- Hey there, Dan Martell here,
serial entrepreneur, investor,
and creator of SaaS Academy.
In this episode, I'm going to share with you
the difference between deferred revenue
versus accrued expenses,
and really get into the weeds of SaaS accounting.
I'm not an accountant.
I know I'm wearing an accounting-type sweater.
Trust me.
I'm going to give it to you for the perspective,
as an entrepreneur, a CEO, a founder,
trying to and understand all these different terms
and how best to set myself up
to get the financial reporting that I need
to succeed in my business.
Be sure to stay at the end.
We're going to share with you
my Precision Scorecard Framework.
Essentially, it's a template that you need to instal
into your business to be able to track your key metrics
on a week, monthly, quarterly basis,
and hold your team accountable to grow your MRR.
Let's get into it.
(energetic music)
So I'm going to be honest with you.
I didn't want to shoot this video.
I didn't think there was a need to shoot this video.
I just assumed everybody did accrual accounting.
Until recently, I was on a coaching call
with all my clients.
And I found out that probably 15% of my clients
were doing cash accounting.
And here's what I'm gonna share with you
about cash accounting.
If you do that,
if you run your business from your bank account,
which is what most small businesses do,
non-software companies like 90% just run it off their bank.
Or at least they look at their bank account
to make business decisions.
Is there money, et cetera?
It's just hard to make any types of decision around, like
what's coming up that I need to pay for?
What have I paid for in the past?
How's my marketing doing?
How's my sales team doing?
How has these new initiatives,
these new projects that we've built into our business,
impacting revenue?
All these different aspects.
There's no visibility when you're doing cash accounting
because it's hard to correlate all the different numbers.
And that's why they created accrual accounting.
And I'm going to walk you through some of the terms
that's part of GAAP.
If you see GAAP accounting,
the generally accepted accounting principles,
there's different types of, you know,
if you're a big company in this vertical,
or, you know, this industry will have different kind of
nuances around how you do it.
But the big idea is in SaaS, in software,
most of them will use accrual accounting,
but you need to understand the terms,
like deferred revenue,
to really figure out how to track it properly.
Number one types of accounting.
There's two primary types of accounting, accrual and cash.
Cash is very simple.
If you measure when you got paid
or when you owe stuff based on when you pay it or expenses,
that's cash.
Essentially you're using your bank account
to measure things.
Accrual times everything based on the invoice
or the service itself on when the expense or the revenue
should have been allocated for it.
We're going to dive into it with a bit of story time,
but just understand there's two types of accounting,
cash and accrual.
Most SaaS founders are using accrual,
and a smaller percentage are using cash.
But when you start off, maybe that's easiest way to do it.
So no shame, no judgement .
I'm just gonna tell the difference and why at the end,
you should move over to an accrual accounting process.
Number two, story time.
Story time, story time, story time.
Imagine you have Fire Startup.
That's the name of the company.
We're just calling it Fire Startup because it's on fire.
It's amazing.
It's growing.
And they invoice a customer on July 1st,
but they don't get paid until August 30th.
Okay?
So the invoice July 1st.
They don't get paid August 30th.
If you're doing cash accounting,
then the revenue only comes on August 30th
when the money hits the bank account.
When he gets it's paid, right?
But with accrual accounting,
you would actually account for the revenue on July 1st,
when the invoice got sent out.
That's one of the biggest differences.
So I just wanted to share that quick story
so that you understand how Fire Startup
would look dramatically different
if all of a sudden,
now my income was 60 days different
from when it showed up in my bank account,
which means,
and this is what happens often
as we've got revenue that we're charging for now,
we may not see it if it's paid into the future,
or we get people to pay up upfront for a big amount.
And how do we track that in our accounting?
And that's what I want to share with you in this episode.
Number three terms of accounting,
I'm going to share with you two terms.
You probably hear as deferred revenue and accrued expenses.
Okay?
This is a scenario which many of you probably run into.
You get a new client.
They pay you for a year upfront,
and you, if you're doing cash accounting,
you just like put it in your bank account.
And you track that revenue.
What you want to do is you want to defer the revenue.
You almost look at it as like they paid you up front,
but if you divided by 12
and essentially there's an invoice each month,
that should show up in the bank accounts.
'Cause that's essentially an accounts receivable
that they're going to pay you into the future every month.
That's how you do deferred revenue
because you might have gotten revenue this month,
but you can't take the whole amount in that month.
You have to split it up, right?
So that's why it's called deferred revenue.
So every month you might have new revenue,
but then you also have deferred revenues
from previous full pays or two year contracts
or whatever it is from previous months
that have to be accounted in your revenues
for this month
'cause a lot of this has to do with the taxes, right?
When you report revenue,
the year of the tax year is when you're going to do it.
But I mean, at the end of the day,
accrual is key.
And then there's deferred, sorry,
accrued expenses.
Accrued expenses are expenses that show up
in your accounting that you haven't paid for yet.
Okay?
So their invoices you haven't paid for,
and they usually essentially show up as accounts payable,
but it's really important to understand those two big terms
because they're going to come up
when you're talking to your bookkeeper.
Number four, reporting setup.
How do you set up accrual accounting
in your accounting software?
The good news is if you use Xero or QuickBooks,
the default is accrual.
You have to actually go in under the settings
and change it to a cash accounting.
But that is how you set up the reporting
is you use a bookkeeping software or accounting software,
and you make sure it's set up as accrual,
and then you need to obviously follow the GAAP standards
in regards to how you post things.
That's the postings.
You know,
I've learned more about accounting
than I ever wished to learn.
I have a full team,
a finance team that manages all my different companies
and reporting,
but I needed to learn this stuff
so that I can ask the right questions
when I see some discrepancies in some data,
some trend lines, et cetera.
But to just set up the foundation,
it's usually by default in your accounting software.
If you're not using accounting software, add that.
Number five, next step.
So here's the deal.
That was the high level,
the difference between accrual versus cash
and deferred revenues and all these different things
that you're going to deal with with your SaaS business.
But I want to encourage you,
next step, go hire a bookkeeper
that understands accrual accounting.
Let them figure it out.
And the more you get reports,
the more you'll see the difference between
cash in your bank account versus the revenue
for the previous month or this month
or your MRR and how it builds up.
And like I said, there's different GAAP,
generally accepted accounting practises.
And there's some like companies like Zuora
that's looking at subscription accounting
and how that's done because that
obviously has different nuances.
But I just want to share the big thing for most people
watching this,
you guys are going to get what you need,
just going through an accrual accounting,
hiring a bookkeeper,
letting them set up the accounting software,
and then just asking for the reports
that you're going to need to run your business
and make better decisions.
So as I mentioned at the beginning of this episode,
I want to share with you and exclusive resource called the
Precision Scorecard.
This scorecard is what I use across all my companies
on a weekly basis to measure
the heartbeat of the business
in regards to the accounting stuff that I just went over,
as well as sales, marketing product, et cetera,
customer success, it's all there.
All the key metrics.
You can download your template below.
Just click the link to get access to that.
And I have two sets of metrics,
those for sub a million in revenue
and those that are million plus in ARR,
you can choose which types of metrics
are going to best serve you
and give you visibility into your business.
So just click the link to download your copy of
my Precision Scorecard Framework.
And if you like this video,
be sure to smash the like button,
leave a comment and let me know
what was your biggest takeaway from this episode?
And as per usual,
I want to challenge you to live a bigger life
and a bigger business, and I'll see you next Monday.