SaaS P&L: Essential Financial Statements for Startups

Like any profit and loss statement, a SaaS P&L is intended to identify your startup’s revenue and expenses over a specific time period. However, there are key differences in P&L statements for SaaS startups compared to other industries, notably in how recurring revenue, customer acquisition costs, and cost structure are tracked and identified.

These differences are key in assessing the overall financial health of a SaaS startup. Such P&L statements can significantly impact benchmarking, help leadership make important decisions and improve investor relations.

Why SaaS P&L Statements Differ from Traditional Financial Reports

Part of the reason SaaS P&L statements differ so much from traditional financial reports is their unique business model. The biggest differentiators are recurring revenue and how revenue is recognized. Unlike a conventional startup, which focuses mostly on one-time sales, SaaS company startups rely on subscriptions. This requires startups to perform accrual accounting, a practice that recognizes revenue when it’s earned and when expenses are incurred to provide a more accurate picture of long-term financial performance.

SaaS P&L statements must also comply with accounting standards. For instance, subscription revenue under the ASC 606 standard challenges SaaS startups in both accuracy and compliance. Per the standard, startups must recognize revenue when any obligation is satisfied. For subscription-based startups, this is usually over the life of the subscription (rather than upfront). Failure to comply with ASC 606 principles could result in legal and financial penalties.

Finally, SaaS startups should also strive to properly categorize revenue categories to ensure accurate financial reporting and help leaders make more informed decisions. Some of the common SaaS revenue categories include:

• Subscriptions
• Variable revenue
• Professional services (i.e., setup, configuration, onboarding, etc.)
• Managed services
• Physical products or hardware that are sold with any subscription

Key Components Every SaaS P&L Must Include

What components should every SaaS P&L statement include? Here’s a look:

• Proper revenue categorization: Make sure your P&L statement properly categorizes revenue based on whether it’s recurring, transactional or non-recurring. Recurring revenue comes from subscription fees, while non-recurring revenue may derive from professional services, training or other activities. Transactional revenue typically consists of one-time fees.
• Cost of goods sold: The cost of goods sold includes all the direct costs involved with providing your service. COGS may include hosting fees, customer support costs and other related costs.
• Operating expenses: Operating expenses include sales and marketing costs, research and development costs, software development costs, and general administrative expenses required to run your SaaS startup.

Essential SaaS P&L Templates and Financial Modeling Tools

How can your SaaS startup create a robust P&L statement to gain insight into its financial health and help leadership make informed decisions about the future? It all starts with using the right templates and accessing the right financial modeling tools.

At Graphite Financial, our SaaS financial model template is the gold standard in the industry, offering startups the ability to customize it specifically to their operations based on their SaaS business model and the stage that their startup is in. Graphite’s model also includes a detailed dashboard and operating and revenue models to provide your SaaS startup with the real-time clarity and insight to help leadership make informed decisions and drive further growth.

Ideally, your P&L is integrated into a comprehensive financial model to help streamline historical data input and forecast future performance. It should also be integrated with the balance sheet and cash flow statement to improve analysis and gain a more comprehensive understanding of startup performance.

Building Your Three-Statement Financial Model

The three-statement financial models include P&L statements, balance sheets and cash flow documents, and they’re important as part of a wholly integrated approach to your SaaS startup’s financial management. Here’s a look at why this three-statement model is so important:

• It offers more holistic financial insight. These three statements help portray how operational activities impact financial position and liquidity.
• It helps with informed decision-making. From scenario planning to impact analysis, the statements help evaluate investment opportunities, determine the value of assets and help leadership plan.
• Better budgeting and forecasting ability. A better dataset helps leadership with the budget and forecast.
• Better stakeholder communication. Stakeholders value transparency. The three-statement model helps improve transparency and build trust and credibility with everyone from investors to lenders. These statements can be used to communicate your startup’s growth and the ability of your startup’s leadership to manage its finances effectively.

SaaS P&L Metrics That Drive Strategic Decision-Making

A structured P&L statement is about more than tracking revenue and expenses. It can also provide critical insight into decision-making and drive startup growth and profitability. Some of the key metrics that you should be able to glean from P&L statements include:

• CAC: Customer acquisition cost is the amount you spend to acquire a new customer.
• LTV: Lifetime value is the total revenue that you expect from one customer over the lifetime of your relationship.
• CAC:LTV ratio: The CAC:LTV ratio is a metric used to determine how much you can expect to earn from a customer over their lifetime versus the amount of money you spend to attain them. Generally, you want to strive for a CAC:LTV ratio of 3:1 or better, which means you’re earning three times the amount of what it costs to gain them.
• Gross margin: Gross margin is the profitability of your SaaS service after accounting for the cost of goods sold. It can help guide decision-making on pricing, cost optimization and scaling. Generally, startups should strive for a gross margin of 75 percent or more.

Other key metrics from P&L statements that can provide valuable insight include MRR, ARR, churn rate, net burn rate, NRR and NDR.

Revenue Recognition and Its Impact on SaaS P&L

Revenue recognition is challenging in SaaS P&L statements just based on the business model of subscription-based services. Some of the major challenges include determining standalone pricing of various services, properly identifying performance obligations, managing deferred revenue and accounting for any variable considerations and contract modifications that may arise.

Some of the key challenges include:

• Managing upgrades, downgrades and renewals: Changes to subscription terms impact revenue recognition, underscoring the importance of properly accounting for these changes.
• Annual contracts: Per accounting standards, recognizing revenue on annual contracts involves spreading the revenue out evenly over the 12-year period.
• Deferred revenue treatment: Deferred, or unearned revenue, is payment for goods or services that haven’t been delivered. It should be treated as a liability, as it represents your startup’s obligation to provide goods or services in the future. In other words, deferred revenue should be a placeholder on any balance sheet, reflecting the timing difference between receiving payment and delivering the service.

The Role of a SaaS CFO in P&L Management and Analysis

A CFO is tasked with driving financial strategy to help ensure the long-term success of your SaaS startup. A big part of these duties includes P&L management and analysis. However, experienced SaaS CFOs don’t just work to create basic P&L statements, but those that are able to offer deeper insights into the startup so they can more quickly assess financial health, operational efficiency and growth potential.

Some of the strategies that SaaS CFOs use with P&Ls include:

• Segmenting revenue streams helps offer a better understanding of the startup’s overall business model and what its key drivers are.
• Defining the cost of goods sold with SaaS specifics to get a better understanding of gross margin.
• Thoroughly categorizing operational expenses.
• Including any bookings to help provide insight into your startup’s future potential.
• Emphasis on key metrics and benchmark data, from gross margin to MRR and ARR.

Structuring P&Ls so they offer more comprehensive data and greater detail allows CFOs to gain the insight necessary to make better decisions on pricing, cost optimization, resource allocation and managing startup growth.

Startups don’t need to rely on full-time, in-house CFOs to manage and analyze their P&Ls. In many cases, startups can better conserve resources and overhead by working with a fractional CFO, or an external, part-time accounting professional who works on demand.

Board-Ready P&L Presentation and Investor Reporting

Presenting P&Ls in an informative and engaging way to investors is crucial to driving engagement, creating understanding and helping facilitate informed decision-making. Here’s a look at some tips for going beyond just presenting numbers and offering more value:

• Know your audience: If you’re presenting to executives and investors, your presentation should be more high-level. If you’re presenting to your own employees, you can present more granularly.
• Follow a logical flow and try to tell a story with the P&L narrative. Try to be as engaging as possible to hook your audience into wanting to learn more. End any presentation by summarizing or reviewing key takeaways.
• Provide proper context around key metrics and data.
• Be honest and transparent. If there’s a bad metric that you have to cover, don’t hide from it. Instead, explain it, the circumstances that have led to it and what you’re going to do to correct it in the future.

Beyond this, you should also allow time for questions. As you prepare your presentation, try to anticipate any questions and prepare for them accordingly.

Common SaaS P&L Mistakes and How to Avoid Them

Your SaaS startup should be striving for clean, accurate P&L reports. However, P&Ls may have their share of mistakes if you’re not careful. Here’s a look at some of the most common mistakes and how to avoid them:

• Improper revenue categorization: Separate subscription revenue, one-time fees, professional services and other revenue streams.
• COGS classification: Be sure you’re properly categorizing costs according to product delivery and operating expenses.
• Only taking a single-statement approach: Single-statement approaches don’t tell the full picture, exclude cash flow considerations and offer limited insight. The three-statement model is more robust, incorporating balance sheets and cash flow statements.

Technology Stack Integration for Accurate P&L Reporting

For robust P&L reporting, consider using the appropriate accounting software that supports SaaS revenue recognition and other integrations. Integrations with billing systems and financial reporting can help streamline P&L creation. Look for programs that also offer automation opportunities in preparing and analyzing your P&L statements.

Transform Your SaaS Financial Operations with Expert Support

Are you ready to transform your SaaS startup’s financial operations and modeling? At Graphite, we specialize in working with startups for all of their financial needs, from creating P&L statements to long-term forecasting, and have hundreds of success stories to our name. Professional support is often key to scaling and growing your startup. We’re standing by and ready to serve as your long-term accounting partner. Contact us today to learn more and schedule a consultation.

FAQs about SaaS P&L

What makes a SaaS P&L different from traditional profit and loss statements?

P&L statements for SaaS startups differ in how recurring revenue, customer acquisition costs, and cost structure are tracked and identified.

How often should SaaS startups prepare P&L statements?

SaaS startups should prepare P&L statements monthly to fully understand trends and growth trajectories and position themselves to make timely changes.

What revenue recognition method should SaaS startups use?

SaaS startups should follow best practices according to the ASC 606 standard. This standard states that revenue is recognized when it’s earned, not when payment is received.

How do you calculate gross margin for a SaaS business?

To calculate gross margin, subtract the cost of goods sold from the total revenue. Then, divide this number by the total revenue. Lastly, multiply this number by 100.

• Gross margin = (Total revenue – COGS) / Total revenue x 100

What COGS should be included in a SaaS P&L?

COGS should include all direct costs associated with delivering the service to customers. These may include hosting, infrastructure, technical support, professional services, licensing, etc.

When should a startup hire a fractional CFO for P&L management?

A SaaS startup should hire a fractional CFO for P&L management during periods of rapid growth, when finances become too complex for founders to manage or when leadership wants to free up time to focus on growing the startup.