To the customer or even the executive, a business can be many things: a product, a brand, a mission statement, a vision. But to an accountant, a business is nothing more than numbers preserved in a collection of hundreds, or even thousands of ledgers.
Though not a romantic notion, it is exactly because businesses amount to numbers sorted into balance sheets and income statements that businesses can pursue global opportunities.
Everyone is playing by the same universal accounting rules, making ledgers a common tongue spoken by finance teams worldwide.
For SaaS businesses, this language of numbers has become complicated. Whereas software sales in the 80s and 90s were entered once on the balance sheet, the modern software customer is charged monthly fees.
The modern accountant is then left sorting through the mess of recurring financial transactions—countless debits and corresponding credits to ledgers and a rigorous set of compliance standards that direct what must be done with them.
The proliferation of subscriptions for software has made the task of accurately maintaining ledgers by hand basically impossible.
The solution of course, is to automate.
Subscription billing software with accounting ledger support automates the onerous task of bookkeeping to provide accountants with some much-needed relief. These platforms automatically use transactional data to produce the clean, accurate ledgers necessary for sound accounting.
The perils of manual accounting for SaaS
A thriving SaaS business can easily generate well over a million journal entries in a single month. Faced with this insurmountable task of wading through data, accountants working with manual and inefficient legacy billing systems have little choice but to take shortcuts.
For example, rather than composing ledgers that feature the depth and breadth of a nuanced transaction history, they may instead be forced to make a generalized statement—recording how much money was made without having the ability to back that claim up.
While the figures generated by this approach may or may not work internally, they definitely won’t cut it with an auditor.
Though only 1% of businesses are audited each year, red flags will increase the potential of receiving that dreaded notification. And because SaaS businesses face very complicated compliance standards, errors are common.
When the auditor does show up, she’ll be looking for information a manual system likely can’t provide.
For example, the auditor might want to see how a specific invoice for a specific client on a specific month contributed to total revenue.
This is information that’s easily retrievable with subscription billing software, but possibly non-existent through manual processes.
If your accounting system couldn’t stand up to that level of scrutiny, you aren’t alone. About 66% of recently surveyed businesses reported feeling at-risk because of mismanaged accounting information.
The right tools make these risks go away.
Not only does subscription billing software handle your numbers more thoroughly and accurately, but it also integrates with your accounting software, automatically feeding data into your month-end closing process.
Your numbers look better, the IRS stays happy, and your accountants get to stop pulling their hair out.
Adaptive subscription billing software ensures GAAP compliance for SaaS
When software sales occurred on a one-time basis, revenue recognition was simple. A business could accurately claim money from a sale the moment the customer left the store.
With a subscription-based system, things are considerably different. SaaS businesses may receive money on the first of the month from a subscription customer. However, they can’t accurately claim to have earned it all until after the service period has ended.
This complication is due to ASC 606.
- ASC 606 is a GAAP update that standardized the way businesses recognize their revenue.
- ASC 606 emerged to account for gaps in the revenue recognition process that led to certain business sectors recognizing revenue differently than others.
- The essence of the current guideline is that revenue cannot be recognized until the customer has received the full value of their service.
For SaaS businesses operating on the subscription model, this can make the accounting process very complicated. Not only do your books need to account for the difference between earned and deferred revenue, but they also need to be able to track discounts, cancellations, refunds, etc.
Modern subscription billing software breaks all relevant data into distinct parts to remain in compliance with the ASC 606 standard. Your finance team can track recognized revenue down to the product level by general ledger (GL) code in alignment with accounting ledgers.
This granular tracking of revenue enables them to know exactly:
- how much revenue is recognized by your business, and
- for which products specifically.
Not only does this level of revenue clarity bring your compliance and the quality of your data integrity up to the standards of the IRS, but it also provides your business with a much clearer understanding of your operations.
The right billing FinTech is an accounting asset
Naturally, accounting compliance is an important aspect of your basic financial operations. However, it’s not the only reason to keep accurate books. The data integrity that comes with modern subscription billing software comes with many benefits.
- Empowered accountants: Accountants that don’t have to worry about entering a million or more ledger entries a month (phew!) have more time on their hands. Time that may be used on tasks that deliver more value to your business.
- Business insights: Granular real-time financial data has the benefit of providing key insights into the effectiveness of your RevOps, as well as the overall health of your business. Financial data helps with risk avoidance and provides information that can shape future decisions.
- Revenue leakage avoidance: Clean earned and deferred revenue tracking can help prevent revenue leakage. For example, if a customer cancels in the middle of a billing cycle, your detailed ledgers will indicate how much of their subscription fee you earned so that you don’t lose money to an inaccurate refund.
- Accountability: Clean, accurate books can also help you detect internal mistakes or misdoings—a phenomenon that costs businesses approximately 5% of their revenue each year. Early detection not only mitigates loss but also helps businesses avoid IRS penalties and public scrutiny.
Modern recurring billing software isn’t really optional anymore for SaaS businesses working under the subscription model.
In the SaaS world billing automation is critical to revenue operations and risk mitigation making the accounting team a revenue partner.