Guide to SaaS Accounting for Malaysian Tech Startups

Tech is booming in Malaysia. It seems that whichever way you turn, there’s a new tech startup making headway. The Information and Communications Technology (ICT) industry currently makes up around 25% of the country’s total GDP 

More and more of these startups are turning to the Software-as-a-Service (SaaS) model for its scalability and predictable income streams. However, there’s a catch, while recurring revenue sounds like the dream outcome for Malaysian entrepreneurs, SaaS accounting brings a unique set of challenges that traditional methods just can’t fully address.

Unlike conventional product or service businesses, SaaS startups deal with:

• Deferred revenue
• Usage-based billing
• Churn rates
• Multi-period subscriptions
• And more

All of these aspects demand a specialised approach. Just to add to the confusion, tech startups also have to make sure they’re complying with complex tax and regulation standards at all times.

QuickBooks is here to clear things up. Today, we’re going to demystify accounting for SaaS companies and let you in on some time-saving and profit-boosting tips for success. 

What is SaaS accounting?

The truth is, the requirements and processes of accounting can vary a lot based on industry. Traditional accounting typically focuses on one-time sales or service revenue and might only involve one or two big reports a year. When we look at SaaS accounting, however, we find another thing entirely.

SaaS accounting refers to the financial tracking, management, and reporting processes specific to subscription-based software businesses. That means it’s primarily based on recurring revenue models, however, there’s a lot more that goes into effective SaaS accounting.

That includes:

• Deferred revenue: In a traditional model, when a customer buys a product, the payment is made immediately, and the product is delivered. That’s not always the case with SaaS. Often, customers pay for a service that will be delivered over time, so the revenue can’t be recognised immediately. This brings up a whole range of tax and compliance questions.
• Customer churn: This is an important SaaS metric. It tracks the rate at which users cancel their subscriptions. High churn can indicate a deeper problem, so it’s crucial for accountants to keep an eye on it.
• Complex billing structures: Forward-thinking SaaS companies tend to use more tailored, complicated billing structures, including free trials, tiered pricing, user-based upgrades or downgrades, and proration. Again, that brings up a few difficulties when it comes to internal management and external reporting.

The SaaS model is on the rise. That’s especially true in Malaysia, where digital payroll systems, CRM platforms, and productivity tools tailored for SMEs are increasingly sought-after. So, understanding accounting for SaaS companies is becoming critical for firms throughout the country.

Types of SaaS accounting

SaaS accounting doesn’t refer to one particular method. In fact, there are several ways to approach accounting for SaaS companies in Malaysia. Each approach is suited to companies at different stages and with different levels of operational complexity. 

Here are the differences between the three main types of SaaS accounting:

• Cash basis accounting: This is the simplest approach. Here, we only record revenue and expenses when money actually changes hands, making this is easier for startups with minimal transactions. The only problem might be that it doesn’t really reflect long-term financial health. That's especially true when dealing with prepaid subscriptions or deferred revenue.
• Accrual accounting: This basically takes the opposite approach. We recognise income when it’s earned and expenses when they’re incurred, regardless of when cash is exchanged. This aligns well with SaaS models, where deferred revenue is a reality. It’s also helpful for tracking monthly recurring revenue (MRR) and providing insightful reporting.
• Modified accrual accounting: A hybrid model would combine elements of both the cash basis and accrual. Think of it as a halfway option, often used by growing SaaS startups that need more accuracy than cash basis provides, but aren’t yet ready to implement full accrual accounting.

We can summarise it like this, cash basis accounting could be a good place to start. However, accrual accounting is where it’s at for growing, forward-thinking companies.

5-step revenue recognition for SaaS accounting

SaaS companies will find they probably need to recognise revenue differently than other traditional companies. However, SaaS revenue recognition must still align with IFRS 15, the international standard adopted by the Malaysian Financial Reporting Standards (MFRS). This is fundamental, it keeps things transparent and consistent.

So, what is IFRS 15? Basically, the standard outlines a 5-step framework for recognising revenue:

1. Identify the contract with the customer: The first step is to establish a legally enforceable agreement outlining the terms of the subscription. That will include pricing, duration, cancellation policy, and more.
2. Identify performance obligations: What is the customer getting from your service? In SaaS, performance obligations typically refer to ongoing access to the software platform. For example, if a subscription includes monthly access and email support, each may be considered a separate obligation.
3. Determine the transaction price: What’s the total amount expected in exchange for fulfilling the contract? This could be fixed or tiered.
4. Allocate the price to performance obligations: You may have multiple deliverables. If so, the total transaction price must be fairly allocated. If you have a simple setup, with monthly access, for example, you could just divide the price evenly across the service period.
5. Recognise revenue as performance is completed: Here’s the tricky part. With a subscription-based service, revenue is recognised over time as the service is delivered, not the moment the payment is made. 

For example, if a customer pays RM1,200 upfront for a 12-month subscription, you should only recognise RM100 in revenue each month, not the full RM1,200. What’s left is the deferred revenue.

What makes SaaS accounting unique?

Why exactly does accounting for SaaS companies involve so many unique processes? SaaS accounting stands apart from traditional business models because it revolves around subscriptions rather than one-off sales. That slight difference actually introduces several complexities that require specialised accounting practices.

Let’s take a closer look:

• Recurring payments: This is where many of the complications arise. SaaS companies tend to earn revenue over time, often through monthly or annual plans. This creates a steady income stream, which is great. However, it also complicates how and when revenue is recognised, upfront payments become deferred revenue (unearned income) until the service is actually delivered.
• Usage-based billing: Sometimes, charges will vary based on customer activity, like storage used or number of users. As you can imagine, that means you need precise tracking and flexible invoicing.
• Contract-based revenue: Many SaaS startups sign long-term agreements with clients and must account for contract terms, early termination clauses, or upgrades and downgrades throughout the contract period.
• Different metrics: Then, SaaS companies also need a different set of KPIs and metrics from other businesses, like Lifetime Value (LTV) and churn rate. These metrics can’t be underestimated in SaaS as they have a direct impact on everything from valuation to forecasting.
• Compliance: All businesses need to stay compliant with Lembaga Hasil Dalam Negeri (LHDN) and SST. However, compliance can be a more complicated procedure for SaaS.

Plenty of unique challenges, right? Given that, SaaS startups should seriously consider accounting systems that can track subscriptions, automate billing, and produce detailed, compliant reports quickly and easily.

Key SaaS accounting challenges in Malaysia

With all these complexities inherent in SaaS and subscription revenue accounting, it’s no surprise that there are multiple unique challenges that come up often in SaaS accounting. SaaS startup founders may find themselves navigating several regional complexities to maintain accurate financial records and remain compliant.

To give you the best chance of a smooth launch, let’s go over some of the most common challenges in SaaS accounting in Malaysia:

• SST compliance: Tax is already complicated, even for traditional businesses. For SaaS, even more so. Under Malaysian law, digital services are subject to a 6% tax if provided by foreign companies to Malaysian consumers. Local SaaS providers may also be subject to SST if their annual taxable turnover exceeds the RM500,000 threshold. Understanding SST, and applying it correctly, can be a big and costly challenge.
• Multi-currency billing: Many Malaysian startups cater to customers beyond our borders. That’s great for revenue, but it also comes with challenges. You might charge in USD, SGD, EUR, and other currencies simultaneously. That adds a layer of difficulty to already-complex revenue recognition. Accurate currency conversions are also critical for tax.
• Manual reconciliation: Payments can come in from multiple sources, which can make reconciliations time-consuming and error-prone. If possible, always use accounting software with comprehensive integrations to help keep things smooth and centralised.
• Lack of real-time data feeds: This can make it tough to track incoming payments or match them to the correct invoices automatically. That, in turn, affects cash flow visibility.
• Credits, refunds, trial extensions: Tiny, seemingly unimportant adjustments to subscriptions can have huge knock-on consequences and can make tracking complicated without a tight system in place.

The good news is that all of these problems have one solution, cloud accounting software. Tools like QuickBooks integrate with payment gateways, support multi-currency transactions, and help automate tax compliance. That means smoother accounting and much less risk.

Core financial metrics for SaaS businesses

It’s not just about revenue, it’s also about the quality and sustainability of that revenue. That’s why the right financial metrics are important when getting to grips with your business performance and access to better reporting.

Here are the metrics you should be looking out for:

• Monthly recurring revenue (MRR) and annual recurring revenue (ARR): You need to know your predictable income, this is key for forecasting and valuation. 
• Customer acquisition cost (CAC) vs customer lifetime value (LTV): CAC tells you how much it costs to win a customer. LTV estimates the total revenue a customer will generate. There are different opinions on this, but most agree LTV should be around 3 times the CAC.
• Churn rate: This is the percentage of customers who cancel their subscriptions over a given period.
• Gross margin: This shows how efficiently you're delivering your product. SaaS companies usually aim for margins above 70%.
• Customer retention: Keeping customers is as important as getting new ones. How well do you incentivise customers to stick around?

Best practices for SaaS accounting

It’s normal for startups to run into obstacles. However, taking steps to get it right from day one can seriously slash the amount of hours and ringgits you waste down the line. 

Here are a few best practices to bear in mind:

• Use accrual-based accounting from day one: It’s a good idea to use accrual accounting early on, even if you’re just starting out. This aligns revenue and expenses to the period they occur, which gives you a much more accurate financial picture to work with.
• Automate revenue allocation: Simplify things and use accounting software to automatically allocate and defer revenue based on subscription terms. It saves you time and ensures IFRS 15 compliance.
• Forecast churn-adjusted cash flow: Make sure to take churn into account when forecasting revenue. This will give you a realistic picture, which helps when allocating expenses.
• Clearly separate earned vs. unearned revenue: Deferred revenue is important. Don’t make the mistake of lumping all revenue together. Doing so can distort your profit and loss statement and lead to tax or compliance issues.
• Tag expenses by project or client: Where possible, tag your expenses to specific products, features, or clients. You’ll want to know the true cost of servicing each account or running a project, and it also supports better budgeting.

Tools that make SaaS accounting easier

There’s a lot that goes into seamless SaaS accounting. For some accountants, that can be overwhelming. However, with the right tech stack, accounting for SaaS companies doesn’t need to be any more complicated than traditional accounting. 

That’s because modern accounting tools can help with everything from automating routine tasks to ensuring compliance. 

Here are the tools that will take your SaaS accounting to the next level:

• QuickBooks Online: QuickBooks has long been a favourite with Malaysian SMEs and SaaS startups. For one, it supports SST configuration, so compliance is taken care of. Add in accrual-based accounting and wide-ranging integration with payment gateways and CRMs, and you’re already on the way to zero-friction accounting.
• Stripe with QuickBooks: Stripe is a must-have for subscriptions, tiered pricing, usage-based billing, and customer invoicing. When integrated with QuickBooks, payments and revenue data auto-sync, meaning reduced manual reconciliation and better revenue tracking.
• Maybank2u Biz and CIMB BizChannel: When it comes to bank reconciliation, local options can also work well. They may not offer the same real-time integration as QuickBooks, but they allow you to download transaction histories and streamline cash flow tracking.

How to set up accounting for your SaaS business in QuickBooks

If you’ve already decided on QuickBooks as your SaaS accounting partner, congratulations. You’ve made a great choice. Now, it’s time to get the ball rolling.

Here’s a step-by-step guide for setting up QuickBooks for your SaaS business in Malaysia:

1. Choose an SaaS-specific chart of accounts: First things first, customise your chart of accounts to reflect a SaaS model. Make sure key accounts also include:
2. MRR
3. Deferred revenue
4. Subscription income
5. Churn refunds
6. Payment processing fees
7. Enable recurring invoices and auto-pay: Remember to set up recurring invoices for subscriptions. Why not also enable auto-pay for clients who opt in? This will make collections a breeze. 
8. Connect Stripe/FPX for auto-reconciliation: Want to automatically sync transactions? We recommend integrating Stripe or FPX. There are a bunch of benefits, most notably real-time cash tracking and simplified reconciliation.
9. Set up deferred revenue tracking: Use journal entries or automation tools to allocate annual or upfront payments into a deferred revenue liability account. Then, create monthly schedules to recognise revenue gradually.
10. Configure SST settings: The next thing you should take care of is SST. Just go to Settings > Taxes in QuickBooks to activate Sales and Service Tax (6%). Then assign SST rates to applicable products or services.
11. Run profit and loss reports by product or tier: If you want to break down financial performance by aspects like product line or pricing tier, you’ll find using class or location tracking really useful.

Conclusion: Scale smarter with SaaS-focused accounting

Some might make out that SaaS accounting is just traditional bookkeeping with added tech. That’s not the case. It’s a specialised discipline, and one that takes some getting used to. So don’t be alarmed if it takes you a while to get into the swing of things.

The key thing to take away is that accounting for SaaS companies revolves around aspects like:

• Recurring revenue
• Deferred income
• Usage-based billing
• Metrics like churn rate and LTV

That sets it apart from traditional accounting. 

However, becoming an SaaS accounting pro doesn’t take as long as you might think, especially when you adopt cutting-edge accounting tools like QuickBooks Online. With QuickBooks to guide the way, founders can gain clear financial visibility, stay compliant with LHDN and SST rules, and build confidence with investors through reliable reporting—all with minimal manual input. 

With QuickBooks, the future looks bright. Try it for yourself for free today!