November 5, 2019

Set Up Quickbooks' Chart of Accounts Yourself, the Default Isn't Optimal for SaaS

Jen Happ
Chief Operating Officer

One of the first things you do when starting your SaaS business could end up haunting you down the road.  It’s an often overlooked item that you may not notice the negative impacts of until it comes time to raise money or report key results to your board. What is this I am talking about?

I’m talking about how you set up your accounting software. Ok, before I lose you, here is why it’s important.  Financial data is essential throughout the life of your company - it’s needed to monitor the results of your business, manage cash flow, and calculate the metrics VCs and your Board want to see. Despite financial data being this important, it is often one of the most overlooked areas of any early stage business.

To make the most of your financial data you need to set up your accounting system properly. This seems obvious but most systems don’t default to capture data with the right granularity and accuracy for SaaS businesses.

We’re here to guide you through.

The Problem: Quickbooks, Xero and the like weren’t made for the SaaS business model

Market leading SMB accounting softwares were made to appeal to the masses.

Let me show you what I mean. Here is the third question you are asked when setting up a Quickbooks Online account. How would you answer?

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Now ask your colleagues how they would answer?  My guess is that you will get three different answers if you kept asking around.

By making or selling products - that makes sense we have a product

By providing services - it is called Software as a SERVICE for a reason right?

It’s something else - he’s holding a computer, that must be it!

It’s never a good sign, when the 3rd set-up question brings this much confusion.  Luckily, it doesn’t matter how you answer this question, the resulting settings Quickbooks assigned you based on your response are all equally wrong for SaaS companies BUT don’t worry.

We have figured out the best way to set up and structure financial data specifically for SaaS businesses within these tools. Almost all of our customers needed help in this area, so I wanted to share our #1 recommendation.

The Solution: a SaaS-specific chart of accounts

The chart of accounts simply represents the list of “accounts” aka categories, you will use to code every transaction.  Think, when you receive money from a customer that gets sent to some Revenue (or Deferred Revenue) bucket. When you pay your rent, that goes to a Rent & Utilities account.

You might think, “it’s not like I’m missing transactions, they’re all accounted for, why does it matter if it in this bucket or that one?”

It does matter. You’ll use this data to calculate the metrics that are most important for SaaS companies. Customer acquisition cost, gross margin and so many more will be wrong if your quickbooks data is a mess. VCs and your board of investors need these and they represent the worth of your company, it’s critical they’re correct. Each account is used to calculate different metrics, so you may be taking unnecessary hits on metrics that VCs care about to look good in a metric that doesn’t hold as much weight.

For example, if you used the default chart of accounts, you would likely record all of your contractors expenses in the Contractors account that QBO was nice enough to create for you.

However, when it comes time to calculate your company’s CAC (customer acquisition cost) and you need to gather all of your sales & marketing spend, you will either a) need to go into all the detailed transactions and manually pull out the costs related to your sales and marketing contractors or b) just forget about these costs when performing the calculation because they are “hidden” inside this general sounding Contractors account and don’t scream sales & marketing.  

Either result isn’t good. It will throw off your calculation and could make it look like you’re leaving easy customers on the table by not investing enough in sales and marketing.

Our Recommendation:

All SaaS chart of accounts should have separate accounts to track your larger buckets of spend (e.g., wages, subcontractors, travel, software subscriptions) by each business function (COGS, Sales, Marketing, Product, General & Admin). There is a link to download our template at the bottom!

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By tracking your costs with this level of detail, it will be a breeze to calculate your most important metrics, prepare a functional P&L, and you will get better insights for how to run your business.

Not sure if your chart of accounts is set up the right way?  

Ask your bookkeeper / accountant / controller to show it to you.  If you can’t clearly distinguish which expense accounts contain COGS related costs vs. sales & marketing costs vs. product development costs or you have accounts that contain costs for all the above in one, then you likely need a change.

TL:DR To get the most out of your financial data, your accounting software should be set up in a way that allows you to easily track costs by function.  We recommend a SaaS-specific chart of accounts for all our customers over the default template from quickbooks.

Not sure where to begin to get your financial data in line?

Reach out and we will take a look at your chart of accounts and give you our recommendations for free!

Since we believe this is a fundamental issue across most early and growth stage SaaS companies, we want to provide you with our KPI Sense chart of accounts tailored for SaaS businesses: download here

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