+
The SaaS Income
Statement
About SaaSOptics
Tim McCormick
CEO
570+ Customers in
17 Countries
$4.1B in Managed
Customer Revenue
$12B+ in
Customer-Raised
Capital in 1,800+
Rounds
About SaaS Capital
62
Companies Funded
$630M
of Equity Value Created
12
Years Lending
Todd Gardner
Founder and Managing Director
Agenda
1. Why does the Income Statement matter so
much?
2. GAAP vs cash: Which one makes sense and
when?
3. The “ideal” income statement layout for VCs,
lenders, board members, and the management
team
4. The SaaS Momentum Chart
5. Spending Benchmarks
6. ASC 606…ugh
7. Questions
Polling Question
What is your current ARR?
1. Under $1 million
2. $1 to $3 million
3. $3 to $10 million
4. Over $10 million
The Income Statement
A GAAP Income Statement is the best source for
understanding growth and burn:
• When looking at growth, bookings are important, however:
• Not always commonly defined and reported
• Don’t always translate into revenue and cash (failed implementation)
• Hard to see growth trends due to lumpiness/backlog
• When looking at burn, the cash flow statement is helpful, however:
• Working capital swings in AR can swing monthly cash flows dramatically
• Cash flow statement is best for near-term, seasonal, tactical planning
• At “steady state,” in the long run, Net Income = Burn (Not EBIT or EBITDA)
Polling Question
What accounting method do you use to
recognize revenue?
1. Cash
2. GAAP
Cash-Based Accounting
• Benefits of Cash-Based Revenue Recognition
•
Is a fine way to get started, simple and easy
• Provides direct visibility into monthly cash billings
• Used by the majority of SaaS companies under $2 million in
ARR
• Can be used indefinitely for companies billing monthly and
not raising institutional capital
• Disadvantages
• Provides less visibility on underlying performance trends (see
chart to follow)
• Does not support many important SaaS financial metrics
• Will not support a later-stage capital investment
• Necessitates a separate “MRR sheet” (not tied to the financials)
GAAP Allows for Better Trend Visibility
The Ideal SaaS Income Statement
Tips
• Recognize revenue according to GAAP (spread
it)
• Break out recurring vs non-recurring revenue
and services from licensing revenue
• Provide detail on COGS expenses, and tie
them back to revenue
•
Include support and retention related
Customer Success costs in COGS, and move
cross/up selling costs into sales or by itself
below gross margin
• Avoid one simple expense line called “salaries”
• Do not capitalize software development
expenses (fight auditor on this one)
• Don’t allocate “Overhead”, not worth it
Mar
April
May
Revenue
Subscription Software Revenue
385,000
$
370,000
$
375,000
$
Professional Services
20,000
$
55,000
$
40,000
$
Other Revenue
12,000
$
1,000
$
7,000
$
Total Revenue
417,000
$
426,000
$
422,000
$
Cost of Goods
Direct Third Party Costs
3,850
$
3,700
$
3,750
$
Hosting Expenses
9,625
$
9,250
$
9,375
$
Customer Success (Retention Focused)
14,500
$
13,000
$
13,000
$
Internal Engineering (Salaries)
4,000
$
3,900
$
4,300
$
Professional Services
35,000
$
33,000
$
34,000
$
Total CoGS
66,975
$
62,850
$
64,425
$
Gross Profit
350,025
$
363,150
$
357,575
$
Gross Profit Margin
84%
85%
85%
Operating Expenses
Sales and Customer Success (Sales Focused)
122,000
$
135,000
$
140,000
$
Marketing
89,000
$
79,000
$
90,000
$
Product Development
128,000
$
133,000
$
135,000
$
General and Administrative
73,000
$
81,000
$
83,000
$
Total Operating Expenses
412,000
$
428,000
$
448,000
$
Operating Profit (EBIT)
(61,975)
$
(64,850)
$
(90,425)
$
Interest Expense
7,000
$
7,000
$
7,000
$
Net Income
(68,975)
$
(71,850)
$
(97,425)
$
SaaSOptics’ Income Statement
Explanation
• Recognize revenue daily over the
legal contract term
• We break out recurring vs. non-
recurring revenue
• COGS: Services wages, hosting fees,
royalties, credit card fees, software
tools to deliver support and
customer success
• Exception: Do not have engineering
expenses in the delivery of your
services
• Expenses: Departmental expenses,
and travel
Income:
Subscriptions
Professional Services
Cost of Goods Sold:
Professional Services Wages
Hosting Fees
Royalties
Subscription Costs (Customer Success)
Software Tools (Customer Success)
Credit Card Fees
Customer Support Wages
Partner Commission Expenses
Gross Profit
Expenses:
Subscription Costs
Taxes
Depreciation
Customer Success
General & Administrative
Marketing
Research & Development
Sales
Net Operating Income
The SaaS Perspective (the other key chart)
Benchmarking the Income Statement
Is your company growing faster
than others its size?
How does your company spend its money
compared to others?
How Spending Changes: with Revenue, by Funding
How Spending Categories Scale
with Revenue
Spending as a % of Revenue by Funding
Source
Polling Question
How has your company been Funded?
1. No Funding, bootstrapped
2. Angel Investment
3. VC Investment
4. Private Equity/Strategic
ASC 606 Adoption: SaaS Capital’s Perspective
Despite 2019 being the first year private companies
need to comply with ASC 606 for audit purposes,
we have seen little adoption to date.
1. We have seen only 2 sets of ASC 606 compliant 2019 financials!
2. Everyone is waiting for their auditors to suggest year-end
adjustments.
3. Year-end adjustments may work for 2019, but the 606 rules need
to be baked into 2020 interim numbers and 2019 interim
numbers recast for historical comparison.
ASC 606 Impact: SaaSOptics’ Perspective
570+ customers (99% private)
•
<5% cash accounting
•
95%+ will have to comply with ASC606
•
20-25% will require advanced revenue recognition module:
- Contract language that results in performance obligations (SLAs, cancellation for
convenience, future commitment to discounts, etc.)
- Revenue allocations due to discounting/bundling
- Expense amortization (commissions)
- Materiality matters (one-off contracts vs. majority of contracts)
Advice
•
Ask your auditors or seek an independent review of your current rev rec practices against
ASC606 changes – “Rev Rec Memo”
• Defend your interpretation of the new guidelines
•
Consider automation to save time/headache
Summary
1. Switch to GAAP at $2 or $3 million in ARR.
2. Presenting the Income Statement in a format consistent
with others will help you raise money, benchmark others,
and run the business.
3. Understand your company’s growth rate relative to its size.
4. Expect development expenses to scale down as revenue
grows, but not expect other costs to do the same.
5. Proactively engage your auditors on ASC 606. Manual
year-end adjustments become expensive and hard to
maintain.
Questions?
Tim McCormick
CEO
Todd Gardner
Founder and Managing Director
tgardner@saas-capital.com
tmccormick@saasoptics.com
tgardner@saas-capital.com
Subscription Management
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What Can SaaS Capital Do for You?
SaaS Capital funds the growth of VC and non-VC backed SaaS companies. Because of our higher
availability and long-term structure, most companies use our Committed Credit Facilities in lieu of a Series
A, B, or C of equity.
Benefits of our unique, SaaS-focused, approach:
• Higher advance rates — Capital availability is based on a multiple of your monthly recurring revenue
(MRR) – typically 4x to 7x MRR
•
Capital availability that grows with your business — The amount of capital that you can draw
increases automatically as your revenue grows
•
Long-term source of capital — The capital is drawn down over 2 years under the committed line of
credit, and then either renewed, or repaid over the following 3 to 4 years
•
Efficient use of capital — Capital is drawn down only as your business needs it, thereby reducing your
interest expense
•
Cost is simple and transparent — interest rate of 11% to 13%, a 0.75% to 1.50% commitment fee, and
“at-the-money” warrants
• No balance sheet covenants or cash reserve requirements
SaaS Capital lends between
$2M and $15M
SaaS Capital is best able to assist companies with
the following attributes:
•
Sell a SaaS-based solution
•
$250,000, or above, in MRR
• History of renewals greater than 85%
• Headquarters in U.S., Canada, or the United
Kingdom
•
Revenue growth above 15% per year
Your business does NOT need to be:
• Venture Backed
•
Profitable
•
Billing your customers monthly
Visit www.saas-capital.com to learn more.