The Beginner’s Guide To Creating A SaaS Income Statement
When it comes to running any type of business, one of the most important things is to understand where your money is coming from and where it is going.
This is especially true if you’re running a SaaS company, as you’re relying heavily on subscription revenue. That means you need to constantly monitor customer retention and churn.
That’s why it’s important to create a SaaS income statement that can help you keep track of these trends and make informed decisions about the future of your business.
In this guide, we’ll cover what is a SaaS income statement, why you should have one, and how to create yours.
So let’s get started.
What Is A SaaS Income Statement?
A SaaS income statement is a financial report that shows how much money the company is bringing in and where it’s going. It is also sometimes called a profit and loss statement (or P&L statement, for short).
This statement includes revenue and costs, such as salaries and software expenses. We will discuss these costs and sources of revenue in more detail later.
Income Statement VS Cash Flow Statement
It is important to note that an income statement is different from a cash flow statement, even though they both measure the financial performance of your SaaS business.
A cash flow statement measures how much money has been coming in and out of the company over the last few months or years. This means it includes investments, loans, and other transactions that don’t appear on the SaaS income statement.
Income Statement VS Balance Sheet
The SaaS income statement is also different from the balance sheet. The balance sheet provides a snapshot of the company’s overall financial health based on assets, liabilities, and equity at any given point in time.
While the SaaS income statement shows revenue and expenses over a period of time, the balance sheet displays only current data (usually at the end of each fiscal year).
Why You Need A SaaS Income Statement
Right off the bat, we’ve been mentioning that an income statement can help you monitor your SaaS company’s financial performance.
But there are more specific reasons why SaaS companies should have an income statement. Here are a few important reasons why:
It Makes It Easier To Spot Financial Trends
A SaaS income statement is a snapshot of your company’s performance over a certain period of time. This allows you to easily spot trends in your SaaS revenue, costs, and profits.
For example, if you notice a decline in SaaS revenue month-over-month, you’ll know that something is wrong and be able to address the issue quickly.
What’s more, you will also be able to see in which specific areas you are overspending or are not earning enough revenue.
It Allows You To Make Informed Financial Decisions
An income statement also provides valuable information about your SaaS company’s performance over time.
This allows you to make strategic decisions based on the data in front of you, such as adjusting prices or changing marketing strategies.
It Helps You Attract Investors
Finally, an income statement can be used to attract potential investors. Venture capitalists will want to understand the SaaS company’s financial performance before they invest their money.
Having a SaaS income statement on hand will make it easier for them to analyze your SaaS company’s profitability and decide whether or not to invest.
What To Include On Your SaaS Income Statement
Now that we know why SaaS companies need an income statement, it’s time to start creating yours.
To do that, you should know what you need to add to your SaaS income statement.
Here are some general guidelines for what should be included:
Your SaaS income statement should include all sources of revenue. SaaS businesses, in particular, can have more than one source of income.
Let’s talk about these possible sources of revenue:
What makes the SaaS business model unique is that it usually brings in a recurring revenue stream.
While more traditional businesses only receive a single payment for each purchase, SaaS companies receive recurring monthly or yearly payments from customers.
In this section, you record your monthly recurring revenue (MRR) or annual recurring revenue (ARR), depending on the scope of your income statement.
Now, deferred revenue can be a bit tricky to understand. This is the revenue that SaaS companies have received but haven’t yet earned.
For example, let’s say you closed a contract worth $12,000 for a one-year subscription. Even though you’ve already received the full $12,000, you still haven’t provided the services for the full year.
As a result, you won’t be able to recognize all of that amount as SaaS revenue just yet. You will need to recognize that $12,000 over the course of one year and list it as deferred revenue until you finish providing those services.
For instance, imagine that you closed that $12k deal in January. Since it is a one-year subscription, you will only have $1,000 (1/12 of the $12k) of recognized revenue in January. Then you will recognize another $1,000 in February, and so on—until you’ve recognized the full $12,000 in December.
But deferred revenue still gives you cash. So you would still need to account for it, right? How does that add up?
Well, you will need to record your deferred revenue as a liability on your balance sheet.
This means that you would have to record the full payment as cash. And cash, whether earned or unearned, is an asset.
But you also need to include the deferred revenue as a liability until the contract or subscription cycle is fully completed.
Now note that, technically, deferred revenue is still subscription revenue. So you may choose to add it to your existing subscription revenue in your income statement.
Revenue From Professional Services
Aside from providing subscription plans to your customers, you may also offer paid professional services. These could include implementation, customization, onboarding, and priority customer support.
While most SaaS businesses offer these professional services for free, others may also charge for them, especially if they cater to large enterprises with special needs.
If your SaaS company does offer paid options for these services, then you would need to record that revenue on your income statement.
Revenue From Hardware Sold (If Applicable)
Some types of SaaS products may also need a physical device in tandem with the SaaS solution.
For example, SaaS products for the Internet of Things (IoT) or point of sales (POS) usually require some kind of hardware or physical device.
And if you are offering that hardware, then you need to include the income it generates in your SaaS income statement.
Other Sources Of Revenue
SaaS businesses can also generate other types of revenue. This could be from the sale of digital products, advertising revenue, or commissions from partner programs.
If any of these apply to your SaaS business, then you need to add them as well.
2) Cost Of Goods Sold (CoGS)
Once you have included all of your SaaS revenue sources, then it’s time to input the cost of goods sold (CoGS). This will be any expenses that are related to producing and delivering your SaaS product.
Here are some of the most common SaaS CoGS:
Your SaaS application requires a server and hosting, so this will be one of your biggest CoGS.
SaaS companies typically pay a monthly or annual fee for the server space, so make sure to include it in your SaaS income statement.
If you are outsourcing or hiring a DevOps team, then their costs need to be included in your SaaS income statement too.
This could be the cost of SaaS-specific tools, licenses for security and monitoring software, etc.
Customer Support Costs
If you have a team of customer support representatives, then their salaries, bonuses, and benefits should also be included as part of your CoGS.
In addition, you may also incur other customer support costs, such as fees for live chat software or other solutions you use for your customer support processes.
Customer Success Costs
Customer success teams are responsible for helping your customers reach their goals using your SaaS product. This is one of the most important ways for you to improve customer retention.
Make sure to include salaries, bonuses, and other costs related to these teams in your SaaS income statement.
Professional Service Fees
If you outsource some of your SaaS services, such as development or customer support, then you need to include the cost of these services in your SaaS income statement.
This could include fees for consultants, freelancers, and other external service providers.
Hardware Costs (If Applicable)
For SaaS products that require physical hardware, you need to list the cost of manufacturing and shipping those devices on your SaaS income statement. This should also include any storage costs for those devices, if applicable.
3) Gross Profit & Gross Margin
Once you have entered all of your SaaS revenue sources and CoGS into the SaaS income statement, then it’s time to calculate the gross profit and gross margin.
The gross profit is simply the total SaaS revenue minus the total cost of goods sold (CoGS).
For example, if your SaaS company had $100,000 in revenue and $30,000 in CoGS, then your gross profit would be $70,000.
Gross margin is a measure of how efficient your SaaS business is at generating profits from its sales. You can calculate it by dividing the gross profit by your total revenue.
In our example above, the gross margin would be 70%, which indicates that for every dollar of SaaS revenue generated, 70¢ in profits are kept by the company.
4) Operating Expense (OpEx)
The next step in creating your SaaS income statement is to add up all of the operating expenses.
OpEx includes all costs related to supporting your infrastructure, growth, and continuous development of your SaaS business.
Here are some of the most common SaaS OpEx:
Research & Development (R&D) Costs
Any SaaS business needs to invest in research and development, so it’s important to include this expense in your SaaS income statement.
This could include salaries for software engineers and designers, as well as fees for any software or tools used during the R&D process.
If you have a big spend on R&D, you may also choose to amortize it over a period of time instead of accounting for it as an upfront cost.
R&D amortization is an accounting method used to spread the cost of SaaS product development over its useful life.
For example, let’s say that your SaaS business spends $100,000 on developing a new product feature. Your SaaS income statement should include an R&D amortization expense of $20,000 each year for the next five years.
Marketing is a key component of SaaS success, so make sure to include any marketing expenses in your income statement. This could include anything from advertising costs to the salaries of any marketing professionals or agencies you hire.
You will also need to account for the fees you pay for any marketing software you may use. This could include email marketing solutions, social media marketing tools, or SaaS-specific marketing solutions.
For SaaS companies that have an active sales team, their salaries, commissions, bonuses, and associated costs should also be listed on your SaaS income statement.
Moreover, this will also include license fees for any sales-related software, such as customer relationship management (CRM) platforms, sales automation tools, or sales enablement solutions.
General & Administrative (G&A) Costs
G&A expenses are the costs of running your SaaS business on a daily basis.
This could include the following:
- Accountant fees
- Office supplies
- Rent for office space
- Internet bills
- Payroll taxes
- Insurance premiums
- Legal services
Depreciation is the reduction in the value of an asset over time due to use, wear and tear, or obsolescence.
If you have any SaaS assets that depreciate over time (such as servers or other hardware) then these costs should be accounted for on your SaaS income statement.
For example, imagine that you purchased servers for your SaaS business at a cost of $100,000. Let’s say that, over the course of 5 years, the value of these servers would depreciate to zero.
So you would need to include a depreciation expense of $20,000 each year on your income statement.
5) Non-Operating Expenses
Non-operating expenses are the costs associated with activities not directly related to SaaS operations.
Here are some common SaaS non-operating expenses:
Taxes should be included in your SaaS income statement.
Depending on the country or state you are operating in, this could include the following taxes:
- Sales Tax
- Corporate Tax
- Property Tax
- Income Tax
- Use Tax
Interest (If Applicable)
If you have any loans or credit lines associated with running your SaaS business, then the interest expense from these should appear in your income statement.
For example, if you have a loan with an interest rate of 5%, then your SaaS income statement should include the amount of interest paid to service the loan.
6) Net Income (Profit)
Net Income is the SaaS business’ total after-tax profit or loss. You can calculate it by subtracting all expenses from revenues (including taxes).
For example, if your SaaS business earned $120,000 in revenue and had total CoGS, OpEx, and non-operational expenses amounting to $60,000, then your SaaS business’ net income would be $60,000.
7) EBIT (Operating Income)
EBIT stands for “Earnings Before Interest and Taxes.”
Your EBIT is your operating income. In other words, it can indicate the performance of your core business operations regardless of your capital structure or tax situation
To calculate your EBIT, simply subtract your total CoGS and OpEx from your total revenue.
For example, if your SaaS business earned $120,000 in revenue and had total CoGS and OpEx of $50,000, then your EBIT would be $70,000.
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.”
EBITDA is similar to EBIT in that it measures the performance of your SaaS business operations. However, this metric also takes into account depreciation and amortization costs.
Most investors look at EBITDA when valuing SaaS companies, as it gives them a better understanding of the company’s financial performance regardless of one-time expenses or costs affected by circumstance.
To calculate your SaaS business’ EBITDA, add depreciation and amortization costs back to your EBIT.
For example, if your SaaS company earned $70,000 in EBIT and had depreciation and amortization costs of $10,000, then your EBITDA would be $80,000.
Or you could simply add back your interest, taxes, depreciation costs, and amortization to your net income.
Final Thoughts About Creating Your SaaS Income Statement
Creating a SaaS income statement is an essential step for SaaS businesses.
By understanding and tracking your SaaS business’ expenses, revenues, and net income, you can get more insight into the performance of your SaaS business.
Moreover, by calculating metrics like EBITDA and Net Income, you can determine how well your SaaS company is performing relative to other SaaS businesses in the industry.
With the information provided in this article, you should now have a better understanding of how to create a SaaS income statement that can help you track and analyze the financial performance of your SaaS business.
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