Are you running a SaaS business? Then you need to know about the SaaS P&L. While the standard P&L format of sales less cost of sales less expenses equals profit may appear to be a sensible option, it falls short in providing the necessary insights for a SaaS business. A more effective approach is to tailor your P&L to the unique needs of a subscription-based business. Done right, the SaaS P&L becomes a useful, vital input to the metrics you use to make day-to-day decisions about your SaaS business.
Running a SaaS business well means instrumenting your business to feed the metrics calculations that allow you to monitor and improve the business. That includes financial metrics, and their inputs that come from the P&L. Using a standard P&L is not helpful beyond after-the-fact profitability and tax calculation. This may mean lots of time and cost re-working the numbers to provide the financial metrics you need to run the SaaS business. Or worse, you try to run the SaaS business without good/timely financial metrics. Upgrade to a SaaS P&L format and your P&L will become relevant, useful, and will help feed your business metrics such as CAC, SaaS Margin, CLV.
For a pure SaaS business that earns 100% subscription revenue, the ideal P&L format shows subscription revenue less four categories of operating expenses; CS&Ops, S&M, R&D and G&A.
(followed by adjustments for non-operating items to calculate Net Profit)
This straightforward format above, which I utilized with A2X, has the benefit of clearly presenting the four categories of operating expenses. From my perspective, I prefer this simpler version since SaaS is not a typical product-based business that requires manufacturing costs. Instead, it is a service-based business. Calculating the SaaS margin as a separate metric outside the P&L is easy, and adding extra lines for cost of sales and margin would not provide much useful information to complicate the P&L.
If you would prefer a P&L that displays the cost of sales or margin, particularly if your goal is to align more closely with the traditional P&L that calculates margin by subtracting cost of sales from sales before expenses. This alternative P&L achieves that objective while also accounting for the four primary categories of operating expenses.
When creating a SaaS P&L, it’s important to group your operating expenses into the four categories of CS&Ops, S&M, R&D, and G&A. Including all the costs of serving existing customers under CS is essential to calculate the cost of sales and margin accurately. Whether you prefer to display this information in your SaaS P&L or on a metrics table, dictates the best SaaS P&L for your business. If you want to know what to include in each of the four operating expenses, please refer to our resources. By customizing your P&L to suit your SaaS business, you can gain access to key metrics that will allow you to optimize your operations. Don't settle for a one-size-fits-all approach. Upgrade to a SaaS P&L.
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