Accounting for Subscription Revenue: How to Button Up Your Revenue Recognition Metrics

Chances are, your early-stage SaaS business has a business-casual dress policy, but your financial metrics still need a buttoned-up Wall Street polish to attract savvy investors or potential acquirers.

Much like a bespoke power suit would break the clothing allowance, robust financial management suites might be out of your budget range to gain accurate revenue recognition metrics. But that doesn’t mean you don’t need to consider accounting for subscription revenue — it just means you get creative.

How creative? You make do with a haphazard assortment of tools like QuickBooks and SalesForce manually pieced together with Excel spreadsheets and a lot of copying and pasting. Needless to say, this doesn’t achieve the cohesive look you’re going for.

Many SaaS businesses will live with this chaos until they think they can afford a power suite for financial management: Something that can manage all of their accounting for subscription revenue needs. 

But this approach ignores the vital importance of having accurate revenue recognition numbers during the early and later stages of the business. Unreliable financial statements stemming from revenue recognition problems can turn off potential buyers and investors.

This has been proven repeatedly in the public markets when companies announce errors in their financial statements due to miscalculated revenue. The stock almost always takes a big hit. In the private market, the impact of improper revenue recognition can be more devastating due to illiquidity — the idea that there is a smaller pool of potential buyers or investors to buoy a failed deal.

M&A and funding discussions make accurate revenue recognition acute for SaaS companies. But proper revenue recognition and metrics are also required for operational insight. You have to have both revenue recognition accuracy and financial metrics to make smart business decisions. Nothing in your SaaS financial statement will tell you anything about your actual revenues, like the following: how much revenue is new, how much revenue is based on renewals, how much revenue comes from upgrades, or how much revenue was lost to downgrades.   

If you can see churn rates, monthly revenue recognition (MRR), and annual revenue recognition (ARR), you can also see where and when you are losing existing customers and what that does to long-term revenue expectations.

The key to all of this is automation. Imagine closed opportunities automatically being turned into GAAP-compliant customer, contract, subscription, revenue, and invoice schedules — information that can also flow automatically into your general ledger system. No more re-keying information or manually entering data.

If a sales rep initially forgets to enter a promised discount and corrects it later, you are instantly alerted to the discrepancy with a message stating that the revenues currently scheduled do not match the contract value. This already makes a big difference in revenue recognition accuracy and efficiency when you have five orders per week. Think about how much time and effort it would save when you grow to 20 orders per week.

Revenue recognition rules like ASC 606 have always been challenging when you’re relying on a system that does not provide all of the capabilities you need.

Returning to our power suit metaphor, instead of a clean, coordinated look at financial operations, your SaaS business may be creating a patchwork quilt of spreadsheets for contract management, deferred revenue, and more. Pull one thread too hard and the whole thing could unravel.

But don’t think you have to spend a fortune for a financial management suite that you don’t really need or have time to implement. You can and should find the middle ground with an automated solution that enables you to present polished, accurate revenue recognition, and financial metrics that will enlighten your operational decisions and satisfy potential investors and buyers.

At SaaSOptics, we’re experts in managing accounting for subscription revenue businesses, including: revenue recognition, customers and renewals, and more. With our subscription management platform, you can calculate 100+ SaaS metrics with the click of a button so you can get the numbers you need, right when you need them. Interested in learning more? Get a free demo with us today