Dan Martell - December 21, 2020


Deferred Revenue VS Accrued Revenue (How to Set Your SaaS Company Up for Success)


Episode Stats

Length

8 minutes

Words per Minute

198.9814

Word Count

1,680

Sentence Count

85

Hate Speech Sentences

1


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

Transcript

Transcript generated with Whisper (turbo).
Hate speech classifications generated with facebook/roberta-hate-speech-dynabench-r4-target .
00:00:00.080 Hey there, Dan Martell here,
00:00:01.000 serial entrepreneur, investor, and creator of SaaS Academy.
00:00:03.000 In this episode, I'm gonna share with you
00:00:04.480 the difference between deferred revenue
00:00:07.040 versus accrued expenses,
00:00:09.120 and really get into the weeds of SaaS accounting.
00:00:12.800 I'm not an accountant.
00:00:13.680 I know I'm wearing an accounting type sweater.
00:00:15.760 Trust me, I'm gonna give it to you
00:00:17.520 from the perspective as an entrepreneur, a CEO, a founder,
00:00:21.160 trying to understand all these different terms
00:00:22.840 and how best to set myself up
00:00:24.640 to get the financial reporting
00:00:26.040 that I need to succeed in my business.
00:00:28.680 be sure to stay at the end.
00:00:29.920 We're gonna share with you
00:00:30.740 my precision scorecard framework.
00:00:32.760 Essentially, it's a template that you need
00:00:34.220 to install into your business
00:00:35.740 to be able to track your key metrics
00:00:38.140 on a week, monthly, quarterly basis
00:00:39.860 and hold your team accountable to grow your MRR.
00:00:43.280 Let's get into it.
00:00:56.940 So I'm gonna be honest with you.
00:00:58.060 I didn't wanna shoot this video.
00:00:59.680 I didn't think there was a need to shoot this video.
00:01:01.560 I just assumed everybody did accrual accounting
00:01:04.100 until recently I was on a coaching call with all my clients
00:01:07.860 and I found out that probably 15% of my clients
00:01:11.200 were doing cash accounting.
00:01:13.560 And here's what I'm gonna share with you
00:01:15.000 about cash accounting.
00:01:16.200 If you do that, if you run your business
00:01:17.880 from your bank account,
00:01:18.860 which is what most small businesses do,
00:01:21.440 non-software companies,
00:01:23.160 like 90% just run it off their bank account.
00:01:25.740 Or at least they look at their bank account
00:01:27.520 to make business decisions, is there money, et cetera.
00:01:30.140 It's just hard to make any types of decision around
00:01:33.040 like what's coming up that I need to pay for?
00:01:36.320 What have I paid for in the past?
00:01:38.340 How's my marketing doing?
00:01:39.720 How's my sales team doing?
00:01:41.540 How has these new initiatives,
00:01:43.200 these new projects that we've built into our business
00:01:46.000 impacting revenue, all these different aspects.
00:01:49.060 There's no visibility when you're doing cash accounting
00:01:51.980 because it's hard to correlate all the different numbers.
00:01:54.960 And that's why they created accrual accounting.
00:01:58.100 And I'm gonna walk you through some of the terms
00:01:59.940 that's part of GAAP.
00:02:01.360 If you see GAAP accounting,
00:02:02.680 the generally accepted accounting principles,
00:02:05.340 there's different types of, you know,
00:02:06.680 if you're a big company in this vertical,
00:02:08.420 or, you know, this industry,
00:02:09.780 you'll have different kind of nuances around how you do it.
00:02:12.720 But the big idea is in SaaS, in software,
00:02:16.420 most of them will use accrual accounting,
00:02:20.000 but you need to understand the terms like deferred revenue
00:02:22.920 to really figure out how to track it properly.
00:02:25.680 Number one, types of accounting.
00:02:27.180 There's two primary types of accounting, accrual and cash.
00:02:31.700 Cash is very simple.
00:02:32.980 If you measure when you got paid or when you owe stuff
00:02:35.740 based on when you pay it or expenses, that's cash.
00:02:38.480 Essentially, you're using your bank account
00:02:39.740 to measure things.
00:02:40.680 Accrual times everything based on the invoice
00:02:44.960 or the service itself on when the expense
00:02:47.840 or the revenue should have been allocated for it.
00:02:50.740 We're gonna dive into it with a bit of story time,
00:02:52.460 Just understand there's two types of accounting,
00:02:54.780 cash and accrual.
00:02:56.640 Most SaaS founders are using accrual
00:03:00.160 and a smaller percentage of using cash.
00:03:01.580 But when you start off, maybe that's the easiest way to do it.
00:03:03.600 So no shame, no judgment.
00:03:05.420 I'm just gonna tell you the difference
00:03:06.660 and why at the end you should move over
00:03:08.300 to an accrual accounting process.
00:03:10.420 Number two, story time.
00:03:11.880 Story time, story time, story time.
00:03:14.140 Imagine you have Fire Startup.
00:03:16.120 That's the name of the company.
00:03:16.960 We're just calling it Fire Startup
00:03:17.800 because it's on fire, it's amazing, it's growing.
00:03:20.740 and they invoice a customer on July 1st,
00:03:23.860 but they don't get paid until August 30th, okay?
00:03:27.180 So they invoice July 1st,
00:03:28.360 they don't get paid August 30th.
00:03:30.320 If you're doing cash accounting,
00:03:32.740 then the revenue only comes on August 30th
00:03:36.540 when the money hits the bank account,
00:03:38.540 when he gets paid, right?
00:03:40.340 But with accrual accounting,
00:03:41.620 you would actually account for the revenue on July 1st
00:03:45.060 when the invoice got sent out.
00:03:46.740 That's one of the biggest differences.
00:03:48.980 So I just wanted to share that quick story
00:03:51.100 so that you understand how Fire Startup
00:03:52.960 would look dramatically different
00:03:54.800 if all of a sudden now my income was 60 days different
00:03:57.780 from when it showed up in my bank account,
00:03:59.660 which means, and this is what happens often,
00:04:01.800 is we've got revenue that we're charging for now.
00:04:03.780 We may not see it if it's paid into the future,
00:04:06.180 or we get people that pay us upfront for a big amount,
00:04:09.020 and how do we track that in our accounting?
00:04:10.660 And that's what I wanna share with you in this episode.
00:04:13.460 Number three, terms of accounting.
00:04:15.300 I'm gonna share with you two terms you probably hear
00:04:17.160 is deferred revenue and accrued expenses, okay?
00:04:20.760 This is a scenario which many of you probably run into.
00:04:23.760 You get a new client, they pay you for a year up front
00:04:26.500 and you, if you're doing cash accounting,
00:04:28.660 you just like put it in your bank account
00:04:30.180 and you track that revenue.
00:04:31.860 What you wanna do is you wanna defer the revenue.
00:04:34.000 You almost wanna look at it as like they paid you up front
00:04:36.160 but if you divide it by 12 and you,
00:04:37.900 essentially there's an invoice each month
00:04:40.060 that should show up in the bank accounts
00:04:42.100 because that's essentially an accounts payable
00:04:43.820 or receivable that they're gonna pay you
00:04:45.480 into the future every month.
00:04:46.580 that's how you do deferred revenue
00:04:49.420 because you might've gotten revenue this month
00:04:51.440 but you can't take the whole amount in that month.
00:04:55.760 You have to split it up, right?
00:04:57.260 So that's why it's called deferred revenue.
00:04:58.820 So every month you might have new revenue
00:05:00.880 but then you also have deferred revenues
00:05:02.200 from previous full pays or two-year contracts
00:05:05.300 or whatever it is from previous months
00:05:07.040 that have to be accounted in your revenues for this month
00:05:09.580 because a lot of this has to do with taxes, right?
00:05:12.720 when you report revenue is the year,
00:05:16.420 the tax year is when you're gonna do it.
00:05:18.100 But I mean, at the end of the day, accrual is key.
00:05:20.420 And then there's deferred, sorry, accrued expenses.
00:05:23.640 Accrued expenses are expenses that show up
00:05:26.900 in your accounting that you haven't paid for yet.
00:05:30.100 Okay, so they're invoices you haven't paid for
00:05:32.160 and they usually essentially show up as accounts payable,
00:05:35.840 but it's really important to understand those two big terms
00:05:38.680 because they're gonna come up
00:05:39.660 when you're talking to your bookkeeper.
00:05:41.140 Number four, reporting setup.
00:05:42.740 How do you set up accrual accounting
00:05:45.020 in your accounting software?
00:05:46.360 The good news is if you use Xero or QuickBooks,
00:05:49.060 the default is accrual.
00:05:50.800 You have to actually go into the settings
00:05:52.300 and change it to a cash accounting.
00:05:54.400 But that is how you set up the reporting
00:05:56.280 is you use a bookkeeping software or accounting software
00:05:59.380 and you make sure it's set up as accrual.
00:06:01.560 And then you need to obviously follow the gap standards
00:06:04.320 in regards to how you post things.
00:06:05.760 That's the postings.
00:06:06.960 I've learned more about accounting
00:06:11.240 than I ever wished to learn.
00:06:12.460 I have a full team, a finance team
00:06:14.100 that manage all my different companies and reporting,
00:06:16.400 but I needed to learn this stuff
00:06:18.660 so that I can ask the right questions
00:06:20.540 when I see some discrepancies in some data,
00:06:22.440 some trend lines, et cetera.
00:06:24.020 But to just set up the foundation,
00:06:25.960 it's usually by default in your accounting software.
00:06:28.600 If you're not using accounting software, add that.
00:06:30.840 Number five, next step.
00:06:32.180 So here's the deal, that was the high level,
00:06:34.100 the difference between accrual versus cash
00:06:36.420 and deferred revenues and all these different things
00:06:38.180 that you're gonna deal with with your SaaS business.
00:06:40.080 But I want to encourage you, next step,
00:06:43.200 go hire a bookkeeper that understands accrual accounting.
00:06:46.160 Let them figure it out.
00:06:47.760 And the more you get reports,
00:06:49.380 the more you'll see the difference
00:06:50.680 between cash in your bank account
00:06:52.340 versus the revenue for the previous month
00:06:54.980 or this month or your MRR and how it builds up.
00:06:57.900 And like I said, there's different gap
00:06:59.560 generally accepted accounting practices.
00:07:01.760 And there's some like companies like Zuora
00:07:03.920 that's looking at subscription accounting
00:07:06.900 and how that's done,
00:07:08.300 because that obviously has different nuances.
00:07:10.680 But I just wanna share the big thing
00:07:12.640 for most people watching this,
00:07:13.920 you guys are gonna get what you need,
00:07:15.840 just going to an accrual accounting,
00:07:17.240 hiring a bookkeeper,
00:07:18.840 letting them set up the accounting software,
00:07:21.040 and then just asking for the reports
00:07:22.800 that you're gonna need to run your business
00:07:24.320 and make better decisions.
00:07:25.860 So as I mentioned at the beginning of this episode,
00:07:27.760 I wanna share with you an exclusive resource
00:07:29.400 called the Precision Scorecard.
00:07:31.020 This scorecard is what I use across all my companies
00:07:34.140 on a weekly basis to measure the heartbeat of the business.
00:07:38.260 In regards to the accounting stuff that I just went over,
00:07:40.680 as well as sales, marketing, product, et cetera,
00:07:43.140 customer success, it's all there, all the key metrics.
00:07:45.600 You can download your template below.
00:07:47.460 Just click the link to get access to that.
00:07:49.580 And I have two sets of metrics,
00:07:51.680 those for sub a million in revenue
00:07:53.740 and those that are a million plus in ARR.
00:07:56.200 You can choose which types of metrics
00:07:58.000 are gonna best serve you
00:07:58.880 and give you visibility in your business.
00:08:00.440 So just click the link to download your copy
00:08:02.700 of my Precision Scorecard Framework.
00:08:04.560 And if you like this video,
00:08:05.900 be sure to smash the subscribe button,
00:08:08.640 leave a comment and let me know
00:08:10.540 if you have any other questions around accrual accounting,
00:08:12.820 I'll do my best.
00:08:13.980 And if there's somebody that you feel like this could serve,
00:08:15.980 feel free to share it with them directly.
00:08:17.680 And as per usual, I wanna challenge you
00:08:19.120 to live a bigger life and a bigger business,
00:08:20.900 and I'll see you next Monday.
00:08:22.800 Oh, the accounting, the accounting.