As a SaaS company, it’s important to understand the difference between GAAP revenue vs ARR. Here’s a breakdown of what each metric means and how they differ. I remember when I first started my software company, I didn’t really know the difference between GAAP revenue vs ARR. My accountant told me that GAAP was one of the generally accepted accounting standards and that we should use it for our financial reporting. But he also said that AAR was a more accurate measure of our recurring revenues because it took into account things like deferred revenues from long-term contract values. So which one should you use? Well, it depends on your business model and what you’re trying to communicate with your investors or stakeholders. If you want to give them a more accurate picture of your recurring revenues, then go with ARR. However, if you’re looking to show growth in terms of top-line revenue then GAAP is probably the better option.”
GAAP Revenue vs ARR
The Difference Between SaaS And GAAP Accounting
SaaS metrics can tell you about the growth and momentum of your business. They track different areas of your company’s performance, including its sales, marketing, and customer base retention.
But GAAP metrics can tell you how well you are delivering your service and whether you have a solid foundation on which to build your growth machine.
Both are necessary to build a successful business. So what is the generally accepted method of accounting for a software as a service (SaaS) company?
Just because you’ve signed a contract and received payment doesn’t mean you can count that as income. You haven’t earned the cash until the customer has received the product.
To earn a sale, you actually have to deliver what you promise. That ‘delivering’ is the basis of Generally Accepted Accounting Principles (GAAP). In a traditional software company, the delivery of the software was a one-off transaction.
You released the software all at once, were paid, and were able to recognize the revenue immediately.For example, you released a new version of your software in January.
You can recognize revenue from sales the moment you receive payment from customers.
A SaaS company delivers a portion of its software to its customers every day throughout their subscription period.
If you provide services, such as consultancy, for a set period of time, such as a month or year, then you will receive payment upfront, but can only recognize this money as income slowly, as you provide the service for the specified amount of time.
When things are simple, both GAAP and SaaS metrics look similar. However, if you’re only recognizing revenue monthly (when technically, it should be rated daily for the period you’re delivering the service), then your revenue and MRR might not be identical.
In the example, the monthly recognized revenue and the MRR are both $1666.67, but this may not be the case once you start expanding your business. Adding accounts, offering annual payments, and increasing sales can complicate your finances.
When you are bundling services, you will find that your SaaS metric will be different from your GAAP metric. Additionally, when you don’t deliver for a customer, you will have to face different consequences since they have already paid for your service.
One possible reason your server might be down is that you cancelled your consultancy service.
Then you will either have to pay the money back, or incur extra expenses in order to deliver the service. If you don’t have a way to distinguish earned income from income that you have yet to deliver, you won’t know exactly what you still have to do, or how much you still have to invest, to make your customers happy and earn that money. This is why you need to know the exact difference between your bottom-line revenue, the cash in your bank account, and your sales and MRR numbers, as well as how all of these numbers interact as you grow.
Bridging the Disconnect Between GAAP and SaaS Metrics
If you want to sell your company, you need to keep track of the KPIs that potential suitors will be looking for. But you also need to keep an eye on your key performance metrics.
The goals of any company should be profit, monthly recurring revenue, cash flow, time to recoup customer acquisition cost, and growth in sales. In order to track these metrics, it is important to use the right performance indicators.
For tech companies, the most likely outcome of being acquired by another company is being bought out. This is not the case for most software as a service (SaaS) companies, as an incorrect valuation can hinder the negotiation process.
In this post, we’ll explore the metrics that CEOs of software-as-a-service (SaaS) companies can use to convince potential suitors that their business is performing well.
This gap between how companies evaluate a software business and how potential buyers evaluate software companies often causes problems during negotiation.
This gap between potential sellers and buyers is often a hurdle in negotiation.
Subscription businesses as a services industry, while relatively new, have already seen massive growth. This difference from more traditional business models, where customers buy the software outright, is just one of the factors that sets the two apart.
For traditional businesses, revenues are calculated from deals that have already gone through.
With SaaS businesses, a vendor can reasonably expect to sell the software to 1,000 customers, but the total value of those customers would be worth significantly more than $99,000. This is because customers who subscribe to a SaaS service are more likely to stick around and be more engaged with the product than those who buy a one-time software.
Revenues are not calculated on previous or existing subscription, but on current and future ones.
There are a number of key performance indicators (KPIs) that are commonly used by software as a service (SaaS) companies.
MRR and ARR metrics are commonly used to measure the performance and growth of a software as a service (SaaS) company.
As a founder, it’s important to keep an eye on the numbers that matter to you and your potential acquirers. However, since no standard rules have yet been established for the various metrics, this can be a lot of work.
This doesn’t need further explanation.
2. The MRR (Monthly Recurring Revenue)
Tracking your Monthly Recurring Revenue (MRR) is a great way to get a clear view of how successful your SaaS business is. By watching this number, you can track how your monthly revenue is growing over time.
To be more precise with your projected income, you should deduct the cancelled subscriptions from the total subscribers before calculating your expected earnings. This computation will give you your committed monthly recurring revenue (CMRR).
3. Months to Recover CAC (Cost of Acquiring a Customer)
To determine your CAC, you need to calculate how long it takes for you to recover your CAC.
Businesses that have been around for a long time, such as banks and cell phone providers, can afford to wait a long time before recovering their CAC because the cost of acquiring customers is low and readily available.
In the software as a service (SaaS) business, it’s important to turn a profit from customers within a year. If you don’t, you’ll need to re-evaluate your business model. This is because money is tight in the Saas industry and you can’t afford to wait too long to get paid.
The growth of a business is a good indicator of success. When a start-up gains customers and starts to gain a following, it’s usually a good sign that the business is doing well.
Companies that invest in content marketing get a lot more press, social media, and blog coverage. This indirect marketing helps lower their cost of acquiring new customers.
So which metric should you use? GAAP revenue vs ARR? It really depends on your business model and what you’re trying to communicate with your investors or stakeholders. If you want to give them a more accurate picture of your recurring revenues, then go with ARR. However, if you’re looking to show growth in terms of top-line revenue, then GAAP is probably the better option.”