R&D Expense Assumptions for a SaaS Startup

Q: What is the best way to enter R&D expenses for my SaaS business plan when using the Startup Financial Model?

A: Pre-launch and post-launch R&D expenses are often handled differently based upon each countries accounting rules, so be sure to check on that prior to modeling. According to U.S. GAAP rules, for example, SaaS R&D expenses prior to going "live" with an application should be capitalized (added to the Balance Sheet as an Intangible software asset and amortized over the expected life of the software asset), but once you've gone live, the ongoing expenses should be expensed (added to the Income Statement as an expense and not run through the Balance Sheet).

For handling R&D expense, we recommend the following for handling both initial R&D and ongoing R&D for U.S.-based SaaS companies:

1. Pre-launch R&D: To capitalize your R&D expenses prior to “going live” with your SaaS software, you would enter all of those pre-launch expenses into the Intangibles portion of the Asset Investment assumptions on the left-hand menu per our example below of pre-launch expenses of 250,000:

With the simple input above, the model automatically creates the proper CapEx and Depreciation/Amortization table and runs it through the Cash Flow and Balance Sheet effortlessly:

2. Post-launch R&D: To expense your R&D expenses after going "live", you would enter the R&D staffing expenses under Staff assumptions on the main menu, as in this example input:

On the Staff report, you can easily see the scale up of number of employees and compensation by various roles month over month, quarter over quarter and year over year. This is a much easier way to model compared to adding each employee individually and it is also more informative to create roles and then fill them with numbers of employees over time. We recommend modeling other positions the same way, based upon roles.