While SaaS is a fast-evolving industry, B2B SaaS accounting is anything but simple. It requires a substantial amount of knowledge and insight to handle it efficiently.
Given the challenges, SaaS owners and entrepreneurs may helplessly rely on several accounting tools and techniques. What’s the result? They end up having disorganized reports, filled with errors and oversights.
That’s why there is a growing need for B2B SaaS accounting education and the development of robust solutions such as Corcentric managed services that can comprehensively handle the process.
If you are a B2B SaaS startup striving to get a grip on your accounting, this quick guide is just for you. Understand the B2B SaaS accounting fundamentals to manage your revenue and expenses in a better way.
Let’s dive right in.
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What Is B2B SaaS Accounting?
SaaS accounting is fundamentally different from traditional accounting. This accounting model is specifically developed to cater to the subscription-based and recurring billing models that B2B and B2C SaaS businesses rely on for revenue generation.
This accounting model also takes into consideration the complex cash flow dynamics to generate financial statements and insights that can help SaaS business owners take more informed decisions.
Types of B2B SaaS Accounting
SaaS accounting is broadly divided into two types based on the way sales are reflected in the financial statement:
1. Cash Accounting
Cash accounting is more popular with startups and small B2B SaaS businesses that have limited revenue and expenses. This accounting system recognizes revenue as cash only when it comes in and expenses are maintained as paid once the payment is made.
Here the ledger is simple and easy to maintain. But what it lacks is the ability to forecast. And because it doesn’t take into consideration credit purchases and expenses into consideration, a company’s financial situation may be misinterpreted to some extent.
2. Accrual Accounting
This is a more advanced and comprehensive SaaS accounting model suitable for larger companies. Accrual accounting recognizes revenue and expenditure when they are earned and does not wait for the cash to come in.
The financial statement here presents a more accurate representation of a company’s financial state and facilitates better forecasting.
If you are looking to scale up your B2B SaaS business, this is the best accounting model for you. Even when you offer diverse pricing packages to your clients, this model can help you generate comprehensive financial statements.
By understanding what is effective subscription management and adopting the best practices, you can streamline all your revenue and grow in a sustainable manner. Read this Younium guide about what is a subscription management for understanding.
Strive For GAAP Compliance
As a growing B2B SaaS business, you should strive to be GAAP-compliant. Generally Accepted Accounting Principles (GAAP) are the industry standards, rules, and guidelines for SaaS accounting.
These rules help to establish transparency and consistency in your financial reports which will be acceptable to your clients, stakeholders, financial institutions, and the authorities.
When you go GAAP early, you can improve your credibility in the industry and streamline bill payments, invoicing, tax payments, and several other financial activities.
Steps For Revenue Recognition For B2B SaaS
FASB and IFRS have come up with a revised and simplified revenue recognition standard called ASC 606 for SaaS companies. It has established a 5-step framework to standardize this process for all SaaS businesses across the globe.
1. Identify The Contract With The Customer
This is an important criterion to be met while signing a contract with a new B2B SaaS client. Both parties mutually agree upon their rights and responsibilities under this contract.
2. Identify The Contract’s Performance Obligations
At this stage, the contract must explicitly define the performance obligations of the SaaS provider. It also includes a list of service deliverables and the rights of the customers under the contract.
The performance obligations are to be listed separately for distinct services.
3. Determine The Transaction Price
The transaction price is the amount a SaaS provider expects to receive for the services he will be offering. This price reflects the total payable amount after consideration and discounts.
4. Allocate The Transaction Price
In this step, you should allocate the total receivable amount to all the performance obligations and for specific billing cycles. To automate your billing process you can choose the right recurring billing tool. This Attrock list helps you choose the right recurring software for your recruitment.
5. Recognize Revenue
At the end of the process, SaaS providers need to recognize revenue upon successfully completing the performance obligations and the customer benefits from the services provided.
B2B SaaS accounting is complex and time-consuming. If you are a SaaS owner trying to manage accounting all by yourself, you need to train rigorously and use top-quality tools to do the job for you.
With the concise framework provided in this post, you can move on to learn more about SaaS accounting and generate comprehensive financial reports for your business.