{"id":26796,"date":"2023-08-30T11:24:16","date_gmt":"2023-08-30T16:24:16","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=26628"},"modified":"2025-09-05T05:42:41","modified_gmt":"2025-09-05T10:42:41","slug":"saas-accounting","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/","title":{"rendered":"SaaS Accounting: Bookings, Billings, Revenue, Deferred Revenue, and Accounts Receivable"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">SaaS Accounting: Bookings, Billings, Revenue, Deferred Revenue, and Accounts Receivable<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/#SaaS_Accounting_Part_1_Bookings_vs_Billings_vs_Revenue\">SaaS Accounting, Part 1: Bookings vs. Billings vs. Revenue<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/#SaaS_Accounting_Part_2_Simple_Excel_Schedule\">SaaS Accounting, Part 2: Simple Excel Schedule<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/#SaaS_Accounting_Part_3_Accounts_Receivable_and_Deferred_Revenue\">SaaS Accounting, Part 3: Accounts Receivable and Deferred Revenue<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/#SaaS_Accounting_Part_4_3-Statement_Model_Example\">SaaS Accounting, Part 4: 3-Statement Model Example<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>SaaS Accounting Definition:<\/strong> Software-as-a-Service (SaaS) accounting rules explain how common line items, such as revenue, deferred revenue, and accounts receivable, change as a software company bills customers, collects cash, and delivers services.<\/p><\/blockquote>\n<p>Many people incorrectly think that a SaaS company \u201conly\u201d has Deferred Revenue (DR) to reflect the cash collected from customers but not yet recognized as revenue.<\/p>\n<div class='code-block code-block-9' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22172829\/vc-tile.png\" alt=\"Venture Capital & Growth Equity Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Model and Value Startups, Understand Cap Tables, and Prepare for VC Interviews<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Evaluate companies and deals like a pro<\/h4>\n              <p>You\u2019ll understand cap tables, startup\/growth valuations, and exits<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Master financial modeling<\/h4>\n            <p>You\u2019ll build forecasts and analyze metrics for tech and biotech startups<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 9 case studies<\/h4>\n            <p>You\u2019ll learn the numbers and how to make investment recommendations\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/venture-capital-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Venture-Capital-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<p>But this is incorrect: SaaS companies have significant Accounts Receivable (AR) balances because it takes time to collect the cash, even after the customers have received invoices.<\/p>\n<p>When a SaaS company first issues an invoice to customers, its AR and DR balances both increase by the amount invoiced.<\/p>\n<p>As the company waits for the customer to pay in cash, its AR balance <em>for that one customer<\/em> stays constant, and when it finally collects the cash, the balance reaches $0.<\/p>\n<p>Meanwhile, the\u00a0<a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/deferred-revenue\/\">Deferred Revenue<\/a> balance decreases each month as revenue for the product or service is recognized.<\/p>\n<p>To explore these concepts in SaaS accounting, this written tutorial and video will walk you through revenue recognition and cash collection.<\/p>\n<p>Here\u2019s the Excel file and slide presentation:<\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Startups-VC\/SaaS-Accounting.xlsx\" target=\"_blank\" rel=\"noopener\">SaaS Accounting &#8211; Simple Model (XL)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Startups-VC\/SaaS-Accounting-Slides.pdf\" target=\"_blank\" rel=\"noopener\">SaaS Accounting &#8211; Presentation Slides (PDF)<\/a><\/p>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<p><strong>0:00:<\/strong> Introduction<\/p>\n<p><strong>1:26:<\/strong> Part 1: Bookings vs. Billings vs. Revenue<\/p>\n<p><strong>2:22:<\/strong> Part 2: Simple Excel Schedule<\/p>\n<p><strong>5:11:<\/strong> Part 3: Accounts Receivable and Deferred Revenue<\/p>\n<p><strong>9:05:<\/strong> Part 4: 3-Statement Model Example<\/p>\n<p><strong>11:05:<\/strong> Recap and Summary<\/p>\n<h2><span class=\"ez-toc-section\" id=\"SaaS_Accounting_Part_1_Bookings_vs_Billings_vs_Revenue\"><\/span><strong>SaaS Accounting, Part 1: Bookings vs. Billings vs. Revenue<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>Bookings<\/strong> represent the total contract value.<\/p>\n<p>So, if a customer signs a 3-year contract worth $300, the Bookings for <em>just this customer<\/em> are $300.<\/p>\n<p><strong>Billings<\/strong> are based on when the customer receives the invoice, which could be once per month, once per year, once per 6 months, or any other frequency.<\/p>\n<p>If this same 3-year contract customer gets an invoice once per year, the Billings are $100 per year, and the company collects $100 in cash per year.<\/p>\n<p><strong>Revenue<\/strong> is based on the delivery of the product or service, so Monthly Revenue = Billings \/ Months per Invoice.<\/p>\n<p>In this same example, the Monthly Revenue is $100 \/ 12 = $8.3, and the Annual Revenue is $100.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"SaaS_Accounting_Part_2_Simple_Excel_Schedule\"><\/span><strong>SaaS Accounting, Part 2: Simple Excel Schedule<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To illustrate these concepts in Excel, we\u2019ll walk through a simple example of a customer contract worth $120 over 12 months with invoices 6 months apart and 3 months required to collect the cash for each invoice.<\/p>\n<p>We show the $120 in <strong>Bookings<\/strong> if we\u2019re currently in Month 0, when the contract is initially signed, or the start month of the next contract.<\/p>\n<p>We can check for this condition with the MOD function in Excel, which divides two numbers and outputs the remainder, which is 0 if the numbers are evenly divisible:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26694 size-full\" title=\"SaaS Bookings Formula\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/01-SaaS-Bookings-1.jpg\" alt=\"SaaS Bookings Formula\" width=\"2069\" height=\"714\" \/><\/p>\n<p><strong>Billings<\/strong> are based on a similar idea, but now we check the month number against the invoice interval, not the contract dates.<\/p>\n<p>We display the Billings only when the invoices are issued:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26695 size-full\" title=\"SaaS Billings Formula\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/02-SaaS-Billings-1.jpg\" alt=\"SaaS Billings Formula\" width=\"2051\" height=\"783\" \/><\/p>\n<p>We multiply the Total Contract Value by (Invoice Interval \/ Contract Length) because, for example, if the contract is 24 months and the invoices are 6 months apart, we need to divide the Total Contract Value by 4 to get the amount in each invoice.<\/p>\n<p><strong>Revenue<\/strong> is based on the product\/service delivery, so it is simple: Total Contract Value \/ Contract Length:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26696 size-full\" title=\"SaaS Accounting: Revenue Recognition\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/03-SaaS-Accounting-Revenue-1.jpg\" alt=\"SaaS Accounting: Revenue Recognition\" width=\"2074\" height=\"801\" \/><\/p>\n<p>This gets more complicated if the customer can cancel, upgrade, or change their contract, but it\u2019s fine for this simple example.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"SaaS_Accounting_Part_3_Accounts_Receivable_and_Deferred_Revenue\"><\/span><strong>SaaS Accounting, Part 3: Accounts Receivable and Deferred Revenue<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>It always takes companies time to collect cash from customers after they issue an invoice, so Accounts Receivable (AR) increases based on the invoiced amount when the invoice is first issued.<\/p>\n<p>It stays at that level and then reaches $0 when the cash is finally collected.<\/p>\n<p>To track the Accounts Receivable, we need to add a row in the Excel model for \u201chow many months have passed since the most recent billing\u201d:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26697 size-full\" title=\"Months Since Last Billing\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/04-SaaS-Month-Num-Since-Last-Billing-1.jpg\" alt=\"Months Since Last Billing\" width=\"2074\" height=\"794\" \/><\/p>\n<p>In the AR formula, we first check to see if the # of months since the last billing is less than the # of months required to collect cash from customers.<\/p>\n<p>If it is, it means the AR balance still exists at its initial level because the company hasn&#8217;t collected the cash from customers yet.<\/p>\n<p>In this case, we use the OFFSET function to move back the correct number of months to this most recent billing:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26698 size-full\" title=\"SaaS Accounting: Accounts Receivable Changes\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/05-SaaS-Accounts-Receivable-1.jpg\" alt=\"SaaS Accounting: Accounts Receivable Changes\" width=\"2066\" height=\"905\" \/><\/p>\n<p><strong>Deferred Revenue<\/strong> increases by the amount billed at the same time that Accounts Receivable does (when the invoice is first issued).<\/p>\n<p>Then, it decreases each month as revenue is recognized due to the delivery of the product or service.<\/p>\n<p>In this Excel model, therefore, Deferred Revenue equals the difference between <em>cumulative Billings<\/em> and <em>cumulative Revenue<\/em>:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26699 size-full\" title=\"SaaS Accounting: Deferred Revenue Changes\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/06-SaaS-Deferred-Revenue-3.jpg\" alt=\"SaaS Accounting: Deferred Revenue Changes\" width=\"2076\" height=\"904\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"SaaS_Accounting_Part_4_3-Statement_Model_Example\"><\/span><strong>SaaS Accounting, Part 4: 3-Statement Model Example<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Investors strongly prefer companies with the pricing\/market power to invoice for ~1 year upfront and collect the cash within 1-2 months.<\/p>\n<p>And if you understand SaaS accounting, you\u2019ll be able to recognize these companies and pick the most promising ones based on their financial statements.<\/p>\n<p>To illustrate the financial statement impact, here&#8217;s an example of a company with 1-year contracts worth $1200 each that invoices every 4 months and requires 2 months to collect the cash.<\/p>\n<p>The Income Statement and Balance Sheet are straightforward:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26700 size-full\" title=\"SaaS Income Statement and Balance Sheet\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/07-SaaS-Accounting-Income-Statement-Balance-Sheet.jpg\" alt=\"SaaS Income Statement and Balance Sheet\" width=\"2400\" height=\"1435\" \/><\/p>\n<p>The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a> shows that the the overall cash flow impact is\u00a0<strong>negative<\/strong> except for the periods in which the cash collection takes place:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26701 size-full\" title=\"SaaS Cash Flow Statement: Impact of Revenue Recognition and Cash Collection\" src=\"https:\/\/breakingintowallstreet.com\/wp-content\/uploads\/2023\/08\/08-SaaS-Accounting-Cash-Flow-Statement.jpg\" alt=\"SaaS Cash Flow Statement: Impact of Revenue Recognition and Cash Collection\" width=\"1114\" height=\"614\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn how SaaS accounting works and how line items on the financial statements change as a SaaS company bills customers, delivers services, and recognizes revenue.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-26796","biws_kb","type-biws_kb","status-publish","hentry","kb_category-venture-capital"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/26796","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=26796"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}