Business models of companies that offer software as a service (SaaS) vary greatly from those of other businesses. It’s important, for smaller or new companies to understand the important aspects of such a business, so that they may start off on the right track. Here are some of the important aspects of a SaaS company that require consideration:
Churn rate is one of the most important factors in the growth of a SaaS company. Churn rate is the annual percentage of such customers who discontinue their subscription. Owing to the meaning that it holds, churn rate is also known as the rate of attrition. When you talk about the growth of any company, the basic principle remains the same. Companies grow when they attract new customers and increase profit margins. Similar is the case with SaaS companies. That’s the reason why the percentage of new customers, in any given year, needs to be greater than the churn rate for a SaaS company to grow. If it doesn’t, then it points towards the fact there are some business issues that the management might need to address. The consideration of the churn rate can do wonders for the decision making of a SaaS company, if used correctly, and can be of utmost importance in matters like the pricing of subscriptions.
Most companies follow the accrual basis of accounting, right? Well, according to the accrual basis of accounting: revenue is supposed to be recorded as soon as it has been earned and not when it is received. What this means is that the figure of revenue for a SaaS company, for any given month, will be the sum total of the total income EXPECTED from the subscriptions, in the simplest of terms. But is there a possibility for a scenario when a subscriber doesn’t pay the subscription charges for any given month? Yes, it can. Under such a scenario, the monthly subscription of the client will show up in the SaaS Company’s revenue, when actually it hasn’t been received. What this means is that there is a high chance for a SaaS company’s revenue to be overstated. Therefore, it’s important for the management to consider the figure for deferred revenue, as well, when making business decisions.
It’s also important for a SaaS company to consider its marketing expenses, owing to the importance of marketing to the overall model of the business. A SaaS Company might have hundreds of applications and software for customers to benefit from, but it won’t get any subscriptions unless the customers know about it, right? When you talk about marketing expenses, in general, it is important for a business to always keep them under check. SaaS companies need to remember, before spending extravagantly on marketing campaigns, that marketing expenses are as good as useless if they don’t translate into more subscriptions.
These are some of the important accounting considerations for a SaaS company. However, they form only the tip of the iceberg. If you’re looking for in depth advice, however, the experts at SKB Accounting would love to be of assistance!