SaaS metrics to track
Now that we have that in place, which metrics should you track in SaaS accounting?
When we talk of SaaS accounting, five key metrics stand out. These metrics are crucial to steering the growth of your SaaS business. In other words, if you need to know whether your business is growing or not, you need to keep an eye on these KPIs.
Bookings reveal the value and period of a contract. In other words, it shows that a customer has committed to spending a certain amount of money in exchange for your services. They indicate future revenue growth based on cash outflows and in-flows.
Bookings are recorded as deferred revenue since they are committed money and not yet earned revenue.
Billings are the payments you invoice customers after successful service and product delivery. Essentially, it's the money that customers owe you. Billing can happen weekly, monthly, quarterly, or annually, depending on the subscription model your business uses.
For a healthy financial status, billings should be at par with bookings. If billings are lower than bookings, it may imply that you are experiencing a challenge in collecting money owed to you. That said, it's easy to offset this challenge by charging prospective clients before service execution and discounting annual payments to entice more prospects to pay up front.
Revenue is the income your business brings in when you achieve performance obligations (deliver services as stipulated in the contract). This means that you will only recognize revenue once you deliver a service to your clients.
For instance, if you have a SaaS product priced at $200 a month, and a client signs up for the annual plan at $2400 on May 1, your first actual revenue in May will be $200 even if you billed the client $2400.
MRR and ARR
Monthly recurring revenue (MRR) tracks the total monthly revenue you earn regardless of your client's subscription plan. On the other hand, annual recurring revenue (ARR) is the total revenue you earn from client contracts for 12 months or more.
Tracking ARR and MRR helps you determine your business' revenue growth momentum and when and how to invest based on your revenue.
Churn rate tracks the percentage of clients who stop using your product in a given time. It's essential to keep tabs on your churn rate as it helps you understand customer retention and satisfaction rate and whether your marketing and customer service efforts are paying off.