SaaS is said to be a "stable business model."
Monthly subscription fees lead to steadily increasing revenue, and as it scales, profit margins can also be high.

However, reading 'Revised Edition of Understanding the Three Financial Statements Integrated', I realize that it is dangerous to look at SaaS without considering the three financial statements together.

This time, I want to apply the concepts from this book to a typical SaaS business.

From a PL Perspective, SaaS Looks like a “Top Student”

First, let’s look at the PL (Profit and Loss Statement).

SaaS PL has the following characteristics:

• Recurring monthly or annual subscription revenue accumulates over time
• Cost of goods sold is relatively low, leading to high contribution margins
• Main costs are personnel expenses and marketing costs
• As the scale increases, profit margins improve

Looking solely at the PL, one might conclude, “Revenue is growing, and profitability is within sight. It’s going smoothly.”

However, the book emphasizes that PL is a “result” and not the “reality,” which is an important point.

The Reality of SaaS is Reflected in the BS

Next, let's look at the BS (Balance Sheet).

SaaS often presents the following characteristics in the BS:

Common Occurrences on the Asset Side

• Cash does not increase as much as expected
• Accounts receivable are relatively low (many immediate payments)
• Internally developed software is hard to reflect as an asset

This results in a common situation where the PL looks good, but the company’s financial strength is weak.

Common Occurrences on the Liabilities and Equity Side

• Loans for development and hiring
• Equity has not yet accumulated sufficiently
• Profits have started to emerge, but accumulation is yet to come

The key issue is the reality that a positive PL does not immediately translate to financial strength.

The More You Grow, the More Cash Decreases Structure

An important concept in ‘Revised Edition of Understanding the Three Financial Statements Integrated’ is “rotation.”

When applied to SaaS, it appears as follows:

• Recruiting people → Personnel costs are incurred upfront
• Investing in feature development → Revenue materialization is months away
• Spending on marketing → Recovery is even further out

In other words, SaaS has a structure where growth = upfront investment = cash outflow.

Even if it looks like growth on the PL, cash continues to decrease on the BS.

Failure to monitor the CF could lead to critical judgment errors.

CF is the “Survival Indicator” for SaaS

The CF (Cash Flow Statement) most accurately reflects the health of SaaS.

Operating CF: The Lifeline of SaaS

• Are subscription revenues coming in steadily?
• Are churn rates being kept in check?
• Is the increase in personnel expenses being absorbed by operating CF?

The stability of operating CF being positive.
This is the dividing line for determining whether SaaS can “operate independently.”

Investment CF: Choosing a Future

• Product improvement
• New feature development
• Infrastructure and security investments

Having a negative investment CF itself can be a sign of healthy growth.

The problem is:

• If investment continues while operating CF remains weak
• If there’s no clear causal relationship between investment and revenue growth

This is the dilemma.

Financial CF: Are You Buying Time or Just Prolonging Existence?

• Are you securing time through loans or financing?
• Or are you just covering structural losses?

In SaaS management, it's crucial to constantly be aware of “when will it operate solely on operating CF?”

When Viewing the Three Financial Statements as One, Management Decisions Change

When viewing the three statements together, you can address the following questions:

• Is this growth truly healthy?
• Is the investment speed proportionate to the financial strength?
• Has this SaaS entered the self-operation phase?

This is not just a matter of accounting; it’s a matter of management decision-making in itself.

Conclusion: Integrated Understanding is Essential for SaaS

Applying the insights from 'Revised Edition of Understanding the Three Financial Statements Integrated' to SaaS leads to a clear conclusion.

SaaS dreams on the PL, understands reality on the BS, and survives based on the CF.

The three financial statements are not just a collection of numbers.
They reflect the essence of the product and business.

For those creating and operating SaaS, the ability to read the three financial statements together is a significant asset.