Bookkeeper for Software Development Companies

How do I keep product revenue and services revenue separate?

The books need to treat a product line and a services line as two different piles of money, even when one company runs both. The two piles behave nothing alike, and if a single P&L combines them you can never see which one supports the business.

When you sell your own software on subscriptions, the income arrives as a steady repeat stream and most of your costs were spent months earlier building the product. When you build software for a client, you bill for work done, and the engineers running up those hours are the biggest cost in the same month you invoice. Signed fees and prepaid maintenance drift the timing even further. A lot of owners run both at once because one naturally grows into the other, and when all the revenue lands in one checking account with a single income category, your own quick instinct about which side is profitable starts leaking.

When your software earns a cut of what other people sell (payment processing, a marketplace, an app store), that transaction revenue is not a single line either. It comes as batches of small amounts with refunds and chargebacks coming back weeks later, so the books need an account per fee stream plus a clear way to catch the refunds. Some of the common slices you will see in the industry: roughly 2.9 percent plus 30 cents for payment processors, 3 percent from hosts and a larger slice from guests on booking platforms, and 15 to 30 percent for the app stores.

How do I book revenue for a subscription paid up front?

A customer paying a full year at once gives you a liability, not revenue. That money goes into a deferred revenue account on the balance sheet, and the part you have actually earned moves into the income statement as each month of service passes.

The exact same rule applies to a prepaid retainer or a paid maintenance plan: you earn it as you deliver, not on the day the deposit clears. If your whole annual check triggered a year of revenue in one day, your P/L will show a banner year and your bank account will quietly run out of the money that was actually only one month's worth. A bookkeeper who books the entire amount up front is exactly the kind you replace when the dashboard looks fine but the cash doesn't.

What are the real costs in a software business?

People are the biggest cost at the top of the list for every software shop. Developer wages and payroll taxes dominate, and on the services side the subcontractors you bring in for overflow sit within small reach of the top.

Projects also carry a second cost that doesn't look like payroll: hosting and cloud infrastructure, the software you run the business on, and the sales and marketing money that product-funded companies spend ahead of any income. On top of that, many finished projects leave behind a maintenance and support retainer, commonly a few hundred dollars a month, in the neighborhood of $200 to $500, whether a new client shows up that month or not. These are fixed line items on the recurring cost side, and owners often miss them. The per-project gross margin you are proud of is different from the fixed grind that keeps leaving regardless.

How do I record subcontractors and the markup on them?

When a subcontractor does the work and you do the billing, the full client invoice is our gross revenue, the fee you pay the subcontractor is the cost of that job, and what is left in between is the actual margin your business earns.

Do the math plainly: a $40k client invoice, of which $26,000 goes out to a subcontractor, leaves a $14,000 margin that pays for your own engineers, your last bill, your overhead. Gross shows the revenue, cost goes to the subcontractor as a dedicated expense line. If you instead bury the contractor fee inside general wages and treat the whole $40k as mark revenue, the revenue side of your P&L will look far stronger than the company is. This is the largest single turn in development agencies: the revenue number gets confused with the actual cut that is yours.

Why do software margins look so different?

Industry margins are scattered from excellent to losing, and both extremes can be true for different companies in the same field. The gap is not a contradiction, it restores why it matters to compare yourself against the right group.

The two extremes come from the two shapes of the trade we started with. An agency that sells its developers time at a healthy markup can hold a net margin in the strong double digits. A product company that charges subscriptions can hold a huge gross margin and then spend most of it on research, sales and marketing, ending near zero operating. There is no single number to measure against. You need a set of books that separates the groups and tells you which denominator you actually live in.

What should the monthly close show me?

A clean month end for a software business settles two things at once: the revenue you actually earned, recognized month by month, and the work you did but have not yet invoiced. Both show up across the books, and their balances must sit where anyone coming back to the books can see them.

On the subscription side that means the deferred balance: how much paid cash is still owed as future. On the services side it means work in progress, the labor and milestones of projects that have run past the month end. If your sheet carries neither number, the books have no memory of the work already performed but not billed, and the quarter report swings according to which client you happened to invoice mid quarter.

• The deferred revenue balance: subscriptions and prepaid retainers you have not yet earned.
• Work in progress by project: hours or milestones done by the close that you have not billed.
• A P&L view that separates services from product when both are in the company.
• The actual margin on the product line and the services line, not the combined gross line.
• Refunds and chargebacks against the transaction revenue. If you left those out, the profit you are seeing for the last three months is being corrected right now.

Simply put, a close is right when you can answer two questions in plain language: how much delivered work has not yet been billed, and how much prepaid cash still has to be delivered. Then decide. Hire another developer. Raise the hourly price on the next sale. Both decisions need the margin to be true.