Complete Guide to SaaS Accounting + Revenue Recognition methods

What is SaaS Accounting?

SaaS Accounting differs from regular accounting, where you usually sell a single product or a one-time service. The subscription model makes it necessary for you to carefully monitor your revenue and predicted revenue. That requires a whole host of metrics and models, that helps you to focus on the particular approach to grow your business.

In this comprehensive guide, we explain the various ways of measuring your revenue – and what benefit each metric and model has for your business.

Types of revenue recognition and sales metrics

There are multiple methods for calculating revenue and monetary value in SaaS accounting. Each has strengths and weaknesses, but they also have their uses.

Typically, the methods are divided into five categories:

  1. Booking
  2. Cash collection
  3. Recognized revenue
  4. Deferred revenue
  5. MRR/ARR (Monthly/Annually Recurring Revenue)

Booking and cash collection are, strictly speaking, not revenue recognition, as they don’t account for whether or not the service has actually been provided. They are considered a type of sales metrics.

1. Booking

Booking is, simply, when you book a client or customer. That means that they have signed up or signed a contract and committed to paying for your service. This is the metric that most sales departments use, as they’re predominantly occupied with acquiring new customers.

If your customer subscribes to your SaaS for $100 a month for six months in advance, then the booking would account for that as a one-time $600 sale.

Benefit

The benefit of booking is that it’s a fine metric for estimating customer acquisition.

Downside

The downside to using booking as a metric is that you have technically not yet delivered the service, you promised to provide the customer – and doesn’t tell you, if you’ve received an actual payment for your service.

2. Cash collection

Cash Collection is when you receive the payment from the customer. This doesn’t account for expenses or if the customer has committed to future payments down the line, as with a subscription model.

It can be used to give you a decent estimate of how much money, your company has, and is able to use, use right now.

Benefit

The benefit of cash collection is that it’s a very precise measurement of exactly how much money, you are acquiring.

Downside

The downside is that it doesn’t account for contractually-obliged payments, recurring revenue or potential loss. If, for example, you fail to deliver the service to the customer, you are liable and can be legally required to pay them back.

3. Recognized revenue

Recognized revenue is the current and actual revenue, you’ve made by a subscription.

If a customer or client has subscribed for $100 for four months, out of the six contractually obliged months, then the recognized revenue is $400. This is money that is essentially safe. Your company is free to spend it however you wish.

Recognized revenue is measured by looking at the total price of the service, divided by the time, they’ve received the service.

That means it accounts for the revenue not as a one-time sale, as with booking and cash collection, but as a guaranteed form of revenue. This means that even if the customer unsubscribes or cancel before a contractually set date, you are not required to return this specific revenue – even if they paid in advance.

However, if they have paid in advance and did not receive the expected service for the remainder of their time, you can be required to repay the remaining amount. That is why recognized revenue is always accompanied by deferred revenue.

The benefit and downside by recognized revenue are listed together with deferred revenue.

4. Deferred revenue

Deferred revenue is revenue, you can expect to receive, as you fulfill your contract. This is not money that you are certain to receive, until you have delivered your product or services. For SaaS, this is the revenue that your customers are obliged to pay, unless you fail to live up to your part of the contract.

Deferred revenue is measured by looking at the remainder of the SaaS-subscription and calculate the expected revenue, if the customer continues to receive the service for the entire duration, defined in the contract.

Benefit

The benefits of recognized and deferred revenue is that you can estimate the exact revenue, your company has “earned” and what you can be expected to earn.

Downside

The downside is that recognized and deferred revenue do not show upsales, churn or estimated revenue, if the customer continues to subscribe to your service for a longer duration. These are all vital factors, when you’re trying to recognize revenue in SaaS accounting.

5. MRR / ARR

Monthly / Annual Recurring Revenue (MMR/ARR) is a common metric, when you’re estimating the viability and momentum of your SaaS-business. It calculates the exact revenue you can expect to earn every month or year. This includes churn, customers cancelling or downgrading, and cross-sales, customers buying additional features or improved services.

There is an important distinction between SaaS revenue and SaaS accounting. Because you technically have yet to “earn” the revenue by fulfilling your contract, accounting does not update your recognized revenue, until the service has been delivered.

MRR and ARR are effective measurements of your growth and overall momentum. That’s also why, they’re some of the most important metrics for SaaS-businesses.

Need help handling subscriptions for your SaaS?

Upodi helps you grow your SaaS and Subscription business. We do that by aiding you automate your subscription and on-demand billing. This makes SaaS accounting easy, because our system handles the bulk of the work for you. That way you can focus on growing your business, and let us handle the rest.


Fanny Josefine Fredskilde
@Fanny
May 3rd, 2019
- 11 min. read.

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