majority of SaaS providers employ accrual accounting, which records revenue at the time of sale, rather than on a cash basis, which records revenue at the time of receipt of payment.

When organizations should recognize revenue for contracted services is governed by ASC 606 and IFRS 15. This typically occurs when a business hands over control of the service to the client. The “transfer” takes place during the course of the contract, although SaaS clients never actually take ownership of the service. As a result, SaaS providers are required under ASC 606 and IFRS 15 to recognize revenue from services sold in installments throughout the course of the client contract.

However, it is crucial that before you analyze the SaaS-based implications, you have a good idea about some other components which are equally crucial.

Deferred Revenue

In the most simple terms, it can be referred to as the revenue which a company has already billed. But at the same time, one cannot recognize it yet because you have not ended up providing the services yet. In the balance sheet, this is usually referred to as a liability, and in a lot of cases, it is also very popularly referred to as unearned revenue because of its theoretical rendition. The deferred revenue is the amount of revenue that you are yet to recognize, and hence it is time-dependent as well.

Accrued Revenue

The next important component, in this case, is the accrued revenue, and it is the revenue that one has realized but has not yet recognized. The invoice is yet to be billed to the client, but at the same time, the business has already earned the revenue, and hence it is recognized. Not only that but the accrued revenue, in a lot of cases, is also referred to as the unbilled revenue as well.

Unless the customer ends up paying the bill, the accrued revenue is most often referred to as the accounts receivable. The balance sheet is usually referred to as the current asset. If you notice that the accrued revenue is very high, then there is a high probability that, as a business, you are not getting paid for the services that you are rendering. It can be difficult and end up ruining the cash flow of your business.

In most of the SaaS accounting cases, you will notice that the accrued revenue can be attributed to:

  • Upgrades are usually made based on the plans and the quantity.
  • The one-time charges like subscription fees.
  • The purchases are often referred to as add.

Deferred Revenue

ASC 606 and SaaS Revenue Recognition

It is a five-step model, and the aim of this model is to help you analyze the principles for the collection of revenue. The addition of this model has proven to be extremely beneficial for a better understanding of the accounts, which is indeed very crucial. The five steps under this model include the following:

Step 1
Understand Your Contract With The Clients

Simply, these are the criteria that you need to establish with the client before you end up providing any service. It is usually a contract that is mutually decided by both the company as well as the client. Not only that, this is quite self-explanatory and refers to the obligations as well as the rights of each of the parties.

Step 2
Analyze the Obligations Of Performance in the Contract

The contract helps you to understand all the obligations that are mentioned for the domain of performance. However, at the same time, if one notices that the services are somewhat unique in nature, then you need to make sure that you account for the same in a distinct manner.

Step 3
Set The Transaction Price

Essentially, this refers to all the steps that you need to encompass before you end up selecting any particular transaction price.

Step 4
Allocation of the Price

It refers to the way the allocation of the transaction price takes place. This is done across the performance obligation, which is usually mentioned in the contract as well. The allocation of the price might include prices that are somewhat variable in nature as well.

Step 5
Recognize Revenue After Having A Satisfying Performance Obligation

The step is quite self-explanatory, right? As a company, you are supposed to recognize the revenue, and this should happen in a stepwise manner whenever you end up delivering the performance obligations.
However, it can still be a bit confusing to understand, and hence if you need more help with any of the steps, feel free to contact us at Profit Jets.

How to Manage SaaS Startup Accounting Easily

Profit Jets is a full-service accounting firm, and we offer you various services to make your accounting easy. Be it accounting, bookkeeping, tax consultation, or CFO services for startup SaaS companies, along with managing the recurring billing for your company.

We believe that using spreadsheets is an age-old concept for a growing SaaS company. It takes too much time to manage a spreadsheet and also has chances of making errors. If you measure these, you may find the workflow to have some flaws. And the key to mitigating such errors are to automate the process for repetitive tasks.

All SaaS companies need a specialized tool to manage subscriptions and recurring billing and ultimately streamline the whole process of finance operations. Profit Jets manages your recurring billing easily while making identifying, reporting, and remaining compliant a breeze. Contact Profit Jets right now if you’re seeking a service that handles all of your financial tasks like bill payment and invoicing included! We provide a senior finance professional to create estimates and budgets and offer you guidance on filling your annual tax return.

Efficiently Powered Technology

The major focus for us is to use technology-oriented approaches, and this includes artificial intelligence as well as machine learning. It aids us in having a better approach towards formulating your GAAP and, at the same time, can perform more detailed bookkeeping responsibilities as well.

Best Experts

For us at Profit Jets, we believe that our experts are our most coveted possessions. You get to contact a specific expert for all the queries, and hence this does not raise any kind of doubts for you as well. We will make sure that once you have raised the query, we can assign someone who will take care of the same at the earliest. Not only that, we have got an extremely comprehensive finance dashboard as well as a finance concierge, and as clients, you can have access to the same round the clock. Sounds convenient, right?


We can say with pride that the team we have is one of the best and most experienced ones, and we have worked for years with the best SaaS-based companies. The experience aids us in giving you the most detailed explanation no matter what your doubts are! Not only that, we like to take up an effective part in the entire decision-making process for your company. Hence we will make sure that under all circumstances, you get to know what the benefits are as well as the problems that you can go through.

Monthly Fee

We tend to make sure that the monthly fees that we charge for the services to your SaaS-based startup are extremely pocket friendly and do not burn a hole in your pocket!

Finance Insights

We don't believe in delaying the time at all. Hence there is no need to wait at all, and we will give you a detailed insight into all the financial statements and that too by maintaining precision as well. For this, all you would need to do is access our Profit Jets finance dashboard, and thankfully you will get all the information that you would need related to your company accounts.

Comprehensive Services

And finally, we have got experience, and hence we tend to aid you in a complete round of the best services that you can expect from us. We understand that as your company grows, you will need more services like the complex accounting inclusion of a CFO, and we are ready to aid you with the same!

Types of SaaS Expenses

SaaS businesses incur many of the same costs as other businesses, in addition to some that are exclusive to software vendors and cloud-based businesses. These often fit into four kinds of expenditures:

General and Administrative

The daily operating expenditures of running a business that is unrelated to the creation of a good or service are referred to as G&A expenses. SG&A expenses are required to operate a SaaS provider’s business, even if they are unrelated to the creation of their goods or services. Office space, utilities, office supplies, and salaries are examples of typical SG&A costs.

Sales and Marketing

The “S” in the commonly used SG&A KPI stands for sales and marketing costs, which have to do with how well a SaaS provider advertises and markets its products. Print, TV, digital, sales and marketing collateral, customer-facing website charges, marketing automation technologies, and public relations costs are all included in sales and marketing expenses. These costs should cover wages for sales and marketing workers, including commissions, similar to R&D staffing.

Research and development (R&D)

A SaaS provider’s budget may include significant R&D costs, especially early on. These expenditures cover the price of hardware, the cost of a software license, and any other costs related to the creation of the software and services. The staffing costs for creating the software and services a SaaS provider sells, such as the salary of the engineering team, are included in R&D even though most payroll is regarded as an SG&A expense.
Research and development

Cost of goods sold (COGS)

The term “cost of goods sold” (COGS) refers solely to the direct costs associated with providing SaaS applications. Hosting and server costs, as well as transaction fees, are some of the most typical costs that go into calculating COGS for a SaaS company. The cost of revenue, which includes all COGS components as well as direct costs for the sales function, including commissions, sales discounts, distribution, and marketing, is another similar measure that SaaS providers may employ. Cost of revenue, like COGS, does not include indirect G&A expenses like manager wages that are not related to sales. Some of the aforementioned costs can be recognized right once by SaaS enterprises, but others must be postponed.

How to Handle SaaS Taxes

When it comes to a SaaS provider, it is exceedingly important to make sure that you have the best idea so that you do not end up making grievous mistakes. It is true that the domain of SaaS taxes can be very difficult, and hence we are here to give you a comprehensive guide on the same.

As you might know, there is an absence of physical software, and this mix makes it very difficult to determine when you need to collect the taxes. The taxation system tends to change from one state to the other. For example, in places like New York and Arizona, it is regarded as sold in software, while for places like California and New Jersey, it is a non-taxable service.

Sometimes we have also noticed that there are a lot of states which do not collect sales tax on SaaS, but at the same time, the cities within them have different specifications and require one to collect the sales tax. These include places like Illinois as well as Chicago. The situation becomes more difficult for those companies who are operating in more than one state and heard you need to follow a nexus.The interpretation, as well as the standardized definition of the term nexus, has undergone a change, and this has happened especially after the advent of internet-based commerce in a more holistic manner.

For some states, there is already a very comprehensive "affiliate nexus" law. Wondering what is it all about? The major saying of this law is that all those businesses which are out of state and yet tend to maintain an in-state connection need to make sure that they collect the sales tax. Some other options have also come forth with the concept of "economic nexus."

Here the major focus is that companies need to collect the sales tax once they have been able to reach the limit for the sales tax revenue. In simple terms, you need to reach up to that volume of sales, and then it will be mandatory for you to pay up the sales tax. In case you have any pertinent doubts about the entire taxation system, you can choose to let us know, and we will help you work your way through the same at Profit Jets.

Tracking Metrics for SaaS Companies

There are two accounting options available to SaaS companies. There is accrual accounting as well as cash-basis accounting. The timing of when sales revenue is reported in the income statement is the main distinction between the two.

Revenue and Growth Metrics

The significance of MRR and Net New MRR is to track the recurring subscription revenues that SaaS companies earn monthly from customers. It is important to break down the MRR and its various sources.

New MRR: It is the revenue that a SaaS company generates from subscriptions of new customers.

Expansion MRR: This is the additional revenue that a SaaS company generates from its existing customers. And this includes upselling, cross-selling, service add-ons, etc.

Churned MRR: This is the revenue loss of a SaaS company because of customers canceling their subscriptions.

Contracted MRR: This is the revenue loss of a SaaS company because customers are downgrading their subscriptions.

The Net New MRR shows the additional MRR of a SaaS company after considering the lost MRR. The Net New MRR is more useful for early revenue-generating companies as the % growth measure may not be very clear. You must compare the New MRR with Expansion MRR to understand the attributable growth of new vs. existing customers.
Computation Mechanism of MRR and Net New MRR
  • Net New MRR = New MRR + Expansion MRR – Churned MRR – Contracted MRR
  • Net MRR = BoP MRR +New MRR + Expansion MRR – Churned MRR – Contracted MRR
MRR and Net New MRR
  • ARR is a SaaS company’s recurring subscription revenues in one year.
  • ARR is useful for companies that primarily run annual subscriptions.
  • ARR is also considered the annualized run rate of MRR
  • You can also break it down into New ARR, Expansion ARR, Churned ARR, and Contracted ARR.
Computation Mechanism of ARR
  • Exit ARR = MRR X 12
  • Net ARR = BoP ARR + New ARR + Expansion ARR – Churned ARR – Contracted ARR
The growth rate measures the performance of your business and its scale-up time.
Computation Mechanism of Growth rate
  • Growth Rate= (Current month MRR – Previous month MRR)/Previous month MRR
Benchmark for Growth Rate: 5 – 10 % MoM growth if a SaaS company wants to raise a Pre-Series A round.

Computation Mechanism of Growth rate

  • Growth Rate= (Current year MRR – Previous year MRR)/Previous year MRR
Benchmark for Growth Rate: The Growth rate should be 100 – 200% if the ARR is less than USD 5 mn, and it is 50% + if the ARR is more than USD 5 mn.
  • Gross margin is important to identify direct costs and if there is any reduction over time.
  • Direct costs are incurred due to customer onboarding, support, use of technology, software licensing, and hosting.
  • A low gross margin indicates the contribution of service elements to the revenue. And this may be an indication that the business may not be able to scale up quickly.
Computation Mechanism of Gross Margin
  • Gross Margin = (Revenues – Direct costs)/Revenues

Benchmark for Gross Margin:
> 70% from the second or third year onwards

  • ARPA is the average revenue contribution of a single customer in a month.
  • ARPA helps to understand the number of customers required to achieve the desired/projected revenue numbers.
  • ARPA is useful for tracking revenue generation on a per-unit basis.
Computation Mechanism of ARPA
  • ARPA = MRR/Total Customers
Cash Accounting
  • LTV is the measure of the revenue generated by each customer during its entire tenure.
  • LTV acts as a guide on how much a company should spend to acquire new customers.
Computation Mechanism of LTV
  • LTV = ARPA/Churn rate
  • The quick ratio compares a company’s growth in terms of its revenue generation against the revenue lost in the same period.
  • The quick ratio indicates how well your Saas product will be able to scale up in the future.
  • It also indicates how well your business can retain its existing customers.
Computation Mechanism of Quick ratio
  • (New MRR + Expansion MRR)/(Churned or Canceled MRR + Contraction MRR)

Quick Ratio Benchmark :
The quick ratio benchmark is > 4X. If it is more than 4X, it signifies healthy business growth with a low churn rate.

Quick Ratio
  • Under the rule of 40, for a company to have sustainable growth, the revenue growth and profit margin should be a minimum of 40 and above.
  • It helps determine the correlation between a company’s profitability and growth.
  • Rule 40 may not be applicable for companies in their early stage with high CAC and other costs as the focus of rule 40 is only its growth.
Computation Mechanism of Rule 40
  • Growth rate + EBITDA margin
Rule of 40 Benchmark : The rule of 40 benchmarks is > 40% at scale.
ACV is the value of a customer’s contract in 12 months. For example, if a customer goes for a 3-year contract with a bill value of USD 75,000, then the ACV = USD 75,000/3 = USD 25,000.
Revenue Concentration
  • Revenue concentration is the measure of total revenue contribution by the top few customers of a company.
  • Revenue concentration also shows a company’s dependency on the top few customers for business sustainability.

Expenditure Metrics

  • CAC is the cost that a company incurs for acquiring new customers.
  • CAC is important to identify the scalability and sustainability of a business operation.
  • CAC ensures that the consistency between sales operations and GTM is not underestimated.
  • The CAC payback period indicates sales efficiency and checks the time the company can recover CAC from customers.
Computation Mechanism of CAC
  • CAC = Total cost of sales and marketing/number of new customers
  • CAC payback = CAC / (ARPA X Gross margin)
CAC Benchmark
  • CAC payback period: 12 to 18 months
  • LTV: CAC ratio more than 3X
  • S G & A Expenses indicate the investment required for a company’s growth.
  • S G & A Expenses help in identifying the efficiency of a business’s GTM strategy.
Computation Mechanism of S G & A Expenses
  • S&M % = Total cost of sales and marketing / Total revenue
  • G&A % = Sum of general and administrative cost / Total revenue
S G & A Expenses Benchmark
  • S&M %: 20 – 25%
  • G&A %: 10 – 15%
  • Gross Burn: Gross burn is the monthly amount of money a company spends to run its operations.
  • Net Burn: Net Burn is the net cash flow of a company in a month after considering the revenue generated.
  • If a company shows a high burn rate against its revenue earning potential, it depicts that it may not sustain itself for long.
  • It indicates when a startup company should start raising its next round of funding.
Computation Mechanism of Gross/Net Burn
  • Net Burn = Gross Burn – Revenue
Gross/Net Burn Benchmark: After a company stabilizes, a negative benchmark after 3 – 4 years.
Net Burn

Sales Efficiency

  • The magic number is important to track the efficiency of a company’s sales team.
  • The magic number indicates the ARR generated in a company against every dollar spent on sales and marketing.
  • If the magic number is 1.0, the company has paid back the entire customer acquisition cost within one year.
Computation Mechanism of Magic Number
  • (Recurring revenue of current quarter – Recurring revenue of previous quarter) * 4 / Sales and marketing costs of the previous quarter
Magic Number Benchmark
  • 0.75X
  • If it is more than 0.75x, a company can invest more in sales and marketing to achieve business growth.
Conversion Rate
Conversion rate is the rate at which leads generated through marketing campaigns convert to paid customers.
Computation Mechanism of Conversion Rate
  • No. of new customers / No. of qualified leads
Conversion Rate Benchmark
  • 2 – 5% if leads generated via digital marketing
  • FTE efficiency is the revenue generated by one full-time employee.
  • You may consider the employees in the sales team and other employees who work on the product directly.
Computation Mechanism of FTE Efficiency
  • FTE Efficiency = Revenue generated / No. Of employees working directly on the product
FTE Benchmark
  • If ARR is USD 0.5 – 1 mn: It must be USD 40,000 per employee
  • If ARR is USD 1 – 2.5 mn: It must be USD 60,000 per employee
FTE Efficiency

Customer Metrics

  • It is the proportion of revenue loss because of canceled and contracted subscriptions.
  • Gross revenue churn indicates how well a business can retain its customers.
Computation Mechanism of Gross Revenue Churn
  • MRR loss in a given time period / MRR at the beginning of the period
Gross Revenue Churn Benchmark
  • Annual churn: 10%
  • Monthly churn to target:
    1. SMBs: 2 – 3%
    2. Mid-market customers: 1 – 2%
    3. Enterprises: 0.5 – 1%
  • Net increase or decrease in the MRR after considering the churned/contracted MRR and MRR earned from upselling to existing customers.
  • Negative churn shows a higher growth from existing subscriptions/customers, and the MRR lost due to upselling MRR offsets.
Computation Mechanism of Net Revenue Churn
  • (Lost MRR in a given period – MRR from expansion in the same period) / MRR at the beginning of the period
Net Revenue Churn Benchmark
  • Negative net churn in the third or fourth year after the stabilization of the company
  • Logo/ Customer Churn represents the number of customers lost due to canceled subscriptions in a given period.
  • Logo/ Customer Churn is a key indicator of customer satisfaction and the stickiness of a product.
  • A higher churn indicates the company needs to analyze the dissatisfaction factors and how to improve them.
Computation Mechanism of Logo/ Customer Churn
  • Number of customers lost in a given period / Number of customers at the beginning of the period
Logo/ Customer Churn Benchmark
  • < 10%
  • Amount of money that is churned in any given month as a percentage of all money that is churned.
  • Contrary to earlier turnover metrics, discretionary churn does not include customers who are locked into annual contracts and are unable to terminate them before their terms expire, even if they are dissatisfied or disengaged.
  • If such consumers (who are obligated by annual contracts) are taken into account in the churn calculation, the company will forecast a lower churn rate.
Computation Mechanism of Discretionary Churn
  • Customers lost in a given period /Number of eligible customers for churn at the beginning of the period.
Logo/ Customer Churn Benchmark
  • < 10%
  • Customer retention rate is the measure of the no. of customers who renew their contracts.
  • Customer retention rate indicates customer satisfaction and product stickiness.
Computation Mechanism of Customer Retention Rate
  • No. of customers who renewed their contracts in a given period / No. of customer contracts that are due for renewal.
Customer Retention Rate Benchmark
  • > 75%
  • Net dollar retention rate is the measure of revenue percentage a company retains from the previous year after accounting for upgrades, downgrades, and churn.
  • If the Net dollar retention rate is < 100%, then the company needs to improve its customer satisfaction.
Computation Mechanism of Net Dollar Retention Rate
  • (BoP Revenue + Upgrades – Downgrades – Churn) / BoP Revenue
Net Dollar Retention Rate Benchmark
  • 110%
  • If it’s more than 100%, growth from the existing customer base can offset the losses (if any) from that customer base.

Overcome SaaS Accounting Challenges With Accounting Software

When it comes to accounting in this particular domain, there are no doubts about the fact that you need to have experience as well as knowledge to excel. However, there are still a lot of SaaS providers who have not switched to professional options and continue to use spreadsheets which can be very difficult to work with. As a matter of fact, this will lead to difficulty in the organization accessing the same as well, as you might end up making mistakes that are extremely costly for your business.
How do we work at Profit Jets to make sure that you do not face these problems as one of the top SaaS-based companies? Here we tend to use an amalgamation of the most modern-day innovation, and this includes incorporating promising accounting techniques as well. It will aid us in maintaining optimum functionality across various domains and is indeed very important to sustain as well. You, as a SaaS business, will be able to streamline financial management tasks. The most important facet here is that it is automation that allows you to streamline the same so easily and without any unwarranted mistakes.
Not only that, but you will also be able to get complete detailed financial reports as well, and this indeed is crucial to help you comply with the State, Federal as well as the standards which are set up by the international accounting mediums.
Before you even start with this domain, it is extremely important to make sure that you have a complete idea about this field. If not, working with compliance across tons of different rules can become extremely difficult and, at the same time, overwhelming as well. When you work in aid with a partner who knows the same, it becomes much easier and more promising for you as well.
At Profit Jets, we have tried to get the most comprehensive services, and this allows us to help you with a wide spectrum of the best options. We have completely automated the process, and this ensures that you will never miss a taxation deadline ever in the future. Not only that, you will be able to see that the system gives you complete access to the various updates, records as well as posts that you need to have an idea about. With the automatic resources, we have tried to make sure that we can bid adieu to the manual options completely, and that too for the long run! It will help us to completely get rid of errors, and in this field, making errors can be catastrophic for the company.
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