Only in your wildest dreams did you think you’d be booking customers left and right, but already within the first few months of your startup’s existence, you’re absolutely shocked when you look at the amount of money that’s supposed to be rolling in. And yet even with this level of success, you still want to acquire additional funding to aid in your growth.
Despite all the VC’s you’ve met with, no one seems to want to take the plunge. Your pitch is solid and you can prove that your service is in high demand based on your bookings – so what gives? Unfortunately, in the eyes of investors, a customer booking doesn’t equate to money in the bank as readily as you might think. However, you can demonstrate your success in a much plainer way by utilizing specific methods of accounting.
Many startups opt for a cash model as it’s straightforward and makes sense in the context of potentially showing a larger balance in the bank. This method only works for so long, though, and eventually, accrual accounting will become more impactful when working with investors – let’s learn why.
Tracking Your SaaS Revenues
Solid bookkeeping efforts might seem exhausting at the beginning of your company’s growth, but perhaps more than anything else, you’ll thank yourself for it later down the road. As we’ve briefly mentioned, startups may gravitate toward a cash accounting method early on because it’s easier to wrap one’s head around. When your company incurs an expense, you record it. When you receive money, you record it.
However, many in the SaaS space think that cash and revenue are interchangeable terms, but they definitely are not. A customer that pays in full at the start of a contract might be handing you a lot of cash, but you cannot consider it as revenue until your services have been delivered. If you offer a monthly product and are on your third month of an annual contract, the remaining nine months’ worth of payment is deferred revenue.
So how can you more accurately track not only the cash that comes in each month, or all at once, as well as clearly see the money you’ve made and the funds you’re counting on? Most opt for accrual accounting, where your bookings, monthly recurring revenue, recognized revenue, deferred revenue, and cash collections are all accounted for.
Consider what an investor might think if you have $500K in bookings but only half of that money upfront – you have a huge liability should your company fall apart tomorrow. If you’re tracking this scenario using a cash model, your bottom line looks great and your level of customer interest is high, but there’s more to the picture. Viewing this situation from an accrual perspective shows a steady inflow of cash and ultimately provides VCs with more information.
When To Implement Accounting Best Practices
If you’re utilizing a cash accounting model now and feel that it’s working fine, that may be true, but only to a certain extent. Whether you’ve had difficulty in securing funding or you’re poised to grow at a rapid rate, this method likely won’t work forever. It’s not always easy to know when to make the switch, because accrual can be an extra burden on whoever’s handling your books, but it’s usually smart to plan ahead and get a head start if possible.
In addition to starting off on the right foot, you’ll thrive by utilizing a specific set of best practices that make sense for your company. Develop a set of metrics that allow you to easily spot areas of improvement, whether it’s difficulty in initial bookings, not being able to recognize your revenue, or one of many other concerns and make sure to keep them at the forefront of your mind. Reconciliation processes can be categorized by level of risk, freeing up time for other activities, and rather than treating various accounts differently based on product or booking type, adopt a standard operation for tracking your revenues.
Imagine trying to shift from a cash model to an accrual one after a year in business and consider how dramatically it would change your financials on paper. Think about presenting your data to investors knowing that you’re successful but you chose an inappropriate type of accounting method to demonstrate your actual potential? These pain points are felt by SaaS founders every day, and the frustration doesn’t just come at the beginning of your journey.
An important consideration when discussing SaaS revenues is how your accounting method factors into investor relations – once you’ve secured funding, it’s your responsibility to communicate key information to your VC. There are metrics that they will want to know about, from new bookings generated to deferred revenue on the horizon, and it’s your job to have the data.
It’s Worth The Effort
Ultimately, it may seem daunting to integrate an accrual accounting method from with the multitude of other tasks on your plate, yet a little extra time and energy spent now will pay off quite handsomely later on. Rather than using only your bank balance to acquire funding, your company will be in a position of demonstrating a track record of current and future success along with solid financial data that’s easy to understand.
If you’re unsure about how to begin tracking your various types of revenue or need guidance when switching away from a cash model, the team at airCFO can help. Not only will you have the support of experts behind you every step of the way, but you just might find that your pitches are better received as a whole. Those who are ready to seek funding may want to consider what Lighter Capital has to offer as well, with investment options that often don’t require companies to forego board seats or equity.
No matter what funding avenue you venture upon, it’s time to take the stress out of SaaS revenue tracking and turn your attention to more important things – like building a thriving business.