SaaS (Software as a Service) is a model that is becoming increasingly accepted and continues to gain popularity. After many years in which the software industry focused primarily on desktop solutions, with software sold with individual licenses to be installed on each computer, the current trend is to move it all to the cloud. Though there were initially some concerns about security risks with cloud storage of sensitive data, it’s now generally accepted that it can actually be more secure than local storage, due to the accessibility of cutting-edge security technology. In addition, large cloud providers like Amazon, Google, and Microsoft have made it fast, easy, and relatively inexpensive to roll out new products hosted in the cloud. The scalability of cloud solutions and lower up-front costs has further enabled the enormous market growth of SaaS companies.
Like businesses in any industry, SaaS companies will find some unique concerns in the realm of bookkeeping and accounting. One of the biggest issues currently is the matter of revenue and cost recognition. The SaaS model is a departure from more traditional software sales, so it requires a different approach to bookkeeping. In the case of traditional software licensing, the transaction is generally considered to be a sale of a product. In contrast, SaaS is typically viewed as a service that is provided over a period of time. Consequently for software sales, most or all of the revenue is recognized when the product is delivered to the customer. Since there is no delivery of a product in the Software as a Service model, SaaS companies will typically need to recognize their revenue prorated over the lifetime of the contract, or through the time that it’s expected that the customer will be using the software.
SaaS companies also face some specific issues on the expense side. There are two general types of costs incurred in the SaaS business model. Those that relate to development and maintenance of the software employed in the service, and direct costs related to specific customers. Again, in the cases in which the costs are for development of the underlying software, it’s more likely to be amortized of the life of the arrangement. For costs related to specific customers, the Saas company may elect a policy of expensing these as they are incurred, or deferring them to be recognized as revenue is recognized. Once a policy is set, it should be adhered to consistently.
This can be a bit complicated, and changes in regulations add further challenges. If this seems a bit overwhelming, we understand. Why not consider outsourcing it all to a virtual accountant? They’re not only experts in these matters, they’re also SaaS providers, just like you.