It has become a lot more common in the last few years for businesses to offer their wares "as-a-service." The phrase originated with software providers that centrally hosted their applications and delivered them to customers over the internet. This model is now called software as a service (think Salesforce and Intacct). Similar concepts have also popped up to describe platforms such as Amazon Web Services (infrastructure as a service) and Google App Engine (platform as a service), but let's dive more into SaaS in particular.
SaaS is sort of like pizza delivery. Sure, pizza lovers could assemble ingredients on their own at home and then bake the made-from-scratch pie in an oven, but it is usually much easier to just select something off of an online menu, customize it and then have it delivered to the door. In a similar way, SaaS saves customers the hassles of setting up their own hardware and software instances. But how convenient is SaaS for the actual provider?
On the accounting side, running a SaaS company is not always easy:
- Financial complexity rapidly increases as the firm grows, which is a textbook story for many SaaS providers. For example, the business chat service Slack grew from 14,600 daily users in February 2014 to over 2 million in December 2015. Users and subscriptions are accordingly added at a torrid pace that can quickly strain a company's existing tools and processes (e.g., manual Excel-based setups).
- Against this backdrop, both quote to cash and revenue recognition become challenging endeavors. Revenue recognition requirements can evolve rapidly. Meanwhile, quote to cash is complicated by the need for efficient subscription billing that offers a full view into each customer's status and enables accurate reporting as well as speedy sales cycles.
- Indeed, subscriptions and application integrations are the bread and butter of SaaS operations. More specifically, SaaS teams usually need seamless integration with Salesforce for effective customer relationship management and quote to cash. Subscription billings, renewals and accounting should be as painless as possible. To reuse our analogy: You can't deliver pizza without first having a proper system for taking orders.
These challenges can add up to a string of headaches for fast-moving SaaS companies, which are in many instances competing with entrenched incumbents, seeking multiple rounds of venture capital/funding and searching for rock-solid operational metrics to show to their investors. It is fitting, in a way, that specialized SaaS tools (i.e., cloud financial software) are the best mechanisms for handling SaaS finances. What might the before and after look like for a SaaS company grappling with common accounting issues? We'll explore the "before" in this part, and the "after" in part two.
How can SaaS companies overhaul their financial systems?
Before: Manual processes, lack of seamless quote to cash impede SaaS growth
SaaS is designed to be scalable, like a pizza parlor that can deliver hundreds of pies on demand. But as the subscriptions flood in and the supporting cloud infrastructures ramp up, productivity can fall behind as the internal accounting system struggles to keep pace.
"Complex revenue recognition requirements and manual calculations are a recipe for trouble."
Complex revenue recognition requirements mixed with manual calculations is a recipe for trouble. Not only is it slow going, but there is also the high risk of making a mistake during data entry, which would put everyone even further behind and compromise the accuracy of the company's financials.
Operational metrics are a good example here. A legacy process for assembling them might entail:
- Gathering numbers from disparate financial applications
- Constructing metrics reports based on these figures
- Performing calculations on the aggregated data within Excel
It is all manual and very time-consuming. Likewise, the same kinds of unscalable practices are often in place for managing customer relationships. Even SaaS companies that excel at automating tasks like insurance claims management for their customers might still handle their own invoices and renewals in a spreadsheet or through a legacy application.
SaaS provider Snapsheet was in this boat before it switched to Intacct. The company, which specializes in auto claims appraisals, relied on QuickBooks to manually record each one of its insurance claims. QuickBooks has many limitations, including its ability to associate only one database file with a company. In this case, the real bottleneck was in its lack of integration with a backend claims management system for bulk billing.
In the second half of this series, we'll take up what the "after" looks like, once a SaaS organization has implemented cloud accounting software.To work around this problem, Snapsheet's team sunk many hours into Excel-based workarounds to handle customer claims as well as insurance carrier invoices. Up to 8 hours each day were spent simply on invoice production. It would be like having to devote the bulk of a day at a pizza place simply slicing mushrooms; there wouldn't be enough time to do everything else needed for completing orders.
