A software products business typically generates revenue through one or more of the following business sources:
Licensing: The business sells licenses for its software to customers, who then have the right to use the software for a certain period of time or indefinitely.
Subscription: The business charges customers a recurring fee, such as on a monthly or annual basis, to access and use the software.
Freemium: The business offers a basic version of its software for free, but charges customers for additional features or services.
Advertising: The business generates revenue by displaying advertisements within its software.
Services: The business provides consulting, training, or other services related to its software to customers.
E-Commerce: The business sells software as a product on an E-commerce platform.
A software products business's expenses include:
Research and Development: The costs associated with designing and developing new software products and features, including salaries for software engineers and other development staff, equipment, and software tools.
Marketing and Sales: The costs associated with promoting and selling the software, including advertising, trade shows, and sales personnel salaries.
General and Administrative: The costs associated with running the business, such as office rent, utilities, insurance, and legal and accounting fees.
Hosting and Infrastructure: The costs associated with hosting and maintaining the software, such as server and storage costs, and network and security expenses.
Support and Maintenance: The costs associated with providing customer support and maintaining the software, including salaries for support staff and technical writers.
Taxes and Compliance: The costs associated with complying with tax and other legal requirements, such as business licenses and permits, and accounting, legal and other professional services.
Acquisition: The costs associated with acquiring other business, software or technology.
Revenue and expenses may vary depending on the size and stage of the business, as well as the specific software products and services offered.
Account for software products businesses: Software products businesses typically use generally accepted accounting principles (GAAP) to account for revenue and expenses.
Revenue is recognized when earned, typically when the software is delivered to the customer or when the customer has access to the software. For example, if the business model is licensing, revenue is recognized when the customer has access to the software and the license agreement is signed. If the business model is subscription, revenue is recognized over the subscription period as the customer has access to the software.
Expenses are recorded as they are incurred. For example, research and development expenses are recorded as they are incurred, such as when the software engineers are paid. Marketing and sales expenses are recorded when the expenses are incurred, such as when the advertising is placed or trade shows are attended.
In addition, Software products businesses may have to follow specific accounting standards such as ASC 985-20 Software - cost of software to be sold, leased, or otherwise marketed. This standard addresses the accounting for costs incurred in developing and marketing software products to be sold, leased, or otherwise marketed.