Your company is your asset. Wondering how? It is a venture which either brings you the profits owing to the market value today, or it will be capable of building on it tomorrow. All of it depends on financial planning and handling.
When you are working on the business plan during the initial days, pay extra heed to the financial projections. Before breaking it into discrete pieces, look at the whole business, and understand what you and the organization intend to develop. There are various businesses around the world, but only a few go up the ladder of success. It is due to their efficient financial model that works well in every condition.
There are SaaS companies around the world that continue to remain as the most successful software-as-a-service platforms. It is not just a unique business idea but also the driving of their financials smartly. And SaaS financial model is the way for successful financial planning.
What do you understand by the term “SaaS Financial Model?”
A SaaS financial model is a unique instrument. It is like comprehending all the intertwined data that will work together to drive the bottom line, namely, revenue and growth. And it does not have a simple formula such as revenue minus expenses like every other business. They are average businesses that are easy to understand. It looks like the more you sell, the more money they make. Easy enough.
SaaS businesses are different. A financial model for a SaaS company typically requires a monthly model that forecasts users, subscription rates, churn rates, and average revenue per user (ARPU). It also resembles a traditional three statement model that includes operating expenses, customer acquisition costs (CAC), customer lifetime value (LTV), LTV/CVC ratio, and payback period.
Let me help you understand these terms in the easiest possible manner:
It is the lifeblood of the SaaS company. It is a fairly straightforward concept of summing up of recurring revenue streams over a particular period.
Churn is a part of the recurring revenue. It is expressed in terms of percentage and is equal to the customers or revenue lost over a while. It is calculated by simply taking the number of customers lost for the period and dividing it by the total number of customers.
Customer acquisition costs
It is the amount of money that a company has to spend on an additional customer. The value is derived by adding sales and marketing, and later, dividing it by the number of new customers added for that particular period.
Customer Lifetime Value (CLTV)
Customer lifetime value is the revenue on average that you generate from a customer in the return of using a SaaS product.
What are the elements of an early-stage SaaS company?
There are early-stage SaaS companies that typically do not have a finance pro in their staff. And they often end up spending a heavy amount on building financial forecasts themselves. The financial metrics are removed as there is no large volume of it for it to be meaningful. Now, considering the non-spreadsheet jockeys and new co-founders, the following tabs will help in understanding and building the first forecast:
It is a tab where one can input the details of the headcount roster. The headcounts are likely to be the title, wage, taxes, benefits, etc. The exceptional feature is that it allows specifying the start date and end date for each position. And it is how the headcount planning formula will play the role and give you a wage forecast in minutes.
Recurring revenue model
For SaaS businesses, recurring is the core of their existence and valuation. It is further divided into a few inputs, namely, new customer counts, churns, revenue, and other services.
Operating expense model
It includes items other than major headcount and wage costs such as commissions, travel, rent, and professional offerings (doctors, engineers, lawyers, etc.). These are likely to be the most common expenses at the early age of start-ups.
Lastly, the SaaS model of early start-ups also comprises the SaaS P and amp;L template, which is further grouped in department-wise expenses. This segregation is to help new co-founders and non-spreadsheet jockeys come across correct SaaS gross margin and operating expenses.
So, they were the terms expressing their role and function in the SaaS financial model. These terms should be used in a way that helps in developing a model so that individuals do not have to develop the model over and over again. The model will be created in a way where you can easily drop in exports from accounting or use the MRR (monthly recurring revenue) metrics software to get the template ready.
Below mentioned are the types of templates:
- Reporting models
- Forecasting models
- Operating models
- Data exports (actuals)
Start-ups can refer to the modular structure of the SaaS financial model during their early stage of understanding and learning in business.
How to begin your financial model?
A modular structure, as described above or (available on Google), will help your team in several ways. It generates team leads as they can easily build and own the overall forecasts. The structure or basic explanation can be shared further with your team members, and they can bring in the best inputs and right contexts for creating financial forecasts.
Hopefully, this article helped you understand the key things of the SaaS financial model. As a financial analyst in a SaaS company or a financial leader in an organization, you can refer to these basic elements of the SaaS financial model and develop a basic understanding of the structure.
Refer to financial advisories to get more on financial modeling, start-up life, and other SaaS metrics. With their experience in developing and automating financial forecast can save you from the ever-causing trouble of building excel templates.