The Smartest Business Model: What is SaaS?
2 Min Read
We have all been there. You check your bank statement and see a small, recurring charge for a streaming service you forgot you owned. You might also pay monthly for your accounting software or even for extra cloud storage. This is the world of Software as a Service, or SaaS.
In the past, you bought a box with a disc, installed the software, and owned it forever. Now, you simply rent access through the cloud. For businesses, this shift is like moving from buying a car to having a permanent Uber subscription. It is efficient, it scales quickly, and it is taking over the financial world.
What is a SaaS Business?
In essence, SaaS replaces traditional physical inventory with software. Instead of having to stock individual units for every customer, you build one product (the software), host it in the cloud, and then giver users access via a subscription model.
Genius right?
Why get your customer to pay you once when you can get them to pay you every month?
The Scalability of SaaS
The key lever within a SaaS business is that your degree of scalability is essentially off the charts. Servicing your thousandth customer costs essentially the same as serving your first (if not less).
Look at it this way:
You spend R10,000 developing a software (which, with the rise of "vibe coding," is more than possible).
You then charge each user R1,000 per month.
Based on these figures, you would recoup your initial costs in 10 months.
Assuming your product is any good, that should be a single customer who keeps their subscription active.
While these figures are anecdotal and the initial cost depends on the complexity of the features, they highlight why the model is so attractive to investors. It creates Monthly Recurring Revenue (MRR), which makes financial planning much easier because you can predict future cash flows with high accuracy.
The CA(SA) Perspective: IFRS 15 and the Cloud
For those of you tackling the SAICA syllabus, SaaS is a perfect case study for IFRS 15: Revenue from Contracts with Customers.
We have to look at performance obligations. Does the customer get the benefit all at once, or do they receive it over time? In a SaaS model, the service is provided continuously. This means the revenue is recognised over the period of the subscription. If a client pays for a full year upfront, you cannot record that entire amount as profit on day one. You have a contract liability that you slowly turn into revenue as the months pass by.
Additionally, we must consider IAS 38 regarding intangible assets. SaaS companies spend millions on research and development. As future CAs, you must distinguish between research costs, which are expensed immediately, and development costs, which can be capitalised if they meet specific criteria. It is the difference between "thinking of a cool app" and "actually building a functional product that will make money."
What Comes After You Build the Product?
Generally, after building a software product, the following stages are pretty simple:
Marketing, Marketing, and More Marketing: You need people that’ll actually pay for the software, tell you if it works, and how to make it better, which if your only user is your demo account is pretty hard.
Sales: Naturally after marketing you’ll probably need to convince leads to actually buy your software, selling becomes one of the biggest function of the business.
Customer Relations and Maintenance: The product requires constant updates and iterations to remain valuable, ensuring customers pay month after month.
The metrics that matter here are CAC (Customer Acquisition Cost) and LTV (Lifetime Value).
The goal is simple: you want your LTV to be much higher than your CAC. If it costs R500 to get a customer but they only stay for two months at R100 each, your business model is essentially a sinking ship.
The Bottom Line
The SaaS model has changed how we think about ownership and value. It has turned software into a utility, much like water or electricity.
Next time you see that R159.00 leave your account for a music app, do not be annoyed. Just think of it as a practical lesson in IFRS 15 and recurring revenue.
Until next week,
The Journal Entry Team
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