Challenges In the Software Industry
3 Common Software As A Service Accounting Challenges
While the COVID-19 pandemic has proved disastrous for even the most resilient enterprise organizations, Software as a Service (SaaS) companies have seen enormous growth in the last few years. Research shows that the Compound Annual Growth Rate (CAGR) of the SaaS market for business applications is 16.4% between 2017 and 2022. Roughly translated, this means the industry has grown by $50 billion in just five years.
In this increasingly digital world we live in, SaaS companies are thriving and going public faster than ever. But this kind of rapid growth can put pressure on weak accounting systems, which in turn threatens the entire business operation. In this blog, we’ll explore common Software-as-a-Service accounting challenges and discuss key components of an agile SaaS accounting system.
Unique SaaS Accounting Challenges
While every industry has challenges when it comes to finance and accounting, software as service companies have unique challenges that are intrinsic to the industry.
The main difference between SaaS and other tech companies is that SaaS organizations offer an intangible product. As opposed to a physical piece of software, SaaS companies generally host an application and make it available to customers through the cloud. Because there is no tangible exchange of goods between business and client, taxes are calculated based on services provided. This is why accurate accounting is critical for SaaS organizations. Let’s take a look at some of these accounting challenges in detail.
Revenue Recognition
Recognizing revenue continues to be one of the greatest challenges for SaaS companies. The Financial Accounting Standards Board (FASB) requires SaaS companies to recognize revenue over the contract term, whether the service is paid for upfront or over a period of time. Profit and loss (P&L) statement becomes more difficult to prepare as your business must recognize revenue on your recurring and professional services. Flexible subscriptions, customized contracts, and various reporting mechanisms can make this challenging process even more burdensome.
Managing Expenses
Similarly, SaaS businesses must document various expenses and decide which of these expenses can be recognized immediately and which must be amortized. Because customer-related expenses are service-based, knowing your cost of goods sold in relation to your customer lifetime value is essential. SaaS companies must carefully document expenses when they occur and differentiate between deferred and incurred expenses.
Preparing for IPO
Mindfully documenting financials is not only important for smooth business operations—it allows potential investors to peer inside at the inner workings of your company. If your SaaS business is looking to raise capital or exit, lenders or investors want to see accurate and detailed reporting. Businesses need to show that they have the proper accounting systems in place through GAAP or IFRS financial statements, audit trails, and other system controls.
Other Challenges
SaaS companies have various accounting concerns to contend with including collecting sales tax, managing a variety of services, and overseeing cost centers. Simply put, managing finance and accounting in the software as a service industry is not an easy feat, and cutting corners could land your business in hot water.
For these reasons, it’s crucial for growing SaaS companies to implement the best accounting software. The right enterprise resource planning (ERP) system can help your SaaS business overcome common accounting challenges and capitalize on success. Below we’ll explore key features of a complete accounting solution.
Key SaaS Accounting Software Features
Accounting software has been around for quite some time, but up until recently, digital accounting solutions were rigid in their application and required a lot of know-how to operate. Enter the ERP system.
An ERP system is a software solution designed to tie together day-to-day business operations with accounting and financial management all in one streamlined platform. There are several ERP systems designed specifically for the SaaS and tech industries with unique features which include:
- Financial and accounting compliance and revenue recognition functionality (specifically for ASC 606 and IFRS 15 standards)
- Subscription and recurring billing management
- Streamlined reporting features
- Advanced control designed to expedite the auditing process
Modern accounting software enables SaaS providers to connect disparate systems and streamline finance and account management by automating manual tasks and organizing reports, allowing your software as a service company to scale up with confidence.
But with so many best-in-class ERP accounting software solutions on the market, how do you know which one is right for your business?
Best ERP for SaaS Companies
There are many end-to-end accounting software solutions to choose from. Some of the best and most capable SaaS ERP systems include Sage, NetSuite, and Microsoft Dynamics.
Sage Intacct
Sage Intacct is a cloud ERP system specializing in accounting and financial management. Sage Intacct is known for its powerful accounting capabilities, with built-in features specifically designed for SaaS organizations. Complete with customizable workflows, instant reporting dashboards, and financial metrics tracking, Sage Intacct will help your SaaS business keep up with rapid growth. Sage Intacct is a great option for small to mid-sized companies who want to modernize their finance and accounting management.
NetSuite
NetSuite is perhaps the most well-established ERP system on the market, and for good reason. Over the decades, NetSuite has made a name for itself by providing critical accounting functions, customer relationship management (CRM), and human capital management (HCM) features. NetSuite’s SaaS accounting solutions include global financial management, recurring revenue management, and billing management across multiple revenue streams. NetSuite is considered ideal for mid to enterprise-level organizations looking for a complete business management solution.
Getting Started with ERP+
Choosing the right accounting technology is essential to the growth and success of your software as a service business. At FRC, we specialize in helping you select and implement business software solutions that meet your unique business needs. Contact our team of software solutions experts to find the optimal accounting management solution for your business.