The SaaS sector abounds with financial terms like bottom line and top line are. You must understand these two concepts when talking to your investors. In this article, we explain how a P&L statement (profit and loss) is structured, from the top line (sales) to the bottom line (net income). And above all, we focus on one of the fundamental intermediate balances: EBITDA.
1 – Bottom line versus top line?
Bottom line and top line are two terms that represent opposite ends in a company’s income statement. Let’s look at how income and expenses are handled when calculating the profit or loss of a SaaS.
1.1 – A quick recap on profit and loss (P&L) statements
The P&L statement stands for profit and loss. This is the document that lists all the company’s accounting income and expenses for the purpose of determining losses or profits.
French accounting regulations require a standardized presentation in tabular form, particularly for reporting to tax authorities. Professionals thus have a breakdown of operating, financial, and one-off items.
There is also a form of P&L in which the financial data are presented in successive steps: MIS. In this case, you have business and revenue indicators to analyze results:
• the company’s production;
• sales margin;
• added value;
• gross operating profit (EBIT) or EBITDA;
• operating income;
• net financial income;
• one-off income;
• corporate income tax;
• net income.
1.2 - The top line of your company’s P&L is your sales
The top line therefore corresponds to the top of the P&L, or sales. For SaaS, it’s essential not to confuse sales with MRR (monthly recurring revenue). Sales represent all invoiced sales for the financial year, whatever the type of subscription. However, it is adjusted for the portion of subscriptions for which the period exceeds the closing date.
MRR is not an accounting item. It is obtained by analyzing monthly and annual subscriptions. It is a projection of monthly revenues based on data known at a given moment, and so can be used to forecast growth. This contrasts with accounting sales, which are a record of past performance over a given period.
1.3 - The bottom line of your P&L is your net income
This P&L line therefore corresponds to earnings before interests, tax, depreciations, and amortizations (EBITDA), i.e. the difference between all income and expenses recorded during the financial year.
A - Revenue between sales and EBITDA
These are also considered sales, i.e. top line:
• subsidies;
• a portion of grants for capital improvements;
• financial investments;
• non-recurring revenue;
• capital improvements, which we discuss below.
b - Expenses between sales and EBITDA
The SaaS business generally offers subscriptions for the use of the company’s online services. In this case, you'll mainly find the following expenses:
• direct operating expenses such as support and hosting costs;
• advertising expenses (particularly online advertising), trade shows and all other communication expenses;
• fees for lawyers, accountants, timeshare CFOs, etc.;
• personnel costs for the Go-To-Market, Sales, Marketing, Dev, and Finance teams;
• amortization of capitalized R&D costs (e.g., creation of a web application);
• financial expenses, in particular to pay down off where applicable;
• corporate tax if the company makes a profit.
2 – Bottom line versus top line—versus EBITDA?
Every company uses one or more intermediate indicators between sales (top line) and earnings (bottom line). These are used to analyze the breakdown of profits or losses. Among these KPIs, EBITDA is a key ratio that every SaaS company needs to master.
2.1 – EBITDA as an indicator of operating efficiency
One of the most important SaaS KPIs is EBITDA. EBITDA stands for "earnings before interest, taxes, depreciation, and amortization."
It provides an indication of the company's profitability excluding:
• money paid to investors and banks;
• depreciation of investments;
• provisions against miscellaneous risks and depreciations;
• government taxes due.
2.2 - Costs to be deducted from the top line to calculate EBITDA
Starting with sales (the top line), deduct the following items:
• purchases and external expenses;
• personnel costs.
2.3 - Items to be added to the top line, such as capital improvements, to obtain EBITDA
Add the following items to sales:
• subsidies;
• capital improvements.
💡 In the early years, a SaaS (like any startup) spends money to develop its product or service. These R&D costs are amortized over several years and may include the time spent by the in-house R&D team. This is referred to as capitalization. It takes salaries and social security contributions in the P&L and capitalizes them, i.e. considers them as assets, on the balance sheet.
2.4 – EBITDA now a crucial indicator for investors
This KPI is one of the most important indicators for analyzing SaaS cash flow and business performance. It gives precise indications of the company's ability to cover the cost of running its business and generate growth to:
• fund investment and financing operations;
• remunerate shareholders with dividends;
• pay government taxes.
For the previous 5 years, investors mainly focused on sales in the P&L top line. With economic conditions worsening since 2022, investors are now looking to limit their risk, and are becoming increasingly attentive to EBITDA. They want to make sure that cash is spent wisely, so they are checking the profitability of the SaaS they have invested in.
💡 Find out more in this article: Why is SaaS financial reporting still crucial for your startup in 2023?
To get your SaaS under control, you need to complement your P&L and MIS analysis with SaaS KPI tracking. Fincome offers you an online tool that directly links to your applications to automate this process. Contact us for a demo of our automated reporting of bottom line, top line, and other KPIs.
👀 Complete your reading with thefollowing articles:
- All about ARPU and ARPA
- Top tips for communicating with SaaS investors
- How to measure and improve SaaS customer retention
- KPI reporting at every stage of your startup
- SaaS metrics for startups: Which ones are key for your company?
- Annual recurring revenue: what it is and how it’s calculated
- How to calculate LTV and track your SaaS performance
- How to calculate burn rate as a SaaS startup
