fbpx

SaaS

SaaS: How to Recognize Revenue

by Sanjeev Archak Sanjeev Archak 2 Comments

The SaaS business model provides some interesting challenges to both businesses and accountants.The SaaS industry has several metrics to measure growth. There are terms like Monthly Recurring Revenue, Average Revenue Per User, Annual Contract Value, all these have revenue in common.But these may not have any accounting relevance.How to recognize revenue for a Saas company?

Lets us understand some of these terms:

Annual Contract Value(ACV)

ACV is the total value of the contract agreed with the customer. This contract can be for a year or more. This also called a “booking”. Some SaaS companies include one time implementation or customization fees into “booking”. 

Annual Recurring Revenue(ARR)

ARR is the Annual Recurring Revenue from your customers. This the revenue you’d collect in the coming 12 months if you don’t add or churn anything. 

Monthly Recurring Revenue (MRR)

This is the ARR divided by 12 or you could say ARR is MRR times 12.

These terms do not have any relevance under GAAP or India Accounting Standards. How does an accountant view these terms?

Here is an example with multiple contracts being signed and going live on different dates:

  1st Contract 2nd Contract 3rd Contract 4th Contract 5th Contract
Contract Signed 1-Apr-19 1-May-19 1-May-19 1-Jun-19 30-Jun-19
Go Live Date 1-May-19 1-Jun-19 1-Jul-19 1-June-19 01-Jul-19
Term 12 months 12 months 12 months 12 months 12 months
ACV          1,20,000            1,20,000          1,20,000          1,20,000          1,20,000

Among the above contracts, only of them will recognized for as ARR viz, Contract 4. The revenue on the other contracts will be recognized as seen below:

  April May June July
ACV Bookings          1,20,000          2,40,000    1,20,000                    –  
ARR Booking          1,20,000          2,40,000    1,20,000                    –  
MRR Booking             10,000             20,000       20,000                    –  
Recognized ARR                       –            1,20,000    3,60,000       6,00,000
Recognized MRR                       –               10,000       30,000          50,000

As the CEO of an Enterprise SaaS company, make sure you understand if you are talking bookings or recognized revenue. Your bookkeeper should be able to help you out if you have questions.

A good accountant will recognize revenue when it is due and will help the revenue curve for the company. Revenue numbers have a huge influence on founders and investors. Therefore, make sure your ARR and MRR numbers are correct. 

SaaS metrics

by Sanjeev Archak Sanjeev Archak No Comments

Keeping track of key metrics is very important and can give you a great overview of how the business is doing. Traditional financial metrics like EBITA,Net Profit, Cash to Turnover does not cut it for a SaaS business. What metric should a SaaS company use to measure performance?  It doesn’t need to be all-consuming so let’s keep it simple. 

Here are the top metrics a SaaS business should track to keep growing and stay on the right path.

1.  Cost Per Acquisition (CPA)

Acquiring customers costs money. There is a cost involved in running Facebook ads, Email campaigns, Google ads. The formula for measuring CPA is simple.Your total marketing costs divided by a number of new clients you attract is your CPA. If you have a high CPA then you will have to re-look at your marketing processes and adjust accordingly. 

2. Customer Lifetime Value (CLV)

It is apparent that CLV has to be higher than CPV to generate a profit. This means that you consider the net profit over the entire course of your business’s relationship with a customer rather than just an initial sale. Depending on your business model this might be weeks, months or even years. SaaS companies have a recurring billing model which result in a loss in the initial transaction due to trial period discounts.

3. Gross Margin

A positive gross margin is required for a business prosper. So what is gross margin it is the difference between sales revenue and cost of goods sold. Increase in sales volume should allow increase in gross margin due to efficiencies.

4. Customer Churn

Customer loyalty is critical for a business. Customer retention costs nearly five times more than acquiring a customer. It is important to measure the time that the customer stays with your business. Something as simple as adding some user-friendly training videos your customers can access may improve churn.

Some simple ways to examine the drop-off points are to survey existing customers and test some changes, ultimately implementing the most effective changes.

5. Cashflow

Cash is King. Without cash, a business dies, it’s that simple. A profitable business need not be a cash rich business and would be struggling to pay day to day expenses.

Its important to build a cashflow forecast for a range of scenarios. A dynamic forecast will enable to make strategic business decisions. 

There are endless financial metrics you could track in your business but getting a handle on just these five will give you a great starting point and help you keep your business on track, improve your bottom line and manage growth in a profitable way.

If you are a SaaS company, we recommend Zoho Subscriptions to handle all your subscriptions. Let our experts Integra Books help you with setting up Zoho Subscriptions.

Happy Tracking.