The SaaS Glossary 101

With the sprouting of numerous Software-as-a-service(SaaS) companies sprouting in the business, I sensed the need to put together a list of SaaS acronyms and keywords to help the new business owners take their first stride. I call this- “The SaaS glossary 101” which is to-the-point and easy to understand.

In this list, you’ll find a set of metrics to keep you updated with your business basics and jargons that you can add to your SaaS vocabulary. Let’s look at them in the alphabetical order:

A

Annual Recurring Revenue (ARR)

ARR is the value of recurring subscription revenue that a business will recognize in a calendar year. It is also equal to monthly recurring revenue (MRR) multiplied by 12.

 Annual Run Rate Revenue (ARRR)

ARRR is ARR plus additional revenue that is not attributed to a recurring subscription. This could include professional services or implementation fees.

 Average Revenue Per User (ARPU)

ARPU is the average revenue recognized per user, per month.

 Average Selling Price (ASP)

The average price that your product or service is sold for, per month, a year or another measurement. Ideally, cost to acquire a customer should not exceed ASP.

B

Bookings

Bookings are the dollar value of contracts in a specified period of time, including both subscription and non-subscription revenue.

 Burn Rate

Burn rate is the rate per month that a company spends its cash (often venture capital) as it grows before generating profit.

C

Customer Acquisition Cost (CAC)

CAC is the dollar amount spent acquiring customers (marketing and business development cost) divided by the number of customers acquired over a particular period of time. This cost can also be further broken down by the desired marketing channel. 

Churn

Churn is the rate at which customers cancel their subscriptions.

Customer Lifetime Value (CLTV or CLV)

Value of the recurring profit stream over a customer’s lifetime minus customer acquisition cost. 

Committed Monthly Recurring Revenue

Projection of MRR into the future accounting for anticipated account expansion and churn.

Contracted Monthly Recurring Revenue

MRR that is contractually guaranteed.

Cohorts

A group of customers that signed up around the same time or took part in the same onboarding group.

Customer Retention Cost

Expenses derived from retaining customers such as the renewals team, professional services team, customer marketing, and other costs.

Customer Retention Rate

How many customers are retained from the beginning to the end of the period, not including new customers.

D

Deferred Revenue

Revenue and cash are not the same. Cash can be obtained upfront but it does not qualify as revenue until it has been earned.

Dunning

The technical definition of Dunning is “to make insistent demands for the payment of a debt.” (Investopedia) In the context of SaaS, it may often refer to emails being sent to a user when their payment has expired.

L

Logo Churn

Also known as “Customer Churn”. Churn calculated based on customer name/company — regardless of deal size.

M

Monthly Recurring Revenue (MRR)
Total amount of subscription revenue expected from customers every month excluding any additional, non-recurring payments such as implementation fees or professional services fees.

MRR Churn

Churn as measured by monthly recurring revenue lost, regardless of a number of companies lost as customers.

N

New Bookings

New contracts, renewals, upgrades, refunds and other changes to subscriptions that impact total bookings — bookings are all items with an impact on revenue.

 Normalized Contracts

Contracts changed so that they are similar enough to be measured against one another; for example, by assigning an average MRR to a contract paid annually to compare it to a contract paid monthly.

O

Onboarding

The process that new customers go through when they are becoming customers.

P

Professional Services

Assisting customers with best practices and strategies on how to run their business, beyond product training.

R

Renewal Bookings

Bookings from previously existing contracts.

 Renewal Rate

A rate of customer retention.

Revenue Backlog

Unrecognized revenue that will become recognized over the term of the contract.

Revenue Churn

Churn measured by dollar amount of contracts lost. 

Revenue Recognition

Revenue becomes recognized from a contract only once it has been earned, whether or not it has been paid in advance.

Runway

Months of the runway are how many months of cash the company has to operate at the current burn rate.

 

Setting up Accounting System for New Business

Now that you are considering starting a new business on your own, including having a sole business idea, designing a career that has the flexibility to grow with you, working toward financial independence and investing in yourself.

Now the real challenge begins as you quit your regular day job & become a business owner yourself, not knowing how that industry works. The most important part of starting your business is managing finance. You can’t proceed too far without establishing a simple & efficient accounting system that won’t get too complicated for you. The early stages are the time one needs to establish the structure that will support your company financially and help you define your financial strategy as you too grow.

It is very important that you manage your accounting properly for the growth of your business. However, it is not necessary to spend a fortune doing it. Rather you can invest it in your own business.

These are the basic that you must follow before you start your new business,

  • Open a Business Bank Account

Opening a bank account that is separate from your personal account is very much necessary for accepting payments & paying your creditors. If you will have employees, a separate payroll account should be set up as well. This should be the account where you make payments and receive payments as well.

  • Separate Personal & Business expenses

Avoid using the business account for personal use by establishing corporate checking & saving accounts. Maintain a separate income statement and balance sheet. Use checks from your business banking account or separate business credit or debit cards to pay for all of your business transaction.

  • Keep records of receipts & invoices

Keeping a record of all your transaction can help you in the long run of your business. This will also come in handy when you have to pay to taxes. You can either keep their physical copies or store them on the cloud so that you can have their access from anywhere.

  • Make a list of Items

Create a list of items and materials the company owns. This list will become your assets in the accounting system. For example, cash, office equipment, buildings, vehicles, and office supplies. Include the value of the assets when you make your list.

  • Create a process for Payment Collection

Always have a process for payment collection so that you know from where and when you will be getting your money. Even keep records for new customers. Establish credits guideline and create a collection timeline so your clients know what is expected. Keep a simple process for payment collection, even for accepting payments through PayPal, or any other online payment.

Choose the right method of recording the transactions

Now that you have set up your business account, the question is how you maintain it effortlessly without investing much of your time. Now you have to choose how you would like to record your transactions. You can record the transaction on your own, hire an accountant or use accounting software.

  • Though recording your own transaction would be the cheapest solution for you but it will take a large chunk of time out of your daily work. Recording transaction and making calculation will take too much of your time. And you may make errors while bookkeeping.
  • If you hire an accountant, you need not to worry about managing your books yourself. The accountant will take care of financial complexity. But, always keep in mind that hiring an accountant can get expensive for your business.
  • The best alternative is using an Accounting Software. You can record your business transaction yourself without needing an accountant. The software will automate your accounting process giving you streamlined book and accurate calculations.

Setup your Charts of Accounts.

After choosing the method for recording transaction, it’s time to set up your chart of accounts. A chart of accounts is simply a list of accounts that you will be using in your business such as revenue, cash, accounts receivable, accounts payable, payroll, supplies, rent, utilities, etc.

Choose the right Accounting Software for your Business.

Now that you are clear which way you want to proceed with, choosing the right accounting software depending on the requirement of your business.

Make a list of crucial features that you absolutely need in your business’s accounting software. Here are some of the features which must be part of a good accounting package,

  • Create and customize invoices
  • Track expenses according to categories
  • Manage inventory
  • POS mode billing
  • Barcoding
  • Income & expense management
  • E-way bill
  • Bank integration & reconciliation
  • GST Reports
  • Bank Reconciliation
  • Multi-user login
  • Manage a list of customers & vendors
  • View account payables & receivables
  • View Balance Sheet, Profit & Loss statement and Trial Balance reports

As you will face multiple setbacks in offline accounting software, so it is better to use online accounting software.

Understanding the Requirement for your Business.

  1. If the software is bloated with every possible feature you can imagine, it will become difficult to use for you & your team. So, go for software which has a simple user interface and is not overstuffed with unnecessary features. The clean interface makes it easy to focus on the important tasks and can reduce the learning curve.
  2. As you are starting a new business so your requirements are of small businesses, so choose a software that can help your small business grow. But, it is also better to select an accounting software which can scale with your business needs.
  3. The major concern of all business is the safety of their data.  If your accounting software provider is hosting the application on their own servers, ask them about the security measures they are taking to safeguard your data.
  4. No matter how good or user friendly the software is, you will need support at some point. And if you have nobody to talk to when you are stuck, your entire investment will go in vain. So before buying always inquire what kind of support you will be provided when you are in doubt.

Budget & Prices

Most of the software provides free trial for a short period of time and then the service becomes paid. So the best suggestion is, do a little research & make a list of some accounting software which you consider is good. Signup with all of them and spend a little time experimenting with all of them. Find the software that you are most comfortable with.

Always have a clear discussion with the company about the actual cost of product & any future costs before upgrading from the free trial. This will be helpful for your business to avoid any hidden cost burden. Make a comparison of the pricing of different accounting software. Invest in the accounting software that you think will take your business to next level.

Conclusion

Always keep in mind, that it will be very difficult for you migrating to different software once you have started and invested so much of your time and money on accounting software. Finding the right software is not easy, take your time but try and make a quick decision.  It’s always better to spend more time before the purchase to save frustration a later stage.

Looking for the best accounting software for your business, start here. Checkout our free trial.