SaaS Accounting Guide: Best Practices & Principles

People have long perceived accountants as the bean counters of an organization — the back-office scorekeepers in place to ensure all the numbers tick and tie every month and the company maintains financial compliance.

But the truth is that accounting (especially in a high-growth SaaS environment) is poised to be so much more than that stereotype would suggest.

At a time when businesses are more data-driven than ever, leaders from across the organization are demanding more from finance and accounting teams. The right infrastructure, technology, and processes can help elevate SaaS accounting from its traditional bean counter stereotype to strategic partner in growing an organization.

What Is SaaS Accounting?

SaaS accounting is the process of tracking, recording, and organizing all financial transactions for a SaaS business. While the general principles and responsibilities are the same as accounting for any other industry, the subscription model in SaaS companies introduces unique challenges and requirements.

For public SaaS companies, accounting means regularly translating SaaS-specific metrics like ARR, MRR< and net dollar retention into terms that comply with generally accepted accounting principles (GAAP). But privately-held SaaS startups and mid-market companies have more freedom in their financial reporting unless they’re required to go through a regular audit process, or their investors request standard financial reports.

The term “SaaS accounting” may sometimes refer to using SaaS tools for traditional accounting workflows. And while that’s part of the conversation here, our main focus will be explaining how to run accounting processes for a SaaS business.

The Accounting Responsibilities for a SaaS Business

The accounting process for a SaaS business, like any business, is a collection of recurring workflows to maintain both timely and accurate record keeping.

While it’s important for accountants to think about how they can level up their strategic value, the ability to get an accurate scorecard in the hands of business partners in a timely manner is the prerequisite for every data-driven process in the organization.

The last thing you want, according to Gem Controller Temi Vasco, is to be in a state where “you get too much too late.” She says, “if your close process isn’t standardized or you don’t have specific paths to follow, something might fall through the cracks. And when it does, you can’t make good decisions based on that.”

There’s more to SaaS accounting than the month-end close process. But that process provides a good framework for understanding the accounting process as a whole.

Those workflows, together with some other high-level responsibilities, make up the broader SaaS accounting process.

Customer Contract Management

One thing that’s unique to SaaS accounting is how much time and attention you have to spend pulling data together from customer contracts. Working closely with the revenue team to stay on top of new customer contracts is crucial to understanding which accounts to bill, which ones not to bill, and which ones have unique payment structures. This ongoing collaboration is the preamble to effective accounts receivable (AR) management.

Payroll

Processing payroll is an ongoing mission-critical task for any accounting team. And for a SaaS business where headcount may make up 70% to 80% of total expenses for the company, it’s among the biggest opportunities for accountants to add strategic value. Record expenses for employee compensation, payroll and other taxes, and benefits payments in your books continuously.

Accounts Payable Management

Aside from payroll, software spend is likely the next largest source of burn for SaaS companies. SaaS accounting teams need solid processes and systems in place to manage incoming invoices, review them, and approve/pay them. But beyond that, there should also be an ongoing effort to ensure payments are tagged properly to keep data clean.

Billing and Collections

The effort you put into maintaining close ties to customer contracts should set you up for the monthly billing and collections process. Take that information to run your accounts receivable (AR) processes. Bill your customers according to their payment terms, track revenue collected and still owed, and record your AR balance at the end of the month.

Accruals

Every month, SaaS accounting teams have to review accrued expenses and revenue to ensure they’re booked properly in the GL. And on the first of the next month, you have to reverse the accrual to maintain accurate records for the following period. It’s a critical piece of the month-end close process. But it’s notoriously tedious and difficult to manually review all accruals and ensure records are accurate when you generate financial statements.

SaaS Revenue Recognition

The SaaS subscription model makes revenue recognition complicated for accounting teams. Part of the cyclical close process is reviewing the changes in accrued revenue and deferred revenue based on customer contracts and services delivered to report recognized revenue according to ASC 606 standards properly.

Generate Financial Statements and Reports

The output of the month-end close process should be a set of financial statements and reports. If you’re a privately-held company, you may not need to generate GAAP versions of your income statement, balance sheet, and cash flow statement regularly unless you’re up for an audit or an investor wants them. But you should definitely be doing custom financial reporting, at the very least, to create a clear view of both GAAP and SaaS financial metrics.

Flux Analysis

After officially closing the books, flux analysis helps SaaS accounting teams QA their outputs. Looking for outliers and variances that exceed expectations can help you spot missing or inaccurate data, catch inaccurately-booked expenses, and potentially identify fraud. And beyond just QAing the data, flux analysis gives accountants an opportunity to surface strategic insights to the rest of the org about the past month’s performance.

Types of Accounting (and Which Ones Are Right for SaaS)

Accounting is a complex field with multiple specialties, disciplines, and industry applications, which means a quick search for “types of accounting” will leave you with anywhere from 4 to 15 different options.

Types of accounting can include tax accounting, government accounting, forensic accounting, corporate accounting, cost accounting, public accounting, and more.

But in the context of a growing SaaS business, there are really only two sub-types of accounting you need to think about — cash basis accounting and accrual accounting. And in reality, unless you’re a local small business, your business is going to run on accrual accounting.

• Cash basis accounting. The simple accounting method where you record transactions based on when you exchange cash with customers or vendors. This straightforward approach makes accounting easier, but it breaks when a business becomes any more complex than the smallest businesses.
• Accrual accounting. The standard GAAP approach to accounting, where you record revenue and expense transactions when they are earned or incurred — not when you receive or make a payment. The goal is to match revenue and expenses as much as possible from a bookkeeping perspective.

SaaS Accounting Best Practices

The world’s best accounting teams find ways to strike the perfect balance between maintaining compliance controls and maximizing speed and efficiency to unlock their strategic value to the business.

Striking that balance is much easier said than done, though.

The following best practices come from some of the best accounting and finance leaders in the SaaS industry — Howard Katzenberg from Glean, Amy Garefis from ZipRecruiter, Temi Vasco from Gem, Parker Gilbert from Numeric, Edwine Alphonse from Ramp, and more.

Take advantage of these tips to elevate the strategic value of your accounting team while also prioritizing accuracy.

Build a Stronger Relationship with Your Revenue Leader

We mentioned this above in the section on SaaS accounting responsibilities, but it bears repeating — set yourself up for success by maintaining a clear view of all customer contracts. Don’t fall into a cycle of scrambling to connect with your revenue team to wrangle contract data at the end of every month. Create an open line of communication throughout the month to stay ahead of billing and collection cycles. Ask questions as they come up throughout the month so you can address them proactively.

Continually Push the Limits of Automation with SaaS Accounting Software

It’s not uncommon for some accounting teams to spend upwards of three weeks trying to close the books on the previous month. The mission-critical workflows, when handled in entirely manual ways, are massively time-consuming, which has two effects. First, it means that by the time accounting delivers the numbers to the rest of the business, they’ve essentially gone stale. And second, it means that you have little time left to offer any strategic value to the business. Embrace automation to streamline accounting wherever possible.

Vasco says that she looks for three things when trying to automate something:

• Is the workflow or process repetitive?
• Does the workflow require strict structure?
• And is the workflow or process a problem for everyone in the org?

Treat the Month-End Close as a Data Problem

Plenty of companies get through month after month of closing processes without clean ERP data. According to Parker Gilbert:

If your accounting data isn’t clean enough to surface strategic insights for the rest of the business, start to make changes now. Embrace an iterative approach to cleanup and start enriching your data with proper tagging and transaction-level granularity.

Make Sure Your Chart of Accounts Sets You Up for Success

Organizing your general ledger according to GAAP standards will only take you so far. Take the time to make sure your GL reflects your business with the right level of complexity and granularity to create a rock-solid foundation for financial reporting.

We believe that the best chart of accounts structure:

• Doesn’t lean heavily on parent/child formatting because accounts will roll up to broader account categories anyway.
• Aligns with how you want to view the business, adding granularity where your reporting needs it and taking a high-level view where appropriate.
• Makes department-level tagging a top priority across accounts.
• Clearly delineates the split between cost of revenue and operating expenses.

Check out our chart of accounts template to get a jumpstart on your cleanup process.

Be Proactive in Implementing New Accounting Solutions

One best practice for any high-growth company is to invest in tools and systems that scale alongside the company. This is as true for SaaS accounting teams as it is for any department in the organization. And the biggest example is your ERP — the accounting system of record.

The critical decision for high-growth SaaS companies is when to move from accounting software like QuickBooks or Xero to a more robust one like NetSuite. Given the horror stories about NetSuite implementation and the fact that you can get quite far with QuickBooks, people often delay this upgrade.

But for Edwine Alphonse, who implemented NetSuite for Ramp, the “lesson learned is just to rip off the band-aid and get it done. The sooner you can get it done, the better. Because if you wait longer, it’s more data, it’s more time. And with more data comes the risk of losing that data or having it compromised.”

This doesn’t mean you should implement accounting tools that are far beyond of your company’s maturity level. However, you should be proactive with tech investments to keep accounting processes running smoothly.

Consider Independent Audits (Even If They Aren’t Required)

Audits can be painful, so it’s no surprise that many companies don’t go through them unless it’s required (either by investors or some regulatory standard). But even if you aren’t required to have audited financials, consider at least having independent auditors go through your numbers annually.

If you know an audit is coming up at the end of the year, it’s a forcing function to level up the GAAP reporting side of your accounting processes. Independent auditors eat, sleep, and breathe GAAP, so you’ll have to maintain a strong understanding of the lines between management reporting and GAAP reporting.

Regular financial audits will keep your processes and books in order for when your company is legally required to produce GAAP reports.

Embrace Your Role in Strategic Financial Management

Accounting data is the foundation for every ounce of value that a strategic finance function can provide to a business. It’s why finance and accounting leaders have to be in lockstep with one another. But, according to Parker Gilbert, the handoff from accounting to finance can be “frustratingly rigid.”

CFOs and their teams need clean, real-time accounting data to properly understand the financial health of the business. It’s the only way to reliably dig into SaaS metrics and glean insights that enable proactive decision-making. But if you and your finance partners are stuck doing everything manually in spreadsheets, you’ll have a tough time embracing your role as strategic business partner.