The complete guide to mastery in financial reporting for SaaS success

Financial reporting is absolutely vital to the success of any business. Without it, business leaders would have no way of diagnosing issues threatening their company (much less addressing them), and they wouldn’t be able to identify new opportunities for growth, either. 

It not only makes it possible to monitor your business’ financial health and performance but also helps you make informed decisions, attract investors, and ensure compliance with regulatory requirements.

Financial reporting is a big topic. It encompasses a wide range of financial statements, key performance indicators (KPIs) and metrics, and ratio analysis, all of which can provide deep insights into a company’s financial health – if you understand how to use them.  

In this guide, you learn everything you need to know about financial reporting so you can begin more fully leveraging it to drive growth in your business. 

What is financial reporting and why is it so important?

Financial reporting is the process of communicating financial information to internal and external stakeholders. 

Financial reporting is not only necessary to understanding your company’s finances, it also offers several other benefits to your business, including:

• Optimized debt management
• Enhanced working capital management
• Real-time insights and tracking for quick business decisions
• Identification and forecasting of business trends
• Better management of assets and liabilities
• Cash flow analysis and insights
• Internal controls to prevent fraudulent activities

All of these benefits derive from the various statements and reports that are used in financial reporting, which individually and together paint a clear picture of the financial health and stability of the company over a specific period of time.

Financial reports are used both internally and by external parties. 

Within the company, they’re used by management, finance and accounting teams, data analysts to: 

• Analyze profitability of the business as a whole and by the different dimensions of the business, such as by subsidiary, geography, location, and/or product
• Track and assess cash flow for mature companies or assess burn rate for start-ups
• Develop budgets, projections, and forecasts
• Make strategic decisions around business growth and performance

Externally, investors, creditors, and regulatory bodies use financial reports to:

• Assess the financial health of a company before buying stock or making an equity investment
• Analyze credit applications for loans, lines of credit, and letters of credit for overseas activity
• Examine potential merger or acquisition activity

The main objectives of financial reporting

The primary objective of finance reporting is to ensure that all stakeholders, from internal management and finance teams to external investors and auditors, have the financial performance information they need to make data-driven, strategic decisions about the company’s growth and future profitability. It forms the backbone for financial planning, analysis and benchmarking.

1. Assessing financial performance and position

Financial reporting allows stakeholders to assess a company’s financial performance (i.e., its profitability over a given period) and its financial position (i.e., its assets, liabilities, and equity at a specific point in time). It also allows investors to compare the financial health of different companies, leading to more informed investment decisions.‍

2. Tracking cash flow

The cash flow statement shows the changes in cash during a period of time. By reviewing this statement, investors can know if a company has enough cash to pay for expenses and purchases.

3. Communicating essential data

Key shareholders, executives, investors and professionals all rely on current financial data and documentation to assess profitability, risk and future returns. It also enables all the relevant stakeholders to monitor the management of the company.

4. Ensuring compliance

Financial reporting helps businesses follow all the necessary processes to ensure compliance with mandatory accounting regulations. Accurate financial reporting also simplifies tax, valuation and auditing processes, reducing the time to complete necessary financial obligations and further validating financial compliance.

5. Evaluating operations at scale over longer periods of time

The information on a balance sheet is a snapshot of a company’s assets and liabilities at the end of a financial period. On the other hand, an income statement, shares results about sales, expenses, and profit or losses during the period. Through accurate financial reporting data, investors can both evaluate a company’s past income performance and assess future cash flow.

6. Analyzing shareholder equity

The statement of shareholders’ equity is important to equity investors. It shows the changes to various equity components like retained earnings during a period. Steady growth in a business’s shareholders’ equity as a result of increasing retained earnings (as opposed to expanding the shareholder base) means higher investment returns for current equity shareholders.

7. Mitigating financial reporting errors

Accurate financial reporting can help businesses spot and address discrepancies in the financial statements early on in the process and avoid additional costs.

What do financial reports contain?

Broadly, financial reporting includes a variety of financial statements, various financial KPIs and SaaS metrics, and results from different types of ratio analysis, all of which communicate different aspects of the business. Let’s take a deeper look at each of these components. 

Financial statements

The purpose of financial statements is to enable business leaders to understand their finances across the entire business by providing a detailed summary of previous financial data. They also help leaders make strategic decisions about the company’s operational activities, growth, and future profitability. This data can also inform other stakeholders, including investors or creditors, about the overall financial health and stability of the business.  

Financial reporting typically comprises four main financial statements. The first three – the balance sheet, income statement, and cash flow statement – are part of the three-statement model, which provides the foundation for all financial reporting. All four, however, are considered key financial reports for any business, public or private:

• Balance sheet: This document shows a company’s assets, liabilities, and shareholders’ equity for a specific date. These are typically created at the end of the fiscal year. The assets are listed in order of liquidity, while the liabilities are listed in the order that they need to be paid.
• Income statement: Also known as the profit and loss (P&L) statement, this document illustrates the profitability of a company under accrual accounting rules. Income statements cover either a year (annual financial statements) or a quarter (quarterly financial statements), and describe how a company arrived at their net income over that period. The details of these statements include revenues, expenses, and earnings per share, and usually includes past data for comparisons.
• Cash flow statement: This statement shows cash movements (inflows and outflows) from operating, investing, and financing activities over a period of time. Cash flow statements aid in understanding cash flow, which is critical to ensuring that the money necessary for running the business is available when needed. Finance and accounting professionals also use cash flow statements to find dividends paid and the dollar value of repurchased shares.
• Equity statement: This financial statement describes how the equity of a company changes over time. This change is affected by net profit or loss, individual gains or losses, shares bought and sold, and dividend payments. The equity statement allows stakeholders to see what factors caused a change in owner’s equity during the accounting period. It also includes transactions that are not recorded in a company’s income statement and balance sheet, such as equity withdrawal and dividend payments.

In addition to these, public companies are also required to prepare 10-Q and annual 10-K statements:

• Form 10-Q is a comprehensive quarterly report of financial performance submitted by all public companies to the United States Securities and Exchange Commission (SEC). It contains financial statements, management discussion and analysis, disclosures, and internal controls for the previous quarter.
• The 10-K statement is a comprehensive report filed annually by public companies about their financial performance and includes corporate history, financial statements, earnings per share, and any other relevant data.

Companies might also prepare notes to financial statements, which are referred to as financial disclosures. These documents are found towards the end of a financial statement and provide non-financial information and context around the financial data. They might describe changes in operations or strategy or provide insight into the company structure and chain of command.

Financial KPIs 

Key performance indicators (KPIs) come in different flavors. Financial KPIs are quantifiable indicators of a company’s financial performance, specifically. 

They provide information about expenses, sales, profit, and cash flow that enables tracking performance against the company’s financial goals. 

Most financial KPIs fall into one of five broad categories:

• Profitability KPIs, such as gross profit margin and net profit margin
• Liquidity KPIs, such as current ratio and quick ratio
• Efficiency KPIs, such as inventory turnover and accounts receivable turnover
• Valuation KPIs, such as earnings per share and price to earnings ratio
• Leverage KPIs, such as debt to equity and return on equity

SaaS metrics for financial reporting

Since SaaS businesses typically follow a subscription-based model, their day-to-day operations and functions, not to mention their KPIs for financial reporting, tend to differ from traditional companies (that make money from single sales). 

Some SaaS metrics can also be considered financial KPIs but with SaaS-specific nuances in how they’re calculated while others are used only in SaaS businesses. 

Here are some of the most important SaaS metrics for evaluating financial health:

• Rule of 40 states that the sum of a SaaS company’s revenue growth and profit margin should be equal to or greater than 40% -- the threshold at which the company is considered financially healthy, sustainable, and attractive to investors.
• Annual recurring revenue (ARR) is the recurring revenue from subscriptions, normalized over a period of one year. Given its recurring nature, ARR captures revenue only from subscriptions.
• Gross revenue retention (GRR) is the percentage of revenue a company retains from its customers over a defined period (usually one year).
• Net revenue retention (NRR) is the percentage of recurring revenue a SaaS company retains from its existing customers over a specified time period. 
• Gross Margin is the difference between the revenue generated from a software product and the cost of delivering that product (also known as cost of goods sold or COGS) expressed as a percentage of the total revenue. 

Ratio analysis

Ratio analysis is useful for businesses to analyze their financial position, liquidity, profitability, risk, solvency, efficiency, operations effectiveness, and proper utilization of funds. It is an important aspect in financial reporting as it not only compares line-item data from your company’s financial statements, but also compares it to another company within the same industry or sector.

Ratio analysis can be used by businesses to analyze many different aspects of their financial picture, including their:

• Overall financial position
• Profitability
• Liquidity
• Solvency
• Operational effectiveness
• Efficiency in spending

As its name suggests, ratio analysis is a method of comparing one aspect of your business to another aspect of your business. It can be used to compare line-item data from your company’s financial statements or compare your data with that of another company within the same industry or sector.

For example, in SaaS, to determine the long-term profitability of your customer acquisition activities, you can use the LTV:CAC ratio, which compares the lifetime value of a customer to the cost of acquiring that customer.

Role of dashboards in effective financial reporting

“Measure what matters” is the driving force for CXOs. The right dashboards do just that. They enable you to track and evaluate your entire organization's financial performance — giving you more relevant and reliable visibility into the overall business health.

Financial reporting software with dashboard capabilities allow business leaders to slice and dice their data without having to worry about consolidating it manually from different spreadsheets or validating the accuracy. 

This is achieved through integrations with source systems that automatically pull the data needed for financial reporting into one platform where it can be incorporated into one or more dashboards. With automated data consolidation, you can be confident that your data is always up to date. 

Ideally, any tool you use should have good customization capabilities, allowing you to design different dashboards to meet the needs of various stakeholders. (Bonus points if it allows you to make them interactive.) Here’s just a few ways you can use dashboards to augment your financial reporting:  

• Display a revenue waterfall, variance analysis on income statement vs. budget.
• Categorize your major movers in the P&L and display it accordingly on the dashboard.
• Drill into your data to find and illustrate deeper insights, such as revenue in different geographies or market segments. 

SaaS metrics dashboards

SaaS dashboards can transform raw data and numbers into actionable business insights. Highly useful for finance teams to visualize key SaaS metrics in real-time through interactive charts and graphs and generate insights into metrics, such as customer acquisition, account expansion, churn risk, recurring revenue forecasts, and sales performance. 

For example, a Days Sales Outstanding (DSO) dashboard will help finance leaders and teams calculate DSO on a monthly, quarterly, or annual basis to facilitate financial planning and forecasting.

Financial dashboards

Used for internal reporting, a financial dashboard is an automated, graphical representation of a company's underlying accounting and operational data. 

Different dashboards can be configured to show any KPI or analysis that is appropriate for a particular manager. Real-time dashboards provide the most useful internal financial reporting.

CEO dashboards

Since CEOs need to use their time efficiently, this type of dashboard provides them with a high-level overview of company metrics. 

While some CEOs may want to see only those metrics related to business performance, others may prefer to use dashboards to get a pulse of the entire organization (not just financial health or performance). 

CEO dashboards are also instrumental in conveying the management’s priorities to executives, team leaders, and employees in the organization.

CFO dashboards

CFOs rely heavily on data and the insights it can provide to make sound business decisions. Dashboards designed with the CFO in mind ensure that the data is easily accessible for  monitoring sales and forecasts, revenues and expenses, liquidity, assets, equity, and more. 

Instead of logging into ERP systems, running queries, merging fields and doing calculations, live data is consolidated, processed, and presented in a visual format that meets the CFOs needs. 

Typical reporting on a CFO dashboard might include working capital KPIs, accounts receivable and accounts payable turnover, credit utilization, payroll data and budget trending, as well as summary of financial statements.

Regulations around financial reporting

Regulations and standards that govern financial reporting and accounting vary from country to country. In the US, there are a few authorities that govern financial reporting and accounting standards that every SaaS company should be aware of: 

Internal Revenue Service

All companies in the United States (US), both private and public, must file quarterly tax estimates with the Internal Revenue Service (IRS) and a yearly tax return, which contains all of its financial information for the year. 

However, small, privately-owned companies have fewer external financial reporting requirements than public companies. 

Primarily, they are used to assess tax liabilities for incorporated entities in the US and enable the government to track and be aware of larger market forces and shifts in the economy. 

US Securities and Exchange Commission

In the US, the public capital markets are regulated primarily by the US Securities and Exchange Commission (SEC), a national government agency. 

SEC reporting involves compiling and presenting financial and business information, reports, and disclosures to the Commission, providing transparency to investors and the general public, and also helping them make informed decisions regarding purchasing or selling a company’s stock or securities. 

All publicly traded organizations are required to file with the SEC for numerous types of events, such as the 10-K Annual Report and the 10-Q Quarterly Report.

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) refers to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. 

The Financial Accounting Standards Board (FASB) establishes and updates the accounting rules for the GAAP standard in the US.

Challenges in SaaS financial reporting

Compared to traditional industries, for subscription-based businesses like SaaS, recurring billing is complex due to different billing models, mid-month upgrades and downgrades, add-on charges, etc. 

All of this can present problems for finance professionals. From an accounting and finance perspective, these factors further complicate accurate reporting as they impact revenue recognition. 

As SaaS businesses scale, the complexity also increases as most ERP and CRM systems are not designed to handle recurring revenue.

Common SaaS financial reporting challenges include:

• Revenue recognition: This is a critical accounting challenge for SaaS companies since they have to deal with various subscription models (monthly, annual, usage-based). To address this, companies follow accounting standards like ASC 606 (IFRS 15), which provides guidelines for recognizing revenue over the subscription period.‍
• Deferred revenue and accrued liabilities: SaaS companies often receive payments upfront or in advance for services to be delivered over time. Deferred revenue represents unearned revenue, and must be recognized as revenue over the subscription period. Accrued liabilities account for expenses incurred but not yet paid.
• ‍Customer churn: Customer churn, the rate at which subscribers cancel their subscriptions, has a direct and negative impact on a SaaS company's revenue stream.
• Cost capitalization: SaaS companies invest heavily in software development and implementation. Determining which costs should be capitalized (recorded as assets) and amortized (expensed over time) can be challenging. Accurate cost capitalization affects financial statements, impacting a company's overall financial health.
• Complex contracts: SaaS companies often bundle different services or features in a single contract. Accounting for these kinds of agreements involves allocating revenue to each type of cost based on its standalone selling price. This can be challenging when contracts involve multiple deliverables.
• Taxation: Navigating tax compliance is crucial to avoid legal issues and maintain a positive financial standing. Since SaaS companies operate across multiple geographical jurisdictions, they can face challenges related to taxation, such as sales taxes in the US and the value-added tax (VAT) in European countries.
• Reliance on spreadsheets: Manual financial reporting using spreadsheets can lead to errors and data lags in consolidating and analyzing financial data, especially during monthly close processes.
• Capitalization of development costs: Deciding whether to capitalize or expense costs related to research and development activities can impact financial statements, especially when determining the useful life of the developed software.
• Complying with evolving standards: The accounting landscape is ever-evolving, and SaaS companies must stay updated with the latest changes to ensure compliance with accounting principles.
• Cloud computing costs: SaaS companies often rely on third-party cloud service providers to deliver their services. Accounting for cloud computing costs requires an understanding of cloud service contracts and proper allocation of expenses.
• ‍Intangible asset valuation: During mergers and acquisitions or goodwill impairment assessments, SaaS companies need to value intangible assets, such as intellectual property or customer relationships.

Leveraging technology to level up the value of your financial reporting

The use of technology is transforming how businesses do track, forecast and report on their financial performance, making it faster, easier, and more accurate. 

Not only can it eliminate many of the challenges described above, with the right tool, you can take your financial reporting to the next level, using it to generate actionable insights for business growth. 

Drivetrain is one such tool – a powerful, strategic financial planning and analysis (FP&A) platform that seamlessly connects your business applications and data sources for integrated financial budgeting, planning, forecasting and reporting. 

Drivetrain has robust reporting and visualization capabilities to clearly present financial statements, individual financial KPIs and SaaS metrics, as well as financial forecasts. With Drivetrain, you get highly customizable, interactive dashboarding capabilities with a wide range of different charts and graphs that will facilitate decision-making and communication with stakeholders.

Ready to know more? Check out how Drivetrain can help you become faster and more efficient in your financial analysis and reporting and reveal actionable insights you can use to accelerate growth.