Public Financial Statements For Companies – Every investor, business leader, and future leader should understand how to read an income statement (also known as a profit and loss or P&L). An income statement is a window into a company’s performance over a period of time by reporting the company’s income and expenses.
These three reports are prepared in accordance with GAAP (Generally Accepted Accounting Principles) for US companies or an international version for companies located abroad. These are the accounting rules for how things should be recorded, but they are frequently updated and changed.
Public Financial Statements For Companies
Below is a quick cheat sheet for the main lines of the income statement. If you want details and explanations, read on…
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If the income from professional services is small, many companies will show only an item called “income” in their financial statements. For internal management reporting, all major revenue categories must be broken down so that each type of revenue can be viewed separately.
Depending on who you talk to, the word “revenue” can mean a dozen different things in SaaS companies. Check out the tweetstorm below for the differences in many of these acronyms.
@ Most people don’t understand the difference between all the SaaS “revenue” terminology. There are many acronyms… ARR, CARR, ACV, TCV, GAAP income, RPO, etc. Here’s what you need to know👇🧵 13:16 ∙ September 21. 2022 459 likes 59 retweets
In the income statement, when we say “income,” we mean GAAP income. All other commonly used abbreviations for “return” such as ARR, CARR, and ACV are annual amounts. For GAAP revenue, these amounts must be allocated over the period in which the service is provided (subscription or usage period).
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There are two main types of SaaS revenue recognition models (and varying degrees of hybrid models between them):
Below are typical revenue recognition rules, but the specific facts of each business may affect how revenue is recognized. Many thousands of pages have been written on this subject, because it is complex!
Solution: Revenue is recognized only when consumption occurs, so usage-based pricing can generate more revenue than a traditional SaaS model.
“And also the fourth quarter, as I said, is peak human season, and remember, about 70% of our revenue comes from human interaction with our system, 30% is actually driven by scheduled tasks.” So it has an impact.” –
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“We recognize revenue based on customer consumption on our platform, and such consumption is closely related to end-user activity within the application, which may be affected by macroeconomic factors. – Michael Gordon (CFO of MongoDB)
This applies to the traditional SaaS pricing model. This can be the number of seats or licenses you have access to during the term of the contract, regardless of how much you use the software.
Example: On January 1, 2023, ABC signed a contract for $120,000 for 5 seats for a subscription period of the next 12 months.
Solution: Revenue is recognized proportionately over the subscription period. This is true regardless of usage level as it is continuously available for use throughout the subscription period.
Consolidated Financial Statements: Requirements And Examples
This income is almost always divided into subscription income, unless it is so insignificant that it will not affect gross profit. Most investors view professional services earnings as weak or neutral to a company’s valuation for the following reasons:
A lot of people just say “COGS” which means cost of goods sold, but in pure SaaS there are no “goods” so the financial statements just write “cost of revenue” on that line.
@ Should customer success live in COGS or S&M? It is time to settle this debate once and for all and achieve some consistency between companies. 🧵👇 13:39 ∙ September 7, 2022 43 likes 8 retweets
Investors should make sure they understand what is included/excluded in COGS so they can make informed decisions when comparing to other companies.
Statement Of Financial Position (public Sector)
Gross profit shows how much (in dollars or % of revenue) you earn after subtracting COGS from revenue. In the formula below, we see gross margin expressed as a percentage of revenue. Looking at gross margin as a percentage of revenue is generally more useful because it is comparable between benchmarks and other companies.
COGS is a highly protected financial cost group because SaaS company valuations are (or at least should be) closely related to gross profit.
As noted above, there is a reason why investors tend to view professional service returns as poor or neutral in their investment decisions. Professional services gross margin is very low compared to SaaS gross margin.
That being said, Crowdstrike’s pro services gross margin is phenomenal at 33%… Most SaaS companies either lose money, or have a long history of pro services and can only be marginally profitable at scale.
Key Financial Ratios Of Public Sector Entities
But the ability to have a 76% gross subscription rate with virtually unlimited distribution is what makes SaaS so special.
In addition to these main groups of expenses that appear on the income statement, there are several key notes about expenses that you should also understand in order to know how to compare the income statements of different companies.
There are certain costs and equipment that are often allocated to all of the above cost groups on a pro rata basis (or other reasonable allocation methodology). They are very important and sometimes they are treated differently.
The topic of SBCs has become a hotly debated topic among tech companies as a result of perceived shareholder dilution from Silicon Valley’s sky-high rewards.
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Based on the above, you should understand that the consumption of SBC is not equal to the amount of dilution. Especially in times of high stock price volatility, SBC costs and shareholder dilution can vary significantly.
This is an area where accounting standards have changed in recent years. Before bookkeepers changed the rules, most SaaS companies expensed sales commissions in the period the sale was earned.
Under the new accounting rules, most sales commissions for SaaS companies are capitalized on the balance sheet (ie not billed immediately) and then billed over a discretionary period of time. Almost all SaaS companies spend 3-5 years on sales commissions.
However, not all sales commissions are expensed over time. Some pass immediately. Only sales commissions that depend solely on contract signing are deferred and accrue over time. All other sales commissions are paid immediately.
Financial Statements: Decoding Financial Statements Of Public Companies
Therefore, AEs and their managers will almost always be capitalized and expensed over time, since they only get paid when a deal is signed, but SDRs, whose commission is based on generating appointments, are expensed immediately.
As crazy as it sounds to some SaaS companies, at the end of the day the goal is to be profitable and make money. As soon as this crazy phenomenon happens, the company will have to pay profit tax.
All investors and business operators should understand the basics of the income statement. If you don’t understand the income statement, mistakes will be made in capital allocation and investment decisions.
I just started using Substack so if you could share and like this post that would be great! Financial statements are written records that convey the financial activities of a company. Financial statements are often audited by government agencies and accountants to ensure accuracy and for tax, financial or investment purposes. Primary income financial statements include the balance sheet, income statement, statement of cash flows, and statement of changes in equity. Nonprofit organizations use a similar but different set of financial statements.
Types Of Financial Statements
Investors and financial analysts rely on financial data to analyze company performance and make predictions about the future direction of the stock price. One of the most important sources of reliable and verified financial data is the annual report, which contains the company’s financial statements.
Investors, market analysts and lenders use financial statements to assess a company’s financial health and profit potential. The three main financial statements are the balance sheet, the income statement, and the cash flow statement.
Not all financial statements are created equal. The rules used by American companies are called generally accepted accounting principles, while the rules often used by international companies are International Financial Reporting Standards (IFRS). Additionally, US government agencies use a different set of financial reporting rules.
A balance sheet provides an overview of a company’s assets, liabilities, and equity at a specific date and time. The date at the top of the balance indicates when this image was taken; this is usually the end of the annual accounting period. Below is an overview of the balance sheet items.
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Unlike the balance sheet, the income statement covers a period of time, which is one year for annual financial statements and one quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income and earnings per share.
Operating income is the income generated from the sale of a company’s products or services. The operating profit of the car manufacturer will be realized through production and sales
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