Dan Martell - December 21, 2020


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

Hosted by
Dan Martell
Mentioned
Fire Startup Zuora
Investing in 250+ SaaS Startups with Marvin Liao, Partner @ 500 Startups - Escape Velocity Show #43 How To Overcome The Ups & Downs as an Entrepreneur TODAY

Episode Stats


Length

8 minutes

Words per minute

198.98

Word count

1,680

Sentence count

85

Harmful content

Hate speech

1

sentences flagged


Summary

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

In this episode, Dan Martell talks about the difference between deferred revenue and accrued expenses, and why you should move over to an accrual accounting process. He also shares the story of Fire Startup, a startup that's on fire and is using a different accounting method than traditional cash accounting.

Transcript

Transcript generated with Whisper (turbo).
Hate speech classifications generated with facebook/roberta-hate-speech-dynabench-r4-target .
Hosts, guests, and mentioned names generated with spaCy (en_core_web_sm), reconciled against Wikidata.
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 0.95
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.