Getting a new customer feels great. For a SaaS business, though, receiving payments doesn’t necessarily mean you’ve earned it yet.
Let's say a customer pays in advance, $12,000 for a year of your software. The money is in your account, but you still have 12 months of service to provide. You can't simply count the whole amount as revenue for the first month.
That's the basic idea behind SaaS revenue recognition. You record income as you deliver the service, not when the money hits your bank account.
It sounds simple enough, especially for some subscriptions. However, things get a bit more complicated when you have annual plans, customers changing subscriptions, or bills that depend on how much someone uses your product.
What Is SaaS Revenue Recognition?
SaaS revenue recognition is simply finding out when you actually earned the money. Money is earned and can be recorded once you provide the service to the customer. For example, if a customer pays $100 for the month, you can recognize it after providing the service for the month.
Now imagine someone pays $360 upfront for a year. You may have received a bigger amount, but you still need to provide the service for the next 12 months.
You could collect a lot of annual payments in January and feel like business is booming. However, some of that money relates to work you'll be doing in the months ahead. If you ignore that, your financial reports can give you the wrong picture.
Good SaaS accounting helps you see what's been earned, what's still owed in future service, and how the business is really doing.
Monthly Billing Is Easier, Until Something Changes
Monthly subscriptions are usually pretty straightforward.
A customer pays for access, you provide that access, and you recognize the revenue over the service period. So if the customer pays $100 for April, for example, that amount would generally be recognized during April if the service is delivered evenly.
Accounting challenges often increase when customers change their plans.
If a customer started the month with a $20 plan and upgrades midway to a $40 plan, you may charge them proportionately depending on your agreement.
That extra charge needs to be recorded properly.
Cancellations can cause confusion, too. Does the customer get a refund? Can they keep using the software until the end of the month or does their plan immediately end?
The answers depend on your agreement with the customer. And the accounting needs to reflect what actually happened.
It's easy to miss these little changes when you're handling everything manually. One missed credit or incorrectly recorded refund might not seem like much. Over hundreds of customers, those mistakes can add up. That's one reason businesses use SaaS bookkeeping services.
Annual Billing: Don't Count It All at Once
Annual plans are popular for a reason. Customers may get a discount, and the business gets cash upfront.
One thing to remember is that the money arriving today doesn't mean the entire subscription has been earned today.
Here's a simple example.
A customer pays $1,200 in January for 12 months of access. If the service is delivered evenly, the company recognizes $100 each month. Six months later, the business has earned and can record $600.
The remaining $600 is called deferred revenue. We record this as a liability because the company still has to provide the service to the customer.
Deferred revenue accounting for SaaS helps businesses keep track of money received before the service was provided.
The full $1,200 can only be recognized by December, provided the service has been provided as agreed.
If you record the whole annual payment as revenue in January, that month's results may look much better than they really are. Then the following months might look weaker, even though customers are still paying for the service.
Spreading revenue across the service period gives you a more useful picture of what's happening.
What Is Usage-Based Billing
Some software companies don't charge a fixed amount every month. They bill customers for what they actually use. Usage-based billing is a bit more difficult since usage and billing can happen in different months.
Sometimes, a customer that used your service in May is billed in June. If the service has already been delivered and the amount can be determined under the contract, the revenue may belong in May.
Prepaid credits can make things a bit messy. The customer pays first and then uses the service when they need it. The accounting treatment would then be based on when they use the service.
This is where subscription accounting needs to work closely with your billing system. The billing software tells you what to charge. Your accounting process needs to establish when that amount should count as revenue.
If things seem too complicated, consider outsourcing to SaaS revenue recognition accounting services for invoicing support.
A Few Mistakes That Can Throw Off Your Numbers
- Getting payments for the year doesn’t mean you earned it already.
- Relying only on invoices to recognize revenue. The invoice and usage period can defer so that needs to be understood before recording a transaction.
- Customers often change plans so don’t forget to update the records.
- Deferred revenue is normally a bit difficult to remember so try to be more vigilant.
A simple solution is to go through your books regularly and investigate things that seems off.
When Should You Outsource To SaaS Accounting Services?
In the beginning, you might prefer DIY accounting. If you have a handful of customers and one simple pricing plan, that can work.
However, you might add annual contracts, introduce usage-based pricing, or deal with customers who have different billing terms. Suddenly, the spreadsheet that worked perfectly well six months ago isn't doing the job anymore.
That's when SaaS accounting services can be useful.
A good subscription revenue accounting provider can help you keep track of subscription income, deferred revenue, payment fees, and so on.
AccountiPro: Your SaaS Accounting Services Provider
SaaS revenue recognition is not always simple. SaaS business owners are often juggling through various business functions, unable to properly focus on the core operations. Be it a small business or a larger one, outsourcing always has its benefits.
AccountiPro, with its years of experience handling SaaS accounting, can guide your business through the complexities of SaaS revenue recognition. We not only help you keep track of deferred revenue, subscriptions and payments, we also help you prepare and analyze your business financial reports. With our expertise, you can gain useful insights into your business model. So, contact us today if you want to know more about how we can support your business and the onboarding process.
