Demystifying Financial Management in SaaS

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Demystifying SaaS finance
At a Glance

An amazing startup idea can be a complete success or a complete failure if you fail to manage the SaaS finance of your business. Avoiding the implications of Financial Management is not a choice; it is rather the most important factor in ensuring the success of your business. For a SaaS start-up to succeed, the founders need to have basic financial knowledge, irrespective of their background.

Financial success is an outcome, never a goal.

Sanjay Swamy, Prime Ventures

SaaS has become an incredibly popular avenue for software entrepreneurs. Still, as a founder of a SaaS start-up, you must have a thorough understanding of important financial concepts for your business to run efficiently. Finance and accounts are very important skills to learn. So, avoiding them is not desirable in any case. Yes, you can get assistance from outside, but the statements’ preparation as compliance is not the sole objective. Financial accounting statements give important information required for planning and cost standardization. Furthermore, deciphering financial concepts like cash flow statement, balance sheet, and profit & loss statement also offer useful insights to the founders regarding their enterprise’s health.

Important financial statements for SaaS founders

Accurate and updated financial statements are of extreme importance for the SaaS founders as they enable them to make informed decisions. Financial statements are especially important in understanding finance for non-finance background individuals. Here are some of the essential financial statements which the SaaS founders must be well-versed with: –

Profit & Loss Statement

A profit and loss statement is also known as an income statement. In the profit and loss statement, you must record all the business expenses and incomes, and then you can ascertain the net profit and loss from it.

The profit and loss statement’s income side includes all the incomes or revenues generated from the sales and interest received on loans issued etc. The expense side of the profit and loss statement includes all the expenses incurred in selling the services; the expenses may be direct or indirect. The direct expenses are related directly to the production activities.

Balance Sheet

A balance sheet is a statement that shows the assets and liabilities of the business. In the balance sheet, all the assets, and liabilities, and shareholder equity of the business. The balance sheet is divided into two parts, which are Assets and Liabilities.

Assets: Assets are the items that the business owns—for example, property, building machinery, etc. 

Liabilities: Liabilities are the items that the company owes to others—for example, creditors, loans, income received in advance, etc.

The total of the asset side should always be equal to the total liabilities. If the total of both is not equal, then there might be some error in recording the entries for transactions.

Statement of Cash Flow

To know about the inflow and outflow of the cash, the statement of cash flow is prepared. It helps to ascertain the amount of cash used in different activities carried out by the company. The cash flow statement includes the following three types of activities: –

1. Cash from operating activities

2. Cash from investing activities

3. Cash from financing activities

  • Cash flow from operating activities

Operating activities are related to the activities of day-to-day nature or, in simple words, activities carried out by the business daily. For example, sales income, payment to the creditors, cash received from debtors.

  • Cash from investing activities

Investing activities include any kind of cash inflow incurred due to any investment made (for example, machinery, buildings, or investment in shares, etc.).

  • Cash from financing activities

Financing activities include the activities related to the transactions involving raising and retiring the funds. Some examples of financing activities are transactions that involve debt, dividends, and equity.

Importance of Understanding Financial Statements

The importance of understanding financial statements for SaaS founders cannot be overstated. Here are some of the essential aspects of understanding financial statements, which you must note: –

Helps in ascertaining the true financial position of your company.

Financial statements give you a clearer view of the financial position. A company can ascertain its actual financial health through these financial statements.

Helps in making better decisions.

Financial statements help you ascertain the true position of your enterprise, and analysis of these statements will assist the management of your company in making better decisions for the company.

Helps in communicating the financial results.

Financial statements can convey all the important details about your company to the interested parties. They can simply go through the financial statements of your company, and then they can decide whether they should invest in your company or not.

Financial statements will also help you in tax-related matters as you can convince the taxing authorities about the sales, income, etc.

If you systematically record the financial statements, then this accounting information can be treated as legal evidence in case of any law dispute. You can show these financial statements as evidence. Maintaining systematic financial statements will keep you out of many legal troubles.

Comparison of the results 

Financial statements enable you to compare the financial position of the company. You can compare your company’s financial growth with the previous year’s statements and compare your company with the other company’s financial statements. You can compare your company’s growth, and then you can set the objectives for the coming year accordingly.

Hence, it is clear that financial statements are something that you as a SaaS cannot afford to ignore at any cost. Even if your start-up does not deal in financial services or from a non-finance background, you will still need to have some basic knowledge about finance and accounts to turn your start-up into success. 

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