Is your SaaS Business running at optimal health? The only way to know is if you are tracking your SaaS financial statements. The worst answer to this question would be to say, “I don’t know.” That would mean your financial statements are lacking, or even worse, you don’t have organized financial statements.
Every business must monitor its finances. It is crucial for early-stage SaaS companies to understand their Income Statement. This document will give your company’s monetary position and determine your ability to hire, invest, budget, and acquire capital.
You cannot succeed as a long-standing SaaS company without the longevity and clarity that comes from a solid financial picture. However, it can be tricky to know which line items to include and how to separate them. Every business tallies its quarterly and yearly data differently.
Here is a general breakdown of Income Statements and how they work for SaaS to help you get started developing a basic understanding of your financial picture.
What is an Income Statement?
As we explained, a SaaS’s income statement defines your financial position on the market. You may also hear it called a statement of financial performance, earnings statement, and other names. The basic idea is that you account for profits and losses line-by-line, so you can see monetary growth or decline all in one report.
You can detail each category in your income statement or lump all revenues and expenses together. That is up to you and what you intend to use your document for.
The most crucial step to developing your income statement is ensuring that you keep clear and organized records and use the same breakdown from year-to-year to track your metrics clearly and efficiently through the years.
How does an Income Statement differ from a Balance Sheet or Statement of Cash Flows?
There are three financial statements, including the SaaS income statement, that measure your company’s health. Balance sheets and statement of cash flows are the other two and measure other aspects elements of your earnings and revenue.
An income statement measures all profit and losses and gives you a tally for where you are in a specific period, such as in a quarterly or yearly report.
Similarly, you can learn more about your debt, efficiency, and liquidity with a balance sheet. The difference is that you gain this information by recording assets, liabilities, and owner’s equity rather than losses alone.
Statement of cash flow is the final financial document that informs you and your SaaS executives how you’re doing. They track cash coming in and out of the company as a result of operation, investment, and finance activities. You’ll learn where money is coming from and how you spend it, which is invaluable as your business grows.
What is included in an Income Statement?
Income statements look different from company to company, but they include all totals of revenue and expenses for each. Here is a brief breakdown of items typically included in an income statement.
This includes all the money that has been made in the specified time. It can be broken up into several lines or included as one lump sump item.
Cost of Goods Sold (COGS) is an expense but is usually shown right under revenue to calculate the gross profit before expenses. This is the total of all costs incurred to deliver your product.
This is the total revenue minus the cost of goods sold. It is sometimes shown as a percentage to find the gross margin.
All business operation expenses, such as depreciation and amortization, make up the overall expenses category.
Gains and Losses
Gaines and losses are revenue and expenses that present themselves as one-time events, such as selling land or assets or settling a lawsuit.
EBIT and EBITDA
These metrics are not GAAP approved but give a total of the company’s earnings before interest, taxes, depreciation, and amortization. Some companies use these metrics with investors because they believe it provides a better financial picture of profitability.
Net income is the last item on the income statement. It is the total of everything above and will show the profit or loss for the specified period.
Income Statements for SaaS
Most SaaS companies run on the business model of recurring revenue. This makes generating income statements more complicated.
This is because you only want to account for income and expenses that have been realized already, not that will be in the future. It is absolutely imperative that your team has a solid and organized financial team that understands revenue recognition via the ASC 606.
If your company needs advice for strategically planning financial statements or needs an influx of capital to structure a solid financial team, we can help. Our experienced team of entrepreneurs knows SaaS business and financials and can answer questions and provide the capital you need to get you to the next level.
Call us today at (602).730.4558 to get started today.