Owning a SaaS startup can be a very lucrative endeavor. However, as you’re building the software, chasing leads, and keeping up with customer service, you might be neglecting some aspects of your business (especially those that require hard skills).
Finance and accounting (along with legal issues) might just be the most neglected and misunderstood aspects of SaaS startups. Nevertheless, they’re business fundamentals that you simply can’t avoid.
We know how tricky SaaS bookkeeping can be. Even if you have knowledge and experience with accounting, SaaS startups face many specific issues. Fortunately, we’re here today to take a deep dive into General & Administrative expenses for SaaS companies.
Before that, however, we plan to pin down some basics of general SaaS expense categorization.
Some Essential Rules
Traditional manufacturing companies usually work with two broad expense categories: Cost of Goods Sold (COGS) and Overheads. Building an income statement for a SaaS company is a little bit different. Below are the three most fundamental expense categories that make up the G&A (overhead) on your income statement.
Cost of Goods Sold
This category contains the costs you incur while providing your services. Here are a few subcategories of COGS:
● Merchant fees
● Customer support salary, taxes, and benefits
● Software and services used by the customer service department
Setting up a proper COGS will help you account for such crucial SaaS metrics like Gross Margin and the Customer Lifetime Value.
Sales & Marketing Expenses
Typical expenses that you may overlook here might include:
● A combination of online and offline advertising and promotional efforts
● Sales and marketing staff salaries, bonuses, and taxes
● Costs of any sales-related software and tools
Accounting for these spendings can help you track the Customer Acquisition Cost, an essential metric for defining your profitability and optimizing your sales efforts.
Research and Development
Costs incurred here usually include:
● Software licensing
● Engineering team salary and other spendings
Many companies put R&D in the same category as other General & Administrative expenses. However, there are a few reasons why SaaS companies should keep those separate.
● First, creating software is more research-heavy and engineering-dependent than most other industries.
● Second, the more detailed the expense reports, the easier it is to track your performance.
● Third, you’ll have a greater understanding of your R&D spending and will be able to track whether or not you’ve made enough.
What is G&A?
Once you’ve successfully established the categories mentioned above, it’s time to set up your General & Administrative expenses. The general classification consists of overhead on your day-to-day business operations. The administrative portion accounts for the subcategories that aren’t directly connected to your company’s specific department.
A typical G&A for SaaS ventures includes the following expense categories:
● Rent for office space
● Internet bill
● Software and services (other than support and sales mentioned above)
● Management payroll
● Professional Services (legal, accounting, consulting, etc.)
● Office expenses (equipment, supplies, etc.)
G&A for SaaS: All You Need to Know
G&A for SaaS is a powerful expense category that, if set up correctly, can make a monumental difference for your company. Let’s see what goes into making this category work.
Does G&A’ Catch-it-All’?
If you read a lot about finances in SaaS companies, you might have seen the notion that G&A is a ‘catch-all’ expense category. However, taking this term at face value is a mistake.
Accommodating ‘the rest’ of the spending categories doesn’t make this one a ‘junk drawer.’ You still need to keep all the subcategories clear to optimize your books.
For example, we mentioned the ‘Software’ expense subcategory four times in our article. This was no accident: customer service, sales, marketing, and R&D departments all need specific software to operate at peak productivity. However, for each of these teams, the ‘Software and services’ line in the income statement distinguishes different things.
Although software like Hubspot might offer a combination of services for all the departments, let’s keep this exercise simple and propose that each department uses different, unrelated software. This usage makes the ‘Software and Services’ line for all expense categories a distinct subcategory for separate services.
Yes, G&A catches most expenses that don’t fall under other categories. However, steer clear of putting department-specific spendings in the G&A.
Fixed vs. Semi-variable G&A Expenses
A portion of the G&A is fixed: the spending will still be there even if your company stops selling and supporting the product. Let’s you haven’t acquired any clients in August: you’ll still have to pay the rent for the office space and ‘keep the lights on’ for existing customers.
The other part of G&A expenses can vary depending on the services your company needs and the equipment you choose to buy at a given time. If you’ve successfully categorized your costs up to this point, you’ll reduce semi-variable expenses without jeopardizing service quality, product development, and marketing.
For example, upgrading your printer might be a luxury during a slow month. And while the upgrade would probably make your office staffs’ lives easier, it wouldn’t directly influence the quality of your SaaS.
Thus, this category’s accommodating nature makes it a primary target when you need to reduce spending. Distinguishing between fixed and semi-variable G&A will nudge you towards a more savvy, cost-efficient approach.
G&A is Much Higher Throughout SaaS Industry
The differences between SaaS and traditional businesses don’t end with expense categorization. While other companies have a 12–14% G&A range compared to the revenue, SaaS companies have up to 20%.
According to the experts, the main reason for this is the ongoing improvement of business systems and digital tools investment. Another reason is the constant growth that SaaS companies experience.
Either way, accounting for General & Administrative expenses and implementing careful categorization should be a priority for anybody that works with SaaS bookkeeping.
Once you nail the expense categorization, you’ll gain a better understanding of your business. Creating clear looking and functional books will help you track and improve all the crucial SaaS metrics for your company.
Do you want to grow your business? Visit our blog to learn more about SaaS metrics and its importance for thriving in a competitive world.