On this episode of SaaS Boss podcast I interview Katie Bronnenkant, consulting VP, Finance to startups. We discuss the major accounting and financing issues SaaS founders need to know about.
Katie helps early stage (Seed/Series A) SaaS companies leverage their own financial data to grow their business and raise from VCs.
How Katie started working with SaaS companies
She worked with the founder of Namely, an enterprise HR SaaS company in 2011. She was the first employee that they hired and she had to learn a lot on her own as there wasn’t much information on the internet at the time.
She worked with Namely for four years and she focused mostly on VC raises which gave her a lot of exposure to finance and accounting. Investors are very interested in your numbers so you have to prepare everything so that they would invest.
She raised about $150 million during that time period and eventually left Namely because she moved to Europe with her husband.
She started consulting for companies that are similar to Namely and she helps them with finance and accounting till this day.
Why your SaaS accounting system needs to be in order
She focuses on VC backed companies. They usually have already raised a seed round whether they have a little bit of revenue or some revenue.
Their accounting system needs to be in order because you have VC reporting. Companies that are VC backed have VCs that ask for financial reports.
She also does support raises and builds out models using the experience she has with VCs.
SaaS Accounting basics you need to know
You need to know your revenue and this can get very confusing. If you send an invoice for a full year, it looks like your revenue is in the month that you have it in but that is not accurate.
If you have an outsourced bookkeeper then you will need to provide information to them. You need to know what your MRR is, to do that you need to know what the closed one day is and what is the live date. If you closed a deal in January and the customer goes live on your service in March 1, then it is on the live date that the revenue will be recognized.
You also need to know how long the period is for, if it is a 12 month contract then you are going to divide it by 12. It is also possible to do it down to the day but it can become very complicated especially for an early stage company.
You need to keep track of the closed one data so that you can easily calculate your customer acquisition cost. Your customer acquisition cost is how much you are spending to get a customer, it doesn’t matter which day they go live instead you will look at the time the customer signed the contract.
You will sum up all the contracts that were closed in a particular period then divide it by the amount you spent on sales and marketing in the previous period.
You take your sales, marketing expenses and include salaries, commissions, advertising, events, software tools such as Salesforce, HubSpot and everything you are paying.
This information will make you know if your marketing and sales efforts are efficient. A lot of companies are not profitable in the first year. If the cost to acquire customers during the year is the same amount of revenue you get for the first year then you won’t be profitable.
Other important SaaS metrics you need to take note of
Gross margin is also very important. Gross margin is revenue minus direct costs or cost of goods sold or cost of sales or costs of revenue, it depends on the term you want to use.
The direct costs are things like hosting, customer support and any third-party software integration. This tells you how profitable your SaaS is, you are looking for between 70% – 90% to be considered in line with industry standards for SaaS companies.
How to create SaaS projections
There are a number of acceptable ways to create projections. She prefers to use sales or marketing as the top of the funnel, then you need to see how many leads you need to put into the resources to get a conversion of the projections that you want your revenue to get to.
If you are a B2C company you will use marketing to get your leads then you will start at the top of the funnel, how many visitors do you need to your website and how many signups for free trials do you need.
If you have a sales person and you want to close a $1 million by the end of the year, it means you will need to close about $83,000 monthly. How many deals do they have to close?
It may be possible or it may not be possible, you might also need to consider seasonality. A lot of companies close a lot in Q4 because if they are B2B the budgets renew in Q1.
You can simply use Excel or Google Sheets to do this.
The risks involved in ignoring SaaS accounting and finances
If you don’t spend some time on accounting and finances you could lose money or go out of business.
She worked with a company that worked with an outsourced bookkeeper for a few years. After she carried out an audit, it was discovered that the outsourced bookkeeper hadn’t invoiced about $50,000 in invoices because they weren’t following a system by going through all the accounts they should be invoicing each month.
Even though it was about a year old, they sent out about $50,000 in invoices and some of the customers paid immediately while other customers protested the invoice by saying they didn’t remember, they don’t know about it and other reasons.
At the end of the day, they lost about $25,000 which could have been avoided if they had spent a couple of hours each month to address this issues.
How to start learning finance and accounting for your SaaS company
Finance and accounting is your friend; it is not as hard as it appears to be. She started working in finance and accounting without having any SaaS finance and accounting experience. She learned just by reading and looking things up especially reading annual reports and making some mistakes in the process.
You can find almost anything you need to know on the internet, so you should spend a couple of months to make sure that your stuff is in order.
Google Sheets – Create and edit spreadsheets online for free
Microsoft Excel – Spreadsheet software
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