Startup Bookkeeping 101: Revenue

In today's post we will be going over the revenue section of the income statement. The focus will be on SaaS revenue using the accrual basis which was the subject of the previous post in this series.

The Basics

The image shown is a typical revenue section for a SaaS business selling licenses to three software systems. Each product is broken out into it's own line item making it easy to see at a glance how each segment is performing. The three items have also been grouped into a Subscription Revenue section allowing for a higher level review as needed.

Below Subscription Revenue there are three additional items. Setup Revenue is the amount charged for setting up a client's system. These charges are typically charged at the time of purchase and the revenue is recognized when the setup is complete. Not all SaaS businesses will need this line item as many are self serve from the client side. If you do provide setup services it is important to break these one time charges out so they are not intermingled with the recurring Subscription Revenue. The final two items are add-ons that clients can purchase. In this case the add-ons are not recurring charges so they are not included in Subscription Revenue.

Categorization

While the rules of revenue recognition are straightforward the presentation does require some judgement and can be adjusted to meet your needs. The first item to consider is granularity. How much detail do you need on the face of the P&L for it to be effective? Having a single revenue line give you a total but nothing else. 100 line items showing the revenue for each product specifically provides data but no information. We need to find a sweet spot between the two extremes so you can get a high level understanding of your results that is still comprehensive enough that you can see the underlying story.

Granularity is best addressed by consolidating line items. To do this we consider how distinct are your products. Let's say you sell your licenses in tiers. Tier 1 costs $120/year for one user. Tier 2 costs $360/year for four users. While these may be considered different products in your sales software for accounting purposes they can be combined into a single line item. The licenses are related to the same software offering so it makes sense to combine them for P&L purposes. For more granular detail your bookkeeper should be able to provide a supporting schedule breaking down the revenue by tier or license type but this level of detail is typically not needed for the high level financial review. In my experience SaaS businesses usually have a large number of individual SKUs but they all revolve around a few core systems and the P&L should reflect these core systems.

The next item to review is consolidation. Similar to how we grouped products into single line items based on the underlying software here we will group products into sections based on how they are sold. As shown in our example the most common section used in SaaS businesses is Subscription Revenue. Here every line item sold as a monthly or annual license can be grouped into a single category. Add-ons can be another section as can Service Revenue. These groupings are more flexible and will depend on your specific needs. Consolidating accounts in this manner allows you to minimize or maximize sections as needed allowing you to easily shift from a high level to intermediate level review. Please not not everything needs to be consolidated. In our example the add-ons were simply left as two line items because it may not make sense to group them into one section.

Once the granularity and consolidation issues have been discussed you should have a P&L that tells you what your revenue results were for a given time period in a way that aligns with how you view your business. The alignment is the ultimate goal here. These two considerations are based on your view of the business and are intended to make your life easier. If your P&L is making your life harder reach out to your bookkeeper to determine what changes need to be made. These are your financial statements. While there are standards we as bookkeepers must follow there is room for personalization we can explore.

Final Thoughts

One of the first things I do when adding a client is to evaluate if the P&L is providing the right information at the right level of detail for the client. This involves discussion with the client as well as the application of my own experience. The goal is not to record every transaction and call it a day. Instead it is to take your base transaction data and turn it into usable information. That is what you should expect from your P&L. If you are interested in learning how Woodham Bookkeeping can improve your quality of life by taking your data and turning it into a set of financial statements with actionable information please feel free to reach out via my contact form and we can schedule a time to discuss your specific needs.