June 7, 2023
Jonathan Charpentier
Financial understanding and solid accounting practices are the languages of successful businesses. Utilizing balance sheets, statements of cash flow, and income statements can give an outsider a glimpse of the financial stability of any given company.
SaaS finance often refers to the financial options available for new or growing SaaS businesses. In that vein, SaaS finance is, in a sense, no different than any other business — you need the same accounting practices, financial models, plans, statements, goals, and key SaaS performance indicators (KPIs).
A company that fails to properly manage cash flow, liquidity, and revenue is more likely to close up shop. Therefore, understanding SaaS finance allows SaaS CFOs and other C-Suite leaders to make informed decisions about scalability, investments, marketing, and sales efforts.
It all starts with accurate SaaS metrics, especially for subscription-based business models. Without accurate KPIs, leaders can’t make the best business decisions.
This article explores SaaS finance and strategies you can implement to boost revenue. Whether your Saas company is in an early-stage startup phase or a Series D round of investments, these SaaS accounting and finance metrics are must-adds for your dashboard!
Strong bookkeeping practices and financial planning help business leaders make informed business decisions that boost revenue and profits. Here are a few simples strategies to use financial data to maximize your bottom line.
Your SaaS company’s financial goals should reflect the desired direction of the organization. That means your current goals are sometimes ineffective, unrealistic, or don’t align with that overall direction and require an update. Revisit your financial goals each year without emotional goggles and critically evaluate whether your objectives are over or under-ambitious, which can lead to a lack of focus and motivation among your teams.
When setting your financial goals, use the S.M.A.R.T. method to ensure you have specific numbers and timeframes attached to each key metric. As your business grows and evolves, ensure your financial leaders revisit these goals and update their progress or make adjustments where necessary.
Acquiring new customers is expensive, and a poor customer experience is the fastest way to drive your client base into the arms of your competitors. With an excellent customer experience, you can attract and keep existing customers while reducing the effort required for acquisition.
A great customer experience should include every interaction and touchpoint your customer has with your SaaS company. Make it your goal to provide extensive value during each interaction, such as assisting with the buying process, dunning, renewals, product customization, and support.
Ensure your onboarding process is seamless, requiring as little customer effort as possible to reduce friction. Also, have team members be available to answer questions or concerns as they arise. Each interaction should be authentic and extends beyond customer expectations.
Finally, product design should meet clients' needs, and adequate customer education should be available to guide functionality and feature usage. Without a usable product, customers will look for solutions that meet their demands.
Archaic and manual processes take up valuable time and can lead to human error. That’s why Software as a Service (SaaS) companies are turning to automation to streamline manual processes that cause errors that create lost revenue.
Automated systems and processes can help alleviate the pressure on teams in areas such as:
Additionally, you can set up automated systems that make it easier for your customers to interact with your business. Create self-service options for payments, help tickets, purchases, upgrades, product resources, and dunning. By spending less time capturing lost revenue, you can spend more time improving your product or attracting new clients.
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Finance teams can use almost endless SaaS metrics to evaluate virtually every aspect of your operation. However, some KPIs provide more helpful insight than others when providing a valuation of your business. Here are the top analytics you should add to your reporting packet to improve your financial position and decision-making capabilities.
Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are similar metrics that companies use to evaluate the income of a company using a subscription-based revenue model. They describe that revenue as recurring monthly or annually instead of as one-time license revenue.
To calculate MRR, use the following formula:
MRR and ARR help SaaS companies identify products or features that need improvements and if you need to improve your customer retention efforts. They also help identify upselling and cross-selling opportunities.
But it’s essential to be careful, as mistakes in MRR and ARR forecasting can have a domino effect, impacting the forecasting and decision-making in other departments.
Customer acquisition costs (CAC) are the costs of obtaining new subscribers through marketing and sales. It encompasses salaries, ad space, materials, and anything else used to attract and enroll new clients.
The formula for customer acquisition cost is straightforward:
Tracking and understanding CAC helps reign in the “growth at any cost” mentality that SaaS leaders fall victim to and helps make educated marketing decisions. By pairing CAC with customer lifetime value (CLV or LTV), you can view how valuable your marketing efforts are relative to overall revenue growth over a customer’s lifetime.
Customer lifetime value (CLV or LTV) is how much your SaaS business can expect to earn over the average contract length. It’s an excellent gauge of your average client's value to the company.
Calculating CLV or LTV can be complex, but a good practice is to use the accurate data captured in your CRM or ERP software. A simple formula looks like this:
When you combine LTV with customer acquisition cost, you can create the CAC:LTV ratio, which provides a snapshot of customer profitability and potential revenue growth. Through segmentation and cohort analysis, it can also help you identify high-value customers ripe for a targeted marketing approach.
The net profit margin is the golden number of your financial reporting. It’s your company's net income as a percentage of your revenue. It’s your bottom line or how much money is leftover from selling your SaaS product after you pay for everything.
The formula for net profit margin is one of the most crucial in all of business and looks like this:
Net profit margin is the health chart of your SaaS company’s overall financial picture. In other words, are you profitable? It’s how you can tell if your current business practices and processes are working or need changes.
Average revenue per user (ARPU) is the revenue generated by the average active, paying subscriber. It illustrates your company’s ability to generate earnings and can help with forecasting your growth trajectory.
ARPU is another simple equation written as follows:
ARPU has a few notes attached to it, such as that you must use the same period for both the number of subscribers and the total revenue. Additionally, you should not include free or freemium users or create a separate average revenue per paid user (ARPPU) metric.
Calculating and tracking ARPU can also help evaluate your retention capabilities. Noticing a drop in ARPU can signal that something needs improvement, but it can also be misleading, so it’s crucial to use it in conjunction with other real-time reports.
The payback period or CAC payback period is the amount of time it takes your business to financially recover the cost of acquiring a new client. The standard SaaS industry benchmark for CAC payback is between 5 and 12 months, with the shorter timeframes indicating higher performance.
You can calculate a payback period using this formula:
While it would be a dream to have instant profits, the reality is that you need several months to recover acquisition costs, and early customer churn can cause lost revenue. It can also indicate if you are pricing your SaaS product appropriately or are overspending on acquisition efforts.
Finally, one of the most critical SaaS metrics you should track is customer churn rate. Customer churn is the attrition rate or the number of customers who stop paying for service — voluntarily and involuntarily.
To calculate your customer churn rate, use the following:
A high customer churn rate points to several issues, such as price points, product functionality, or customer experience. Without addressing the root cause, this high churn rate impacts profit margins and potential growth.
Understanding, calculating, tracking, and making informed decisions based on SaaS financial data can help turn a startup into a high-performance, must-have product. It can also mean the difference between sustained growth and expedited cash burn.
By utilizing these key SaaS metrics in your operations, you can use sound financial and accounting principles to your advantage, generate more revenue, and increase bottom-line profits.
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