How to track and manage employee-related expenses for better financial reporting in SaaS

For SaaS CFOs and finance teams, a thorough understanding of how employee-related expenses flow through financial statements—specifically the income statement and balance sheet—is important for compliant financial reporting, accurate forecasting, and strategic business planning.

In this article, we discuss the different types of employee-related costs and their significance for financial reporting as well as headcount planning and forecasting. We have also explored how forecasting software and automation tools can help mitigate the challenges in tracking and managing these expenses to ensure long-term business growth.

Types of employee-related expenses and how they are reported on financial statements

In order to better understand the impact of “people costs” on your business’ revenue and profitability, let’s take a look at the different types of employment expenses and how they are reported on the income statement and balance sheet.  

1. Salaries and wages

These are the costs incurred by a company as compensation to employees and contractors for the work performed and/or services rendered over a defined period. 

While full-time employees are paid a fixed salary and typically receive employee benefits, contractual employees are typically paid wages on a daily, hourly, or project basis, without any benefits or payroll taxes (depending on the contractor classification in the United States or other country of employment). 

Salaries and wages together comprise a significant expenditure that directly impacts your business’ profitability and cash flow.

• On the income statement: Recorded as operating expenses, directly reducing net income. Payments to contractors may be recorded under cost of goods sold (COGS) if their work is directly tied to delivering the SaaS product (e.g., freelance developers for feature updates). Otherwise, they are listed under OpEx.
• On the balance sheet: Recorded as current liabilities when accrued but not yet paid.

2. Employee benefits

Employee benefits are additional compensation-related expenses incurred by the company to provide benefits to their employees.

These benefits may be mandatory or voluntary depending on the regulations in which a business operates. Some of the most common include health insurance, retirement plans, paid time off, life insurance, wellness programs, childcare programs, and commuter benefits. 

• On the income statement: Recorded as OpEx, impacting profitability.
• On the balance sheet: Accrued benefits appear as liabilities until paid.

3. Payroll taxes

In the US, payroll taxes are imposed by the government on both employers and employees.

Employers and employees share the burden of Social Security taxes and Medicare taxes equally, while the employer is responsible for unemployment taxes and employees pay federal, state, and possibly local income taxes. 

Employers are responsible for remitting both their share of payroll taxes and the employees’ share to the taxing authorities typically on a monthly or quarterly basis. 

• On the income statement: Recorded as OpEx, impacting net income.
• On the balance sheet: Unpaid payroll taxes appear as liabilities until paid.

4. Bonuses and commissions

Bonuses generally are financial compensation and incentives for employees, beyond their salaries—basically variable expenses. Typical incentive bonuses for employees include signing, referral, and retention bonuses. 

Commissions, on the other hand, are awarded to salespeople based on their performance (achieving their targets) and certain defined metrics. 

These expenses (payouts) can be somewhat more difficult to predict so they need to be monitored carefully to maintain profitability and cash flow during the given time period. 

• On the income statement: Included in OpEx, reducing net income.
• On the balance sheet: Accrued bonuses appear as liabilities until paid.

5. Stock-based compensation

Stock-based compensation, also known as share-based or equity compensation, is a non-cash expense for businesses. 

It is commonly used to reward senior employees with equity in the business, beyond their regular salaries and bonuses.

Stock-based compensation is also often offered by SaaS companies and startups to attract and retain talent while preserving cash flow.

• On the income statement: Recognized as a non-cash OpEx over the vesting period, reducing net income.
• On the balance sheet: Increases shareholders’ equity under additional paid-in capital.

6. Training and development

Training and development expenses include all expenses related to providing training and professional development to employees. 

This would include salaries or wages for internal training staff as well as payments for external training for staff, such as the cost of courses, certifications, workshops, and subscriptions to online learning platforms. 

• On the income statement: Included in OpEx, impacting profitability.
• On the balance sheet: Not capitalized unless associated with specific technology or software training that provides long-term benefit.

7. Travel and entertainment

These are the costs incurred by a company when employees travel for business purposes or entertain clients. 

Travel costs usually include airfare, taxis, associated costs like visas, travel insurance, and accommodations. 

Entertainment costs include dining, event tickets, and team building or relationship-building activities.

Travel and entertainment costs can also include offsite business meetings or remote team gatherings, which are common for SaaS companies with distributed workforces.

• On the income statement: Recorded under OpEx, reducing net income.
• On the balance sheet: Unpaid travel or entertainment expenses may appear as liabilities.

How employee expenses can impact key financial metrics

Employee expenses (i.e., those related to headcount) typically command the largest share of expenses for any business.

A thorough understanding and management of these costs is important for effective financial planning and budgeting. Proper allocation, of both cash and human resources, help businesses to sustain growth and thrive in the face of unexpected market shifts. 

Wages and salaries are the most significant portion of employee costs, typically accounting for about 70% of total compensation in private industry settings.  — US Bureau of Labor Statistics

For SaaS businesses where revenue is recognized over time instead of all at once, keeping an eye on employee-related expenses is especially important to maintaining profitability and sustainable growth. 

This is because in SaaS, you need tech and product people before you can build features.  You have to plan for sales capacity to build a “right-sized” sales team to close deals. And, you need a customer success team to help avoid churn and effectively expand accounts. Employee-related expenses are directly impacting your unit economics at every point making it necessary to optimize these costs to the extent possible. 

At the same time, you have to figure out what kind of compensation package you need to attract and retain the right kind of talent for your SaaS business.

Offering a competitive compensation package helps ensure your employees are motivated, engaged, and productive. It can also slow attrition, which is important, too. Given the cost of recruitment, onboarding, and training, high employee attrition is expensive and can significantly increase your operating expenses.    

In addition, accurately tracking and managing employment costs ensures regulatory compliance with local labor laws and provides transparency in financial reporting. No business wants to see its operating expenses increase as a result of unnecessary penalties or legal fees that could have been avoided with better monitoring of employee-related expenses. 

Impact on SaaS financial metrics

Employee-related expenses influence all aspects of your business, from your burn rate and cash runway to your investor valuation metrics and cash flow forecasts.

To effectively balance employee-related expenses with sustainable growth, SaaS business leaders monitor the following financial metrics.

1. Annual recurring revenue per employee

ARR per employee is a fundamental measure of how efficiently your startup is utilizing its human capital investment. ARR per employee is critical because it directly reflects the return on your largest expense—your workforce.

When your return per employee is lower than industry benchmarks, it might indicate overstaffing or inefficient resource allocation. 

2. Customer acquisition costs

Customer acquisition cost (CAC) is heavily influenced by employee expenses. Typically, the salaries, commissions, and benefits for the marketing and sales personnel constitute the majority of the CAC.

When your sales team's compensation structure isn't optimally aligned with performance, it can inflate your CAC to the detriment of unit economics. Monitoring this metric helps you assess if your investment in sales and marketing headcount is delivering efficient growth and whether your compensation structures need adjustment.

3. Gross margin

Gross margins in SaaS companies are sensitive to employee costs in customer-facing roles. The salaries of the support staff, implementation specialists, and customer success teams directly impact this metric.

When these employee costs aren't optimized, they can compress margins and affect overall profitability. This makes it essential to find the right balance between service delivery costs and maintaining high-quality customer support.

How to incorporate employment costs into headcount planning

Accurate headcount planning requires complete visibility into employee-related expenses. Here’s what businesses need to look at:

• Headcount budgeting and forecasting: Current employment expense patterns help establish benchmarks for future hiring and onboarding costs, enabling realistic headcount planning and budget allocation. 
  
  For example, you can map specific headcount needs by level (entry, mid, senior) for each department and then use historical employee expense data to estimate costs.
  
  Based on these projections, you’ll be able to factor expected changes such as  promotions, annual appraisals, etc. into departmental budgets. 

• Financial modeling: By modeling how headcount requirements affect profitability and overall operating expenses, you can evaluate growth strategies more effectively.
  
  Integrating employee cost data (both historical and current) into financial models provides a foundation for accurate business performance projections during financial planning.
  
  For example, you can use the data for scenario analysis to understand the financial impact of scaling your business vs. the people resources required. 

• Resource allocation: Employment expense data can influence the allocation of employees and contractors across the organization, aligning resources with departments that drive growth.
  
  For example, analyzing metrics like revenue per employee across teams, such as engineering, sales, and customer success. This helps both finance and people teams optimize current resource allocation and plan for future hires in alignment with the long-term goals of the business.

• Cash flow management: Understanding the timing and magnitude of employee-related expenses helps you maintain adequate liquidity for payroll and benefits.
  
  The expense data also informs cash runway projections. 

Another tip for finance teams is to conduct regular variance analysis to understand why actual spending differs from projections. This helps refine future forecasts and identifies areas for optimization in both headcount and cost planning.

Challenges in tracking and managing employee expense data

SaaS companies can face several challenges when managing and tracking employee-related expenses:

• Spreadsheet limitations: A lot of finance teams keep track of employee-related expense data in spreadsheets. However, this introduces a greater risk for errors and duplication. Additionally, version control issues can lead to inconsistencies in financial reporting. 
• Delayed financial close: When companies struggle to consolidate expense data from multiple spreadsheets across regions and employment types, it leads to delays, not to mention inaccuracies, in the financial close process.
• Reporting and compliance: Dealing with different employment types (full-time employees vs. contractors) across different geographical locations can lead to taxation and compliance challenges for startups. 
• Cash flow forecasting challenges: Manual expense reporting and delayed submissions create gaps in real-time financial visibility. This makes it difficult to forecast cash flows and manage budgets. 

Upgrade your employment expense management and financial planning with Drivetrain

A comprehensive understanding of employee-related expenses and their significant impact on financial statements and revenue and cost metrics enables SaaS finance leaders to make more informed decisions about capacity planning, compensation and commission structures, and resource allocation. 

Since employee costs directly influence a company’s financial health and performance, from daily operations to long-term scalability, SaaS finance teams need to move beyond basic expense tracking and unwieldy spreadsheet-based planning to more sophisticated systems that provide real-time visibility and strategic insights.

Modern FP&A platforms like Drivetrain automate data consolidation and provide real-time tracking capabilities that enable finance teams to focus on strategic decision-making rather than manual data management. 

Using Drivetrain as your headcount planning software, you can:

• Integrate and analyze data from various sources, such as HRIs, CRMs, even multiple spreadsheets, to arrive at a single source of truth
• Create dynamic headcount plans
• Streamline financial reporting with automated data flows
• Perform detailed scenario analysis for hiring decisions
• Generate accurate cash flow forecasts incorporating all employee-related expenses
• Track key metrics and variances in real-time

Learn more about how Drivetrain can help you optimize your SaaS business’ largest operating expense.