A chart of accounts for SaaS companies helps leadership and potential investors understand an organization’s finances at a glance. Located in the general ledger, the chart of accounts (COA) essentially serves as an index of a company’s financial accounts, expressing assets and liabilities in different areas of the business.
The COA is a foundational accounting resource essential to any organization’s bookkeeping. However, this index is especially critical for SaaS companies.
Many software-as-a-service providers generate revenues from multiple sources including consulting services, implementation, subscriptions, and licensing fees. This diversity of revenue streams requires SaaS companies to take additional steps to build a reliable chart of accounts.
Why is a chart of accounts important? Effectively describing the full scope of the company’s finances to stakeholders and investors without a detailed and organized COA is impossible.
G-Squared Partners knows exactly what’s necessary to create a functional chart of accounts for SaaS companies. Our team of outsourced CFOs and accounting specialists has helped countless SaaS firms develop a more intuitive approach to reporting. Contact us today to learn more about how we can help your business improve its financial reporting infrastructure.
A well-organized chart of accounts is one of the key building blocks of any SaaS company’s performance and financial health. The index makes it easy to locate relevant financial accounts via a numbered hierarchy of names and categories. Most importantly, the COA helps crystalize how cash flows in and out of the company.
Considering that lack of clarity around the business model is one of the most common mistakes made by early-stage companies, the value of an informative yet digestible COA is immense.
SaaS companies generally format a chart of accounts by organizing their finances into general accounts like assets, equity, liabilities, revenue, and expenses. Subaccounts are then added to better record operational costs, and businesses may also add another layer of subaccounts that breaks accounts out by business function. All told, this level of detail results in a comprehensive overview of the company’s finances.
To determine the best way to organize your organization’s chart of accounts, consider the information that each account type can tell you about your business. Your goal is to create an easy-to-follow structure that succinctly documents the financial infrastructure of your business.
Typically, accounts related to the balance sheet are organized ahead of accounts from the income statement. This way financial data appears in the COA in the same sequence as in the subsequent documents.
Start with asset, liability, and equity accounts; these documents provide a broad overview of your balance sheet. They help your stakeholders and investors understand how much your business is worth and how much cash it has on hand.
Resources that add value to the company are represented in the COA as asset accounts. For SaaS companies, held assets can range from computer equipment and software licenses to furniture and real estate. Accounts receivable and insurance are also typically included as asset accounts.
Liability accounts summarize the debts accrued by your organization. These might include accounts payable, taxes payable, and any outstanding debt. Any payments delivered to your company ahead of completing a service should be recorded in the COA as a liability until those services are delivered.
Equity accounts reflect the current total value of your organization. Equity accounts are largely reserved for common stock, preferred stock, and retained earnings. If relevant, organizations can record additional capital and treasury stock as equity accounts.
Revenue and expense accounts highlight key information from your income statement. This part of the COA shows your stakeholders and investors that there is a functional, sustainable cash flow behind the business.
For SaaS organizations, multiple revenue accounts and revenue subaccounts are necessary to provide sufficient context about the organization’s cash flow. For example, stakeholders learn more about a business’s revenue model by reviewing the chart of accounts to determine the portion of revenues that comes from professional services, implementation fees, and subscriptions – each of which should be separate revenue accounts.
This area should include areas like hosting and technology costs to support the product, as well as salaries, wages, benefits, and payroll taxes of both the implementation team and customer success team.
This area of the Chart of Accounts should be broken into several areas, which often include categories such as Engineering or Product Development, Sales and Marketing, and General and Administrative.
General ledger accounts such as wages, benefits, taxes, and bonuses for each of the above areas should be created and costs should be charged to those accounts. Also, costs like training or attending conferences should be charged to the accounts based on the departments of the employees that attended the conference or event.
Purchases and ongoing payments made by your company to run your business and generate revenues are represented in the COA as expense accounts. Most businesses have utilities, taxes, wages, and rent documented as expenses. These expenses belong in the General and Administrative areas.
SaaS organizations should also expect to include subaccounts to capture sales, marketing, research, and product development. Finally, a General and Administrative (G&A) section is needed as a catch-all account for all other expenses.
A properly organized chart of accounts for SaaS companies can bring significant clarity to an organization’s finances. It can also tell a compelling story about the viability of your business, but only if the COA has the information that potential investors want to see.
Working with a proven expert like G-Squared Partners can streamline this process. As an experienced provider of outsourced CFO services, we’ve helped numerous SaaS organizations improve their accounting practices and organize their books.
G-Squared Partners is dedicated to helping SaaS companies like yours eliminate confusion around their finances. Our professionals are ready to partner with your team to build a better chart of accounts. Contact us today to discover how we can help you more accurately track and manage your company’s financial performance.