SaaS Company or “Software as a Service” is a subscription-based business model that helps deliver services over the internet. Compared to the traditional software that often requires users to be physically present in a specific location, you can access SaaS software from anywhere using almost any device. SaaS providers either develop their solutions or resell solutions created by others and charge their customers monthly.
The demand for SaaS solutions has grown tremendously over the past few years, with both large and small businesses taking advantage of modern technologies. Understanding the most common SaaS solutions is crucial as it helps pick the right solution for the company. It is the top layer of the cloud computing pyramid, not to mention the most popular cloud computing service.
That being said, you also need to know how to make profit and loss statements. They are essential for your SaaS Company and will help you learn about your company’s revenues, expenses, and profit/losses over a given time. It will tell you whether or not your company can generate sales, manage expenses and make profits.
How Do Profit and Loss Statements Work?
The profit and loss statements or the balance sheet are two of the three financial statements issued by every company quarterly and annually. It is usually the most popular and common financial system in a business plan because it shows how much profit or loss a company has generated.
Profit & loss statements are also known as:
- Operation statement
- Financial result or income statement
- Earnings statement
- Expense statement
- Income statement
Like cash flow statements, the profit & loss and income statement show changes in accounts over a specific time. On the other hand, the balance sheet is a snapshot that shows what the company owns and owes at a single moment.
It is essential to compare the income statement with the cash flow statement because, under the accrual method of accounting, a company can enter revenues and expenses before cash changes hands.
Steps for Making Profit and Loss Statements
Before moving ahead and reading all the necessary steps for making profit and loss statement, it is important that you are familiar with all the SaaS Finance Terminologies.
1. Revenue
The revenue part of the P&L statement represents total sales. For a SaaS company, the total number of sales is a function of the monthly subscription price and the number of monthly subscriptions, which might be challenging to project. Still, you can make it easier by making small projections of average sales prices, subscription growth rates, and attrition rates.
2. Sales Price
The sales price is an essential step in calculating or projecting your average sales across your plans. Instead of taking the simple average, you can arrive at the more accurate number by determining the weighted-average subscription prices based on your business plan make-ups.
For example, suppose you have two plans, Plan A and Plan B. The monthly cost of each plan is $20 per month and $15 per month. Using the weighted-average approach, an average price per plan would come around $17.5, hence giving you a fair sales price.
3. Subscription Growth
One of the main reasons for any company‘s success is its solid consumer base. For example, if the company is selling a monthly subscription, they will probably look for a revenue source called “Monthly Recurring Revenue.”
Even though there is a debate about what constitutes good growth, the critical point is to remember that your customer base must grow monthly, ideally in double digits.
4. Have Insights about the Attrition/Return Rate
Sometimes the customer decides to stop using your service for several reasons, some of which are unavoidable. That is why insight into the attrition/return rate can significantly indicate how satisfied your customers are with your service.
There are many ways of calculating the return rate. The most common one is to divide churned customers you had at the start of the period.
5. Bring All Revenues Together
Once you have seen all the actual first-quarter subscription fluctuations, you can calculate the subscription number for the rest of the year. To start, you need to compute a quarterly gross growth rate that does not account for attrition.
You can use this quarterly rate as a projection for the rest of the year. Next, you need to look at the attrition. You need to use the actual data from Q1 for determining a projected attrition rate for the remainder of the year.
The thing to remember here is to apply the growth and attrition rates at the start of the subscription balances to determine each quarter’s growth and attrition.
6. Proper Classification of Expenses
One of the most important factors from the profit and loss standpoint is the proper classification of expenses when it comes to expenses. The cost of goods sold and the operating expenses are two types of statements that represent different expenses. They are critical metrics from both a managerial and an investor’s point of view.
7. Cost of Goods Sold
Even though the concept of Cost of Goods Sold is simple, it is critical. It is defined as the direct costs associated with producing and delivering a company’s goods and services. Since we are dealing with the SaaS Company, this will generally include the following costs:
- Hosting
- Cloud
- Database fees
- Support personnel
- Customer care
- Third-party web fees
- Customer onboarding costs
8. Operating Expenses
The operating expenses are the costs that the company incurs due to its normal business operations, meaning the costs unrelated to the sale or delivery of the product or service. Salaries, rent, advertising, legal and professional ties, etc., would fall into this category.
For example, you have the cost of goods sold and operating expenses defined; now, you need to calculate your projected yearly payments. Once done, you are ready to finalize your profit and loss statement.
For calculating gross profit, start with total revenues and subtract the total Cost of Goods Sold. After the accounting of the Cost of Goods Sold, Gross Profit is the total amount of income available to cover all remaining Operating Expenses. Operating income is calculated by taking out Gross profit from Operating Expenses. After subtracting operating income, we deduct Income tax expenses to get net income.
9. Calculate Gross Margin
The gross margin, usually calculated as gross profit/revenue, is another essential metric used by management and investors. It is the percentage of each sale considered profit after deducting the cost of goods sold. The remaining amount or margin must be sufficient to cover the business’s normal operating expenses.
10. Figure out the Net Income
Net income is the accounting profit that a company has after deducting all of its expenses. It is calculated by subtracting the sales revenue from the cost of goods sold, SG&A, depreciation and amortization, interest expenses, taxes, and other expenses. It is the last or the final thing on the statement.
Profit And Loss Statement – An Essential Requirement for a Business
Profit and loss statements are financial reports that give us the complete summary of a company’s revenues, expenses, profits, and losses over a given time. The statement shows the capability and the extent of the company’s resources to generate sales, keep track of orders, manage expenses, and further enhance and create more profits.
It is created by keeping in view the accounting principles, including revenue recognition, matching, and accruals, which differentiates it from the cash flow statements. Because of these reasons, a SaaS company needs to maintain the statement to keep track of its business.