Expense reports 101: A comprehensive guide for SaaS businesses

For all businesses, managing expense reports is a critical part of the financial process, providing insights into operational costs and enabling strategic planning. For SaaS companies, special considerations need to be made to account for subscriptions and other third-party expenses.

This guide will explore everything you need to know about expense reports in the context of a SaaS business.

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Understanding expense reports

Expense reports are fundamental tools in financial management that record the various business costs borne by employees during a specific period. These costs can encompass a broad range of expense categories. For instance, a typical expense report may include items like travel and entertainment (T&E) expenses, office supplies, or software subscriptions.

In the context of SaaS business, expense reports can carry even more weight, given the unique cost structures inherent to the SaaS business model. These businesses often have expenses that don't commonly appear in other industries, such as cloud-related expenses, third-party software costs, ongoing development expenses, and other operational outlays. As a result, understanding and carefully scrutinizing these expense reports can provide invaluable insights into your business's financial health and operational efficiency.

To comprehend expense reports thoroughly, it's crucial to become familiar with the different categories of expenses that typically appear in a SaaS business's financial documents.

Operating expenses

Operating expenses, also known as Opex, refer to the costs associated with the day-to-day operations of a business. For a SaaS company, these might include salaries, office rent, utilities, marketing and advertising costs, and general administrative expenses. These are the expenses that keep your business running on a daily basis.

Capital expenditures

Capital expenditures, or Capex, are the funds a company uses to acquire, upgrade, and maintain physical assets. This can include business equipment, hardware, or even real estate. While Capex may not be as prominent in a SaaS business as in other industries, they still can factor into the overall financial picture, especially for those that maintain their servers or invest in significant hardware.

See our complete guide to Capex vs. Opex for a more detailed breakdown of these two different types of expenses.

Cost of goods sold (COGS)

For SaaS businesses, the cost of goods sold (COGS) refers to the direct costs of producing the goods or services that a company sells. This can include hosting costs, third-party service costs, and the portion of labor costs directly tied to product delivery. Tracking COGS is vital for SaaS businesses because it directly impacts metrics such as gross margin and gross profit, which are essential measures of business health.

Non-operating expenses

Non-operating expenses are costs that aren't directly tied to a business's core operations. These might include interest payments on loans, exchange rate losses, or costs related to lawsuits or restructuring. While these expenses might not be a regular part of doing business, they can still have a significant impact on a company's bottom line and financial health.

Understanding the different types of expenses and how they affect your SaaS business's bottom line is the first step towards effective financial management. Expense reports offer a structured way to monitor these costs, track changes over time, and identify opportunities for cost savings or efficiency improvements. By accurately categorizing and recording all expenses, businesses can ensure they have a complete and accurate picture of their financial situation, which is critical for strategic decision-making and business planning.

The importance of accurate expense reports in SaaS businesses

Accurate expense reporting is crucial for several reasons:

• Financial analysis: Expense reports are a key input for financial analysis. They help you understand the factors affecting your business's bottom line and inform strategic decisions.
• Budgeting and forecasting: These reports are crucial for planning your budget and forecasting future expenses. By understanding your historical expenses, you can better predict future costs and plan your budget accordingly.
• Tax purposes: Expense reports are necessary for tax compliance. They provide the documentation needed to claim tax deductions for business expenses.
• Fraud detection: Regular review of expense reports can help detect and prevent fraudulent activity. Unusual or unexplained expenses can be a red flag for potential procurement fraud.

In essence, accurate expense reporting lays the foundation for robust financial health, prudent strategic planning, and regulatory compliance for a SaaS business. It both keeps your financial house in order and aids in safeguarding your business from potential fraudulent behavior.

Best practices for SaaS expense reports

There are a number of ways that finance departments within SaaS companies can take their expense reporting to the next level, including:

Clear expense policies

A clear and detailed expense policy is crucial for effective expense management. It should specify what types of expenses are reimbursable, the process for submitting expenses, and any limits or guidelines for specific expense categories. For a SaaS business, it might also include guidelines for software subscriptions, cloud storage expenses, or other common expenses in your industry.

Regular reporting and review

Regular reporting and review of expenses is essential. This helps ensure accuracy, allows for timely detection of any issues or anomalies, and provides up-to-date information for decision-making. Depending on the size and complexity of your business, you might review expense reports monthly, quarterly, or on another schedule that works for you.

Use of expense management software

Manual expense reporting can be time-consuming and error-prone. Using expense management software can help automate the process, reduce errors, and provide valuable analytics. There are many tools available that can handle everything from receipt tracking and expense submission to approval workflows and integration with accounting software.

Training and communication

Ensure your team understands the importance of accurate expense reporting and knows how to properly submit their expenses. This might involve training new employees, regular reminders about expense policies, and clear communication about any changes to expense policies or procedures.

Key SaaS metrics related to expense reports

There are several key metrics that SaaS businesses use to measure their financial health and performance. Understanding these metrics and how your expenses impact them can help guide your decision-making.

Customer acquisition cost (CAC)

CAC is the total cost of acquiring a new customer, including all sales and marketing expenses. This is a crucial metric for any SaaS business, as it directly impacts profitability and growth. To calculate CAC, you would divide your total sales and marketing expenses for a specific period by the number of new customers acquired during that period.

Customer lifetime value (CLV)

CLV is a prediction of the net profit from the entire future relationship with a customer. It's calculated by multiplying the average revenue per customer by the gross margin percentage and the average customer lifespan. COGS directly impacts the gross margin and, therefore, the CLV.

LTV:CAC ratio

This ratio compares the lifetime value of a customer to the cost of acquiring that customer. It's a key measure of the profitability and efficiency of your customer acquisition efforts. A ratio of 3:1 is often cited as a benchmark, indicating that the lifetime value of a customer is three times the cost of acquiring them.

Gross margin

Gross margin is the difference between revenue and COGS, expressed as a percentage of revenue. It's a key measure of a SaaS business's profitability and efficiency. To improve gross margin, a SaaS business might focus on reducing COGS, such as negotiating lower hosting costs or improving support efficiency.

Managing expense reports well is necessary for financial health

Understanding and effectively managing expense reports is a critical aspect of running a SaaS business. By implementing clear expense policies, regularly reviewing expenses, and leveraging the right tools, you can ensure accurate expense reporting and gain valuable insights into your business's financial health.

Moreover, by understanding how your expenses impact key SaaS metrics, you can make informed decisions to drive growth and profitability. Effective expense reporting isn't just about tracking costs—it's about gaining the insights needed to successfully navigate the SaaS landscape.