Building a SaaS Chart of Accounts That Scales With Your Startup

An accurate, well-maintained chart of accounts provides a foundation for financial organization within your startup. It helps leaders with financial reporting and decision-making, and is also key in attracting investors during fundraising rounds and for ensuring tax compliance.

However, a SaaS startup’s chart of accounts differs from those of a standard operation simply because of the SaaS business model and the need to track deferred revenue and manage customer acquisition and software development costs. This underscores the need to properly set up a SaaS startup’s chart of accounts from the get-go to avoid reorganization and other fallout from an unkempt COA down the road.

Why Your SaaS Company Needs a Specialized Chart of Accounts

So just why does your SaaS startup need a specialized chart of accounts? It largely has to do with the business model, notably when it comes to recognizing revenue via deferred revenue and subscription revenue and managing CAC (Customer Acquisition Cost). It’s also important for a SaaS startup to track capitalized software development costs, software development expenses and cost of goods sold (COGS).

Deferred revenue is revenue that has been received in advance, but not yet earned due to service period timelines, while subscription revenue is income that must be tracked from recurring subscriptions, which may involve different pricing tiers and distinct revenue streams.

A good SaaS COA should follow the standard five-category structure, but also include subcategories for SaaS metrics such as recurring revenue, deferred revenue and granular expenses to support accurate financial reporting.

Essential Components of a SaaS Chart of Accounts

SaaS startups should include various account categories from the start. This includes assets such as accounts receivable, cash and cash equivalents, prepaid expenses, fixed assets and intangible assets. It should also include liabilities, such as accounts payable, deferred revenue, taxes payable and payroll. As SaaS startups mature, the COA should also reflect equity, including common stock, preferred stock and retained earnings with clear linkages to your financial statements.

Revenue Account Structure for Subscription Businesses

One of the most important aspects of a SaaS COA is the revenue account breakdown. Revenue must be broken down beyond a single category to accurately track metrics such as MRR (Monthly Recurring Revenue) and ARR. The appropriate categories should include:

• Subscription revenue from recurring subscriptions.
• Expansion revenue, or additional recurring revenue from existing customers through add-ons, upgrades or additional usage.
• Non-recurring revenue, such as one-time fees, development or training.
• Variable revenue.

Revenue should be tracked by product line, geography and customer segment, and discounts, refunds and revenue adjustments should also be accounted for.

How Should You Structure Operating Expense Accounts?

Operating expenses also need to be structured properly to help startup leaders analyze costs and budget accordingly. It’s best practice to create departmental sub-accounts for engineering, sales and marketing. Also, consider tracking CAC separately from retention spending. Finally, it’s important to properly distinguish between fixed and variable costs. Fixed costs are consistent regardless of production or sales volume, while variable costs fluctuate with changes in activity.

Setting Up Your Chart of Accounts for SaaS Metrics Tracking

The best way to set up your COA for SaaS metrics tracking is to ensure you’re designing account structures that directly support key SaaS metric calculations and reporting. Start by structuring your COA with the five core account types (Assets, Liabilities, Equity, Revenue, Expenses) and assign each a unique number.

Next, detail revenue accounts, separating them by source. Be sure to also separate recurring from non-recurring and track variable revenue separately. Then, you’ll want to detail your expense accounts, tracking costs by business function, categorizing people-related expenses and tracking key SaaS expenses (i.e., CAC and R&D).

Just as important as properly setting up your COA is maintaining it over time. As your startup matures, integrate your COA with billing systems to streamline data flow. Be sure to also regularly review and adjust your COA as necessary as new financial transactions and products are introduced.

Cost of Goods Sold (COGS) for SaaS Companies

For a SaaS startup, COGS includes direct expenses for producing and delivering the service. These expenses consist of hosting, data communication, and the salaries of employees and teams.

Don’t confuse COGS with operating expenses. Operating expenses consist of indirect costs, like sales, marketing and general administrative work that support your startup’s operations, but aren’t directly related to delivering the software.

What Belongs in SaaS COGS vs Operating Expenses?

Remember, COGS and operating expenses aren’t the same for accounting purposes. COGS are direct expenses related to producing and delivering your service, while operating expenses are indirect costs that support your startup, but aren’t related to delivering the software.

Here’s what belongs in COGS:

• Hosting and infrastructure
• Customer support and success
• Third-party software and services
• Application and website maintenance
• Payment processing fees
• Any direct labor costs

Here’s what belongs in operating expenses:

• Sales and marketing costs including detailed marketing expenses
• General administrative costs
• R&D costs not directly tied to service delivery

Tracking Infrastructure and Hosting Costs

It’s imperative to structure accounts so they monitor variable costs that scale with customer usage. To do this:

• Separate fixed infrastructure from usage-based costs
• Track costs by customer tier for margin analysis
• Account for development versus production environments

Deferred Revenue and Prepaid Expense Management

Due to the unique nature of the subscription-based business model, SaaS startups have to balance their sheet accounts, which is critical for financial accuracy. Some best practices include:

• Arrange deferred revenue accounts by contract length and type. This helps keep them organized and can also help detect trends, such as growth potential or churn, early.
• Track prepaid expenses for annual licenses
• Manage the monthly recognition and end-of-month processes by implementing the right SaaS accounting software, regularly reviewing the COA, and continuously forecasting and planning.

How Do You Scale Your Chart of Accounts as You Grow?

As your startup grows, your COA will have to follow. So what’s the best way to scale your COA as your startup evolves from the seed stage to Series A fundraising to Series B without having an impact on operations? Here’s a look:

• Start with the essentials and add detail to your COA as your startup grows.
• Ensure your COA is flexible and organized with clear categories and subcategories. Make sure to leave gaps for any future accounts.
• Update periodically to reflect changes in your business model or multiple entities as you expand, so your financial data remains comparable over time.

When Should You Add More Account Detail?

Plan to add more account detail to your COA as your startup grows and the need for more granular financial insights outweighs the simplicity of a less-detailed structure. Some key signs that it’s time to add more detail include an expansion of your business operations, when there’s a need for more robust financial reporting (especially when dealing with investors), and if there’s a challenge with budgeting and cost control.

Preparing for Multi-Currency and Global Operations

If your SaaS startup intends to expand internationally, you should set up your COA to support this expansion from the very beginning. Arrange your COA to account for multi-currency revenue and expense tracking, and be sure to plan for any changes in foreign exchange gains and losses.

Integration With Your SaaS Tech Stack

A good chart of accounts should integrate seamlessly with your critical SaaS business systems, further streamlining your startup’s operations. The systems you should work to integrate include billing and subscription management platforms, and expense management and procurement systems. Also, ensure the data flows seamlessly to financial reporting tools and look for ways to automate between platforms so data is updated in real time.

Common Chart of Accounts Mistakes SaaS Startups Make

When building your SaaS startup’s COA, you should be mindful of some common errors that many startups make. Such issues can lead to reporting problems and require expensive fixes. Some of the problems you want to be sure to avoid include:

• Making your COA overly complex from the start. This can burden small teams and make it difficult to maintain.
• Insufficient detail, which can cause problems during fundraising rounds and for key reporting to stakeholders.
• Misaligned accounts that don’t support key SaaS metrics.

Sample SaaS Chart of Accounts Structure

A good COA structure should begin with the five main categories: assets, liabilities, equity, revenue and expenses. These categories should be assigned a number, and then further broken down into subcategories that allow startups to perform more detailed tracking.

Revenue and COGS Account Examples

Revenue is the main category, and subcategories should include subscription revenue from new business, subscription revenue from renewals, professional services revenue and usage-based revenue.

Operating Expense Account Framework

If expenses is the main category, your subcategories should include line items for COGS, operating expenses (salaries, marketing and advertising, sales commissions and bonuses, rent and utilities), R&D expenses and other expenses such as administrative expenses.

Build Your SaaS Chart of Accounts Right From the Start

There’s one common theme to a good COA — building it correctly from the start. Graphite Financial is here to help. As a leading full-service provider that specializes in working with SaaS startups, we’ll help you build your COA and support its growth and evolution as your startup scales. Contact us today for more information and to schedule a consultation.

Frequently Asked Questions

What’s different about a SaaS chart of accounts versus traditional businesses?

The difference is largely due to the SaaS business model, which is based on subscriptions and requires the tracking of recurring and deferred revenue rather than one-time sales. A chart of accounts should be set up to handle revenue recognition over time, manage liabilities for upfront payments and support key SaaS metrics.

How many accounts should a seed-stage SaaS startup have?

The number of accounts can vary widely, but usually, several dozen to a hundred or more customers indicate strong initial traction.

How do you account for deferred revenue in your chart of accounts?

Account for deferred revenue by recording it as a current liability on your balance sheet. Then, as you earn the revenue by providing goods or services, you can reduce the deferred revenue liability and recognize the amount as revenue on the income statement.

What should be included in SaaS COGS accounts?

SaaS COGS should include the direct costs of delivering your software. This includes costs related to hosting and infrastructure, customer support and success teams, third-party software and API fees, and professional services. Don’t confuse direct costs with indirect costs, such as marketing and general administration fees.

When should you add departmental sub-accounts?

Add departmental sub-accounts when you need to track financial activity for specific purposes, such as managing different projects, departments or events within a single ledger. The ideal time to add departmental sub-accounts is at the start of a new fiscal year after all account balances have been cleared.

How do you structure accounts for multi-product SaaS companies?

Structure accounts for multi-product SaaS startups by creating a centralized data model that can handle multiple projects, usage metrics and diverse pricing tiers.

What account numbering system works best for SaaS?

SaaS startups are best served by a modular numbering system that provides a clear, organized structure for financial tracking. The approach enables scalability and more detailed reporting.

How often should you review and update your chart of accounts?

It’s best practice to perform a review and update of your chart of accounts at least annually. This tends to be best done at the end of the current fiscal year. While it’s typical for startups to add new accounts as needed throughout the year, any major changes should wait until year-end to ensure you continue to maintain reporting consistency.