SaaS Finance Mistakes in Growing Startups

The way businesses handle money is rapidly changing.

Expenses are increasing, business models are getting more complex, and revenue streams are diversifying. 

One of the leading problems CFOs face nowadays is cash flow management, yet only 28% of business leaders believe that better financial insight is necessary to recuperate their business.

With so many things to keep up with, it’s no wonder that financial mistakes are so common in SaaS. 

As they say, being aware of the problem is the first step into fixing it. 

Let’s look at how you can improve your financial health by learning about some financial mistakes commonly made by growing businesses. 

Failing to Create a Proper Budget

Creating a budget means taking control of your funds. 

If you don’t have a good budgeting plan, you’re risking distributing money to the wrong departments, impacting the company’s overall productivity and profitability. 

You’re also gambling with the possibility that you’ll run out of funds faster than you anticipated. 

For a growing business, running out of money is the worst fate imaginable. 

Your first step is to set up an annual budgeting plan. Tracking your spending annually is the best option because it can overlap with financial reporting and accounting. 

Look at current goals and benchmarks for each of your departments and their estimated spending. 

Each department should have a set of goals that are in line with the company’s strategic annual objectives. 

What can each team go without? 

Think about which sacrifices you can make to cut costs, but not at the expense of efficiency. 

When you set a limit, your managers know how much resources they have at their disposal, so they don’t feel pressured to work with less in order to achieve the desired performance. 

You should be strict with your budgeting and avoid relocating resources from one department to the next.

For example, if you notice your Sales and Marketing department spend more during some months, you shouldn’t add more to them from other departments. 

Going over budget can indicate hidden issues, particularly in terms of management. 

Budgeting should be transparent, so everyone knows the company’s financial goals and limits. The most efficient companies continually review how their budgeting affects goal achievement. 

Set an achievable target for allocating your funds to different departments and look where you can cut costs. 

Not Utilizing a Functional P&L

Include all the essential information in your Profit and Loss Statement. 

The Profit and Loss statement is an overview of revenues and expenses that happened during a specific period. This information shows the company’s ability to generate revenue. 

Some refer to this report as an income statement or a statement of operations. 

It is used for business analytics, loan financing, and attracting potential investors. 

Practices vary between companies, but you have to structure your Profit and Loss Statement in a way that makes sense for your business. 

To adequately structure your P&L statement, you need the following categories: 

• Revenue—sales broken up by specific product or service
• Cost of Revenue—expenses for maintaining the service, employee costs, and technology infrastructure. 
• Gross Profit—Revenue minus COR. 
• Operating costs—operating expenses that include product development, sales, marketing, and admin
• Net profit—operating profit minus other expenses
• Other expenses and income 

When you structure your P&L you can calculate relevant metrics and margins. 

This report stays the same throughout the company’s growth, yet it can help you track and analyze past operating metrics, see your present status and prepare you for future revenue forecasting. 

DIY Accounting 

Don’t do your accounting on your own to manage your finances. 

You’re not going to save money nor time if you don’t implement efficient processes for your growing business. Accounting software can sometimes be difficult to navigate if you don’t know what you’re doing. 

You’ll have to learn everything from scratch, which will impact your overall business operations. 

The next thing to keep in mind is how much you know about law requirements and tax compliance. 

Policies change frequently, and you can’t keep up with that and run your company simultaneously. 

Even if you do all your research, chances are you’re going to mess up something. When you mess up your taxes, you can pay a lot more than what you owe. 

General advice is this: 

Unless you have some background in bookkeeping, consider hiring an expert or invest in good software (that someone else will handle). 

When you choose an accountant, look for someone familiar with the SaaS business model. 

Because it is subscription-based, many things are different from traditional accounting, and your accountant should have experience with SaaS.

A trained professional equipped with efficient technology can do wonders for your business. 

Your financial reports will be more accurate, and that will help you make important investment decisions or show current investors how your company’s doing. 

Not hiring a financial expert is not an option.

Using Cash-Based Instead of Accrual Accounting

Accrual accounting is more suitable for the SaaS business model. 

SaaS revenue is recurring, and payments are collected over different periods (monthly, annually, etc.). 

Add to that different subscription plans, e.g., usage-based or paid upfront, and managing finances can become highly complicated. 

The two models used for accounting are cash-based and accrual. The main difference between them is the timing of revenue recognition. 

In the cash-based method, you immediately recognize revenue and expenses, but with accrual, you only count your income once you’ve provided the service. 

In accrual accounting, you spread out your expected revenue for the duration of the contract. 

The cash-based method is more appropriate for small businesses and those dealing with physical goods. Accrual accounting is better suited for SaaS or any subscription-based business.

With accrual accounting, you have a better overview of your revenue and spending, as well as future trends. 

You’re also complying with GAAP and IFRS regulations, and you can provide clear metrics for your investors. 

Accrual accounting helps you look at all your assets and liabilities, which you can’t do with the cash basis method. 

Not Having the Right Chart of Accounts 

Take control of your finances by correctly categorizing your transactions with a chart of accounts. 

By properly using the chart of accounts (COA), you can easily make important financial statements. The level of detail depends on your business needs.

The SaaS chart of accounts is quite different from other industries because it needs different categories for new types of transactions—for example, the deferred revenue category. 

To structure your SaaS chart of accounts, think about including the following elements

• Account names—describes transactions.
• Account types—five basic types are assets, liabilities, equity, revenue, and expenses.
• Account numbers—each transaction has a unique number that gets sent to the correct account. Using more digits helps you add more accounts in the future (choose between 4-7 digits)

Here is an example of a SaaS chart of accounts.

Generating reports based on a well-structured chart of accounts will be easier and clearer. 

Billing Customers Only Monthly Instead of Annually 

You should bill your customers annually if possible. 

Most SaaS companies often rely on common trends and what their competitors are doing. 

Those strategies can be acceptable for a startup, but you should reconsider your options once you start to grow. 

What are the differences? 

Monthly billing plans charge customers every month, while annual billing plans charge them once a year from the date when the contract started. 

Choosing which plan to implement depends on your customers. 

However, giving them options is necessary to bring as many customers as you can, but for B2B SaaS, it is better if you switch to annual billing. 

With an annual billing plan, customers are locked in a long-term cycle, and churn rates are generally lower than monthly billing plans, where customers can cancel at any time. 

Also, it’s inconvenient for larger B2B companies to use monthly billing plans as it might interfere with departmental budgeting. It also makes payment tracking more complicated. 

Other benefits to annual billing include: 

• Upfront payment improves cash flow
• Increases predictability of revenue
• Discounts for a yearly commitment
• Less financial reporting (one invoice per year)
• Reduces accounting costs

If you want to scale your business and cater to larger customers, annual billing is the best option. 

Improper Revenue Classification 

Mixing financial terms is a common financial mistake with larger consequences. 

Sometimes people use terms that mean different things interchangeably. 

The two main areas of confusion in SaaS finance terms are the difference between bookings and revenue, and recording one-time revenue and recurring revenue. 

Bookings indicate the value of a specific contract. They shouldn’t be counted as revenue, but simply a visual representation of the market’s response to a company’s product. 

In other words, they measure the customer’s initial commitment to your business. 

Revenue is income earned after you have provided a service based on a signed contract or subscription plan. 

After each month you deliver on the agreed terms, you can count the revenue for that month as income. 

For example, if a customer signs up for a six-month plan worth $600, your bookings will count the value of that contract as $600. 

However, your revenue will only be recognized after each of those six months passes, actually generating $100 per month. 

Next, we come to the difference between recurring revenue and non-recurring revenue. 

Recurring revenue is income generated by subscription plans in which customers regularly pay for a service (monthly, annually, etc.).

Non-recurring revenue is a one-time payment for a service. 

The definitions are clear, but the problem comes when SaaS companies put both of these revenue streams under the same category, which is a big mistake. 

They should be categorized separately because recurring revenue also impacts other metrics, like: 

• Customer LTV
• Customer Acquisition Cost (CAC)
• Churn rate 
• Revenue and cash flow forecasting 
• Company value judgment

When you are aware of the distinction between those terms, you can accurately manage your finances and make fewer mistakes. 

Assuming 100% Quota Attainment 

Never count on fulfilling your sales plan entirely. 

To show you what we mean by that, first, we need to make a distinction between a sales plan and a budget. 

Your business should have a planned strategy for an upcoming period. It should outline overall functions and operations as well as market changes and predictions. 

Things you can include in your sales plan are:

• Pricing
• Predicted costs
• Economic assumptions (state of the market) 
• New product releases
• Investment plans 
• Competitors (old and new)

Your sales plan helps you understand your current position and the goals you want to achieve in a specific period. Account for unexpected changes and risks for growing your business. 

One benefit of a comprehensive sales plan is that everyone in the company has a good reference point for decision-making and planning. 

Then there’s the budget. 

We’ve already outlined the benefits of having a budget in a previous subsection, but budget is a micro analysis of available resources and forecasting expenses. 

It should count for recurring costs and unexpected expenses like employee turnover, customer acquisitions, and price increases. 

The problem happens when companies set their budgets against their sales plans and expect that they will be completely fulfilled. 

This information can only be used as a baseline performance since the market and business operations change quickly. 

Only by regularly updating your sales and budget plans can you explain increases and decreases each month and see trends over a longer period. 

Nevertheless, there will never be a 100% match between your assumptions and predictions, and your team’s actual achievements.

Align your sales team with your finance team to get to your predicted quota as close as possible. 

GAAP Non-Compliance 

Track the right metrics to comply with GAAP guidelines. 

SaaS companies usually track different metrics to measure performance than required by typical GAAP guidelines.

While private companies are not obligated to operate by GAAP, investors and acquiring companies use GAAP to evaluate SaaS businesses. 

This can make the negotiation and investments a bit difficult. 

Apart from tracking your typical SaaS metrics, look into tracking GAAP-approved metrics such as profitability, MRR, CAC, and growth. 

When you calculate your MRR, you should also include numbers of canceled subscriptions before submitting your revenue calculation. This new metric is called Committed Monthly Recurring Revenue (CMRR).

Investors like a quick return, so accurately measuring your CAC can be crucial. You can’t afford a long payback period, and your investors won’t be too thrilled either. 

If you don’t see any profit from your customer within a year, you should reconsider your acquisition strategy. 

Growth is probably the most essential metric in the startup world.

Investors like seeing a positive performance, indicating a good positioning in the market or even rising to the market leader status. 

All previous metrics contribute to profitability, which is the first thing potential investors will look at.

There are three metrics you can use to present it and comply with GAAP:

• Per customer profitability—measure your CAC with customer LTV. General advice is to have 3x LTV than your CAC. 
• Overall profitability
• Profitability per employee—used for comparison in the industry. Divide expenses by the number of employees. 

If you want to be acquired or raise another round, look into how your financial metrics can comply with GAAP. 

Disregarding Retention Trends

Efficiently track retention trends to make better financial decisions. 

Customer retention is the company’s ability to entice customers to continue doing business with them. This metric shows churn, retention rates, and acquisitions during a specific time. 

Like with other metrics, there are specific trends you can measure by accurately tracking customer retention. These trends indicate how your decisions affect your business.

For example, how customers responded to changes in the sales process or onboarding strategy. If your customers churn, it might be time to reevaluate your strategy. 

Most importantly, retention shows customer’s satisfaction with your company and products. 

The benefits of a good customer retention rate include increased ROI, increased revenue, and spending less on customer acquisition. 

With continual customer retention analysis, you’ll better understand how churn affects your bottom line and when customers are likely to churn.

Disregarding retention trends means neglecting how to improve your business operations. 

Failing to Track the Right Metrics 

The right metrics will show you how healthy your financial state is. 

We’ve already mentioned some metrics to track to comply with GAAP, but there are also other metrics that you can track for your business forecasting and decision-making. 

Aside from measuring MRR, you should also track ARR.

 Investors and creditors prefer the ARR metric, which better shows a company’s profitability in a fiscal year. Your ARR is just 12x MRR. 

Next, look into your burn rate. 

It’s a measurement of how much time you have until you no longer have funds to support your business. You need to subtract expenses from your received income to calculate it. 

After that, calculate your churn. 

You should also include atypical churns, such as customers leaving because of poor product fit. 

Everything counts towards your overall churn rate, and only with an accurate view of churn can you have an accurate performance report. 

Last on your ‘’metrics to track’’ list is the NPS (Net Promoter Score). 

Many believe this is an outdated metric and regard it as very subjective and therefore inaccurate. 

Nevertheless, it is valuable because it is closely connected to customer acquisition and retention. 

It may not show you actual numbers, but it can be another indicator of how successful your business strategies are. 

Track metrics that will measure the real state of your business and help you forecast your growth. 

Failing to Account for Taxes 

Don’t forget about taxes when you report your finances. 

Taxes are a huge factor for calculating cash flow, yet they are generally not included in your P&L statement. 

Although they are a necessary part of business, many companies deal with them too late, leaving everything in the hands of their accountant.

When SaaS companies charge their customers monthly, but tax bills come quarterly or annually, problems can occur. 

This can result in significant tax bills before the company becomes profitable. 

Another potential problem lies in the fact that taxes aren’t the same in every country.

This is difficult to manage for global companies, but it can be an issue even for those who operate in a single country. For instance, the US tax regulations can vary from state to state. 

Moreover, governments are catching up with the market, accounting for software and digital products in their tax regulations. 

To better control your finances, you should make a separate tax plan and integrate it with your overall business plan. 

Not only will you analyze your company’s operations from a tax perspective, but you can also see where you can reduce your tax liabilities. 

In the long run, you can save yourself a lot of money. 

Don’t look at tax as a necessary evil, but instead consider it a helping hand in your business operations. 

You should strive to work within the legal framework, and if you can get some perks from it, why not use them? 

To better understand your profits, account for accumulated taxes you need to pay in different periods. 

Making Payroll Mistakes

Managing finances can be complicated if you make common payroll mistakes. 

Having employees means you have to track their schedules and pay them accordingly. This should typically be a straightforward process, but many SaaS companies make mistakes. 

One of them is clumping payroll accounts. You need to account for different departments and the number of employees in each, and the solution is to expand payroll accounts. 

Make different tabs for each department so you can account for different salary plans. This information is essential for expense forecast reporting, so you want accurate data. 

The second mistake that’s often made is improper worker classification. Companies sometimes have trouble labeling their employees as full-timers or contractual workers. 

Luckily, the US Department of Labour offers resources to determine how to classify your workforce correctly. 

To combat some of these and other payroll mistakes, you must invest in the right tools. 

Research some of the best SaaS payroll solutions that will help you manage your employee expenses. 

Consider products that can update important employee information such as schedules, wages, contracts, and vacation benefits. 

It is also important to be informed. 

Many payroll admins don’t have the correct information since laws are constantly changing. You must help them stay in the loop with proper training and providing resources. 

Payroll mistakes are avoidable if you know how to prevent them. 

Conclusion 

Financial mistakes can happen to anyone. Some of them are out of your control, and some you can tackle head-on if you know what you’re dealing with. 

As your business grows, you should be more experienced with handling finances, but don’t stress too much if you still make some of the mistakes outlined in this article. 

What’s important is that you learn from them so you can make better decisions in the future.