SaaS Finance Metric Comparisons
By James Bell
- Corporate Strategy , Finance , Higher Level Management , Metrics and Ratios , SaaS ,
- 28 Nov
SaaS Finance Metrics have many different purposes. In this article we will look at five different ways to look at one contract with a customer. This is important because one contract has many different perspectives and uses in Financial Analysis, Accounting, and decision making.
We can use some lines for Pro Forma financial statements, others for actual GAAP financial statements. We will use some for understanding growth and others for measuring liquidity. This is a simple look at a new contract. We can expand each of these metrics into more pieces, or simplify them as needed. Things get even more complicated when you have complex bundling of services and packages but the basic idea remains the same.
We are going to go through this using a fictional example. We describe the example contract and break down five different metrics of the same contract in a table. Then we’ll unpack each metric in more detail later. At the end there is an excel file that you can download to look at the formulas and try it out yourself.
Example Contract
We have a customer who signed an agreement for a 12-month contract. The total contract is for $34,000 that is billed in 4 Fiscal quarters (Q1-Q4) with an effective service start date of January 20th, 2018. This customer pays the bill as soon as we invoice them.
Recognized Revenue
This is a GAAP regulated number in the U.S.. This is the amount of revenue that is recognized in the period that it is earned. Even though parts of GAAP from SEC Staff Accounting Bulletin: No. 101 – Revenue Recognition are now superseded by ASC 606, it’s still useful in giving us a basic guideline for revenue to be recognizable:
- Persuasive evidence of an arrangement exists (replaced by ASC 606-10-25-1 for contracts)
- Delivery has occurred or services rendered
- The sellers price to buy is fixed or determinate
- Collectibility is reasonably assured
There are a lot of rules and nuance to Revenue Recognition. A recent major change was in 2014 with the ASC 606.
Here is a link to to some of the differences between IFRS and U.S. GAAP
Here is a link to FASB’s website about Revenue Recognition
Deferred Revenue
Deferred Revenue is also GAAP and shows as a liability on the Balance Sheet in accrual accounting. This is a liability because the products or services are still due to the customer in future periods while the payments have already been received. We are not consider the unbilled amount in either Revenue nor Deferred Revenue. This is on purpose. Doing so is “grossing up” the Balance Sheet. This means that you are grossing up your assets with a liability which goes beyond the scope of this article. You can look into IFRS 15, ASC 606, and other publications on the specifics.
Bookings
This is an important number. It is the total commitment the customer is going to spend. Understanding growth via Bookings is a great high level metric for executives. We typically take the sum of all the closed deals within the month by product or business unit. For our example, we are just looking at one contract so the total bookings equals the total of this one contract.
MRR
Monthly Recurring Revenue is the amount of revenue that you get each month in a subscription based revenue model. This is similar to Bookings in that we can use it measure growth and momentum.
Cash Collections
Cash flows are important when thinking about liquidity. We also call this Billings. Liquidity is the ability of a firm to pay it’s short term financial obligations using cash. Hence, using Cash in the name helps remind us that this relates to liquidity.
Pulling it all together
We see here a mix of Accounting and Finance calculations that all stem from the same contract. We do this because each metric is helpful in making different types of decisions. This article helps us understand why having strong finance and accounting personnel is important. Unnecessary noise, incorrect math, disorganization and miscommunication can lead you away from fact based decision making which means that you are left with making decisions based off of opinions. Doing this right is really important in being able to understand what is going on in your company which is critical to competing advantageously.