SaaS accounting: Finances for a subscription model company

Startup founders often don’t prioritize accounting when getting their business up and running. They’re more focused on creating a great product and building an all-star team. But the sooner startup business leaders consider their accounting options, the less stress (and financial mess!) they will have to deal with in the future. 

‍What is SaaS accounting?

SaaS accounting is a type of accounting specifically designed for software-as-a-service companies. This type of accounting takes into account the recurring revenue and subscription model of SaaS companies and provides financial statements specific to this type of business. 

Why is reliable accounting important for SaaS companies?

SAAS accounting is essential for any SaaS company because it provides accurate financial statements and insight into its operations to help make business decisions. 

Without accurate financial statements, making informed decisions about the company's direction would be difficult. For a fast-growing SaaS startup, access to this information can make or break the company's future.

Along with the functional benefits of good accounting, having your startup financials in order streamlines the process of raising venture capital funds or preparing your business for an exit. 

If your startup does not have clear, reliable financial records and up-to-date financial statements (profit and loss, or income statement, balance sheet, and cash flow statement), you may have a hard time raising capital, delay the fundraising due diligence process, or take a hit on your earnings in the event of an exit.

Additionally, state and federal tax regulations require accurate financial records. Maintaining these accounts helps prevent unintentional tax violations and surprise tax bills. Plus, keeping organized financial records helps maximize your startup taxes and R&D tax credits.

What makes accounting for SaaS companies different?

Revenue tracking is the most notable difference in SaaS accounting because of the subscription model used by SaaS businesses. 

SaaS customers pay subscription and add-on services fees, which require routine “maintenance” as customers upgrade, downgrade, or opt-in/out of different services.

SaaS businesses also use different accounting tools — like subscription management software and recurring billing platforms — which demand different skills and knowledge than small business accounting and traditional accounting for startups.

Key elements of SaaS accounting

The differences between regular accounting and SaaS accounting are clear. Solutions for SaaS accounting should include the following elements to truly benefit a startup. 

Cash vs. accrual accounting

Many startups start by tracking their finances using cash basis accounting. The cash accounting method counts revenue as you receive cash and subtracts costs from that. 

This method is easy to use, simple to maintain, and suitable for small businesses or those with little inventory or customer base, but not recommended for SaaS businesses.

Accrual basis accounting doesn’t count revenue until you earn it, regardless of how much cash is on hand. Even though this method of accounting is more complicated, it’s better for large businesses and SaaS companies with subscription-based income. 

Plus, investors and government regulators may require your business finances to follow accrual accounting and track accounts receivable, so it’s not a bad idea to get ahead of these mandates.

Read our blog on cash basis vs. accrual basis accounting to learn more. 

GAAP-compliant financial management

Generally Accepted Accounting Principles, or GAAP, is a set of accounting rules, guidelines, and regulations to standardize business accounting methods across industries. 

GAAP exists to create transparent, consistent, and accurate financial reporting across organizations. 

While startups are not required to follow GAAP accounting principles, there are benefits to SaaS startups doing so from an early stage.

Because GAAP requires organized, consistent, and comparable financials, your forecasting, financial modeling, and analysis are more accurate and reliable. 

For SaaS businesses, which rely heavily on financial projections to inform important business investments and decisions, working with accurate and up-to-date financials is crucial.

Furthermore, investors, bankers, and auditors will use GAAP to evaluate your company’s finances. If your business seeks an investment, having this in place will save time and effort restating financial information during these cycles.

SaaS-Specific financial reporting and metrics

1. Financial statements

When following GAAP guidelines, there are three required financial statements every SaaS startup (or any business) should generate monthly:

• Profit & Loss (P&L) or Income Statement — Summarizes the revenues, costs, and expenses from a specified time period. Learn more about how to read a profit and loss statement here. 

• Balance Sheet — Provides a snapshot of a company’s assets, liabilities, and equity; things owned and owed by the company.

• Cash Flow Statement — Shows incoming and outgoing cash movements, typically every month, in much more detail than a P&L statement.

2. Bookings

Your number of bookings paints a picture of the revenue you expect to earn over a period of time, based on customer commitments; it looks at the value of a contract ahead of the payment completion. 

‍Bookings are an important metric for SaaS businesses to understand the success of their sales efforts and potential revenue growth.

3. Billings

Billings are the actual amounts billed to customers. This figure is the actual amount you plan to collect from customers and represents the money owed to your company.

‍4. Revenue and revenue recognition

Revenue is the total income generated by a business's primary operations—typically the sales of goods or services—and represents the business’s total gross earnings before accounting for any expenses.

Revenue recognition is an accrual accounting principle that requires you to record your revenues when you earn them, regardless of when you actually collect payment. 

More specifically, it requires you to classify prepayment for services as a liability called deferred revenue or unearned revenue. You can only reclassify it as revenue on your financial statement once you’ve provided your customer the service you promised.

For example, say you sell a 12-month SaaS subscription to a customer for $100 per month and collect $1,200 upfront. You would initially record that $1,200 as unearned revenue, then recognize it month-by-month as the customer uses up their subscription.

Here’s what those journal entries might look like:

‍

While not as common for SaaS companies, accrued revenue or unbilled revenue is the opposite, referring to revenue you’ve earned but have yet to collect.

The Financial Accounting Standards Board (FASB) guidance on revenue recognition is Accounting Standards Codification (ASC) 606, which outlines a five-step process:

1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when (or as) the entity satisfies a performance obligation 

This may sound straightforward in theory, but it can quickly become challenging.

For example, a common issue for SaaS companies is determining whether post-contract customer support (PCS)—such as tech support and software updates—are separate obligations from the subscriptions sold.

According to Chapter 9—Software Entities of the AICPA Audit and Accounting Guide: Revenue Recognition, SaaS vendors should consider whether PCS components are:

• Capable of being distinct
• Distinct within the context of the contract

For instance, if the software works fine indefinitely without the PCS, they may be separate obligations. If the PCS is necessary for continued use, it’s probably a single performance obligation.

After determining your obligations, things can still get messier. For example, you must allocate discounts to all obligations proportionately, and multi-year contracts are often subject to changes, like upgrades, downgrades, or cancellations.

You must determine whether to treat these changes as new contracts or modifications. In case of cancellations, you have to reverse previously recognized revenue or recognize your remaining unearned revenue all at once, depending on whether you issue a refund.

All of these moving parts multiply the complexity of SaaS revenue recognition exponentially.

5. MRR & ARR

Subscription-based services accumulate recurring revenue, which businesses typically measure with two SaaS metrics: monthly recurring revenue (MRR) and annual recurring revenue (ARR).

Both are measurements of your predictable revenue stream over a period of time. Businesses typically calculate their MRR and then multiply that figure by 12 to find their ARR. MRR should reflect:

• Recurring revenue from all customers
• Upgrades and downgrades
• Discounts
• Customer expansion
• Customer churn, or lost revenue

For example, say you start the month of June with $50,000 in recurring revenue from all customers. During the month:

• Some existing customers upgrade plans, adding $5,000
• Other existing customers downgrade, subtracting $2,000
• You gain some new customers, but others cancel, resulting in a net $2,000 loss

Going into July, your new MRR would be:

$50,000 MRR + $5,000 upgrades – $2,000 downgrades – $2,000 churn = $51,000 MRR

6. SaaS KPIs

KPIs (key performance indicators) give you the best picture of your company's overall and financial performance. Which metrics you track depend on your business, but there are five types of startup KPIs that all SaaS companies should track:

• Top of Funnel KPIs
• Revenue KPIs
• Unit Economics KPIs
• Product/Market fit KPIs
• Financial KPIs

For example, say you run a SaaS startup that offers project management software subscriptions to small businesses. During 2024, you calculated the following KPIs:

• Top of Funnel: Website traffic increased from 20,000 to 35,000 monthly visitors, while your free trial conversion rate held steady at 4.5%.‍
• Revenue: MRR grew from $45,000 to $75,000, and net revenue retention jumped from 90% to 100% thanks to better upselling and reduced churn.‍
• Unit Economics: Customer acquisition cost (CAC) dropped from $1,000 to $780 after you refined your pay per click (PPC) strategy.‍
• Product/Market Fit: Your Net Promoter Score (NPS) increased from 38 to 58, and churn fell from 6% to 3.5% monthly.‍
• Financial KPIs: Your burn rate held at $50,000 per month, while your runway extended 10 months after you received a $500K seed investment.

The increase in website traffic and stable free trial conversions show that your top-of-funnel marketing is working and you're attracting the right audience.

Meanwhile, nearly doubling MRR and boosting net revenue retention indicates you’re acquiring more customers, and your existing ones are spending more over time.

Your CAC dropping means you’re spending less to acquire those new customers, while the higher NPS and lower churn indicate growing customer satisfaction.

Lastly, maintaining a stable burn rate while extending your runway signals a strong financial position. You should have plenty of time to continue iterating before you need to fundraise again.

When does a SaaS startup need a bookkeeping and accounting system?

We recommend that all companies set up an accounting solution on day one, along with a business bank account. You never know when your SaaS startup’s growth will take off, and you won’t regret having a trusted accounting system to help guide and support your business through these exciting (and complex!) times.

SaaS accounting software options

SaaS companies need accounting software equipped to handle their unique financial reporting requirements. Here are some to consider, including options for different needs and stages of development:

• FreshBooks: Best suited for seed-stage SaaS companies, especially those that have small teams and value simplicity. It covers the basics—including time tracking and automated invoicing—and provides a clean interface with a shallow learning curve, but it may not be suitable for more complex accounting needs.
• QuickBooks Online (QBO): Great for early-stage SaaS startups due to its affordability, ease of use, and near-universal integration capabilities. QBO also has a wide variety of subscription options that make it highly customizable, and most accountants have experience using it. You can pair it with a subscription management tool like ChargeBee to support recurring revenue management.
• Xero: Excellent for SaaS companies scaling globally, with robust features to support multiple entities and currencies. Otherwise, it’s often compared to QBO for its pricing, market share, and intuitive interface. Similarly, you can pair it with a tool like Stripe Billing to handle recurring payments. 
• Sage Intacct: An attractive option for growth-stage SaaS companies that have complex financial structures or are preparing for investor scrutiny. It has powerful reporting features that support advanced accounting challenges, like GAAP revenue recognition, multiple entities. 
• NetSuite: A strong choice for enterprise-level SaaS companies that need Enterprise Resource Planning (ERP) functionality. It’s well equipped to handle complex needs like GAAP compliance, multiple entities, and native subscription revenue accounting.

How to choose a SaaS accounting software

Before you commit to any SaaS accounting tool, read through customer reviews, double-check integrations, and take advantage of free trials or guided demos to find the one most suitable for your unique workflows.

It’s beneficial to develop a framework you can use to evaluate potential options. While the criteria you use will depend on your needs at your current stage of development, here’s an example for a mid-stage startup beginning to scale globally:

• Automated GAAP revenue recognition (30%)
• Subscription management and integration (25%)
• SaaS metrics and reporting (20%)
• Workflow automation and integrations (15%)
• Multi-entity/multi-currency support features (10%)

Consider treating this as a starting point and adjusting the weight of each category up or down based on your company’s current priorities. However, keep in mind that those priorities will shift over time, so a long-term perspective can help inform your decisions.

For example, venture-backed startups that expect rapid growth may benefit from investing in a more robust accounting system in advance—even if it feels premature—to prevent painful data migrations and system overhauls during critical scaling periods.

In contrast, bootstrapped or early-stage companies might prefer to start with an affordable, user-friendly platform that can handle their core accounting functions until they reach $1M in ARR.

How to implement SaaS accounting software

Once you’ve chosen a SaaS accounting software solution, here’s a step-by-step checklist you can follow to implement it smoothly:

• Analyze your subscription offerings: Map out subscription tiers, contract structures, and upgrade/downgrade options to define your revenue mechanics (1 week).
• Determine your revenue recognition policy: Establish how you’ll recognize revenue in line with ASC 606, including how you’ll handle bundled offerings (2 weeks).
• Configure a SaaS-friendly chart of accounts: Set up accounts aligned with your expected transactions, including SaaS-specific categories like unearned revenue (2–3 days)
• Integrate your subscription billing solution: If necessary, implement a separate recurring billing tool like Chargebee or Stripe to supplement your accounting software (at least 3 weeks).
• Set up revenue recognition automation: Use built-in automation from your accounting platform to schedule journal entries and split revenues across service periods in accordance with ASC 606 (2 weeks).
• Review and test accounting workflows: Reconcile test entries, verify revenue schedules, and confirm that your system reflects each type of financial transaction accurately (1 week).
• Train your accounting and finance team: Provide upfront and ongoing training to help your team get comfortable with the new platform and workflows.

The easiest way to manage your SaaS startup’s accounting

Zeni is a full-service finance firm that provides bookkeeping, accounting, tax, and CFO services for startups. 

Our team of finance experts has deep experience working with SaaS businesses (Zeni itself is a SaaS business!) and brings 100+ years of experience to your startup’s bookkeeping and accounting system.

Whether you’re looking for a service that manages your every financial function (bill pay and invoicing included!), a senior finance expert to put together budgets and projections, or advice on filing your annual tax return, Zeni’s complete solution has you covered.

‍Advanced bookkeeping practices are the basis of what Zeni does and come in all our service plans. Our customers tell us they prefer Zeni to other startup bookkeeping solutions because they get the following benefits:

• Tech-powered efficiency — We use artificial intelligence and machine learning to complete your bookkeeping daily to GAAP standards and manage every bookkeeping and accounting task quickly and accurately.‍
• A responsive team of experts — You get a single point of contact for all your queries, so there’s no back-and-forth around finding the right person to speak with. We’ll assign your request to a team member with the appropriate expertise so you get an informed answer fast. Plus, you have 24/7 access to a finance dashboard and finance concierge.‍
• Comprehensive advice — Our team draws on decades of experience working with technology and SaaS businesses to give detailed answers to your questions. We’ll tell you the pros, cons, and best SaaS accounting practices to support your strategic decision-making process and achieve financial success.‍
• A predictable monthly fee—We’re a SaaS business too, which means Zeni charges a monthly fee based on your expenses for all your bookkeeping.‍
• Instant finance insights — There is no need to wait for your bookkeeping service to deliver financial statements or respond with the metrics you need: You can instantly access up-to-date financial data on the Zeni Dashboard.‍
• A complete range of services — As your business grows, our team can continue to offer the additional finance support you need, including complex accounting, CFO-level guidance, and yearly tax returns (including R&D tax credit).

From one founder to another, let us help you navigate the world of SaaS startup bookkeeping.