Imagine driving to work using only your rearview mirror, or merging lanes on the highway without checking your surroundings first. Unthinkable, right? But SaaS CFOs do the financial equivalent when they fail to prioritize two crucial business activities: reporting and forecasting.
In this post, we’ll cover 1) The importance of financial reporting and forecasting for SaaS organizations, 2) The role of forecasting in SaaS financial planning, 3) The benefits of automating these critical accounting workflows, and more.
If you’re ready to optimize two of the most important activities in your department, let’s begin.
Understanding SaaS financial reporting
Your financial reporting encompasses the process of recording your historical accounting data. All businesses engage in financial reporting to various degrees, but multiple factors make it uniquely important for SaaS companies.
The importance of financial reporting for SaaS businesses
The main goal of financial reporting is straightforward–to help companies monitor their cash inflows and outflows.
Every business needs to engage in financial reporting, but SaaS companies have specialized reporting needs. These encompass:
- Customer renewals and subscription metrics: Unlike companies that make money from one-off sales, subscription SaaS financial reporting needs to factor in renewals and various subscription-based metrics like annual and monthly recurring revenue (ARR and MRR, respectively).
- Special revenue recognition requirements: Subscription SaaS companies are required to follow the revenue recognition standards laid out in ASC 606. This involves following a 5-step process to properly convert bookings into revenue. You cannot report revenue recognized in a manner that deviates from official guidelines–doing so is illegal.
- Attracting investors and raising capital: Many SaaS companies engage in fundraising to meet their goals more effectively. SaaS investors expect and demand that the companies they commit capital to operate on a firm financial footing. And as a SaaS CFO, you can only provide proof of that through your financial reporting.
As we alluded to, SaaS companies rely on a specific set of subscription metrics in their financial reporting. These key performance indicators (KPIs) are crucial to your company’s success, so let’s review some of them.
Key SaaS metrics for effective financial reporting
The functional day-to-day realities of a subscription business are quite different from those of a company that makes its money from single sales. This means they also use different KPIs to measure success in their financial reporting.
For subscription SaaS businesses, some of the guiding lights of your financial reports should include:
- ARR: Your annual recurring revenue measures how much committed annual subscription revenue your company generates. It can be useful for gauging your revenue expectations for next year, and other big-picture calculations.
- MRR: Your monthly recurring revenue tracks your monthly subscription cash flow. This further breaks down into your new MRR, churn MRR, and other monthly metrics to track subscription changes.
- Churn: This KPI measures the number of subscribers you lost over a given period.
- Lifetime value: LTV tells you the average revenue your company generates from each subscriber.
- Customer acquisition cost: CAC tracks the average amount of money you spend to acquire each customer, taking marketing spending, sales commissions, and other factors into account.
These metrics provide valuable insights into business health and customer behavior, enabling data-driven decision-making. Cloud financial management software significantly simplifies financial reporting and forecasting for SaaS companies.
The role of forecasting in SaaS finance
As a SaaS CFO, financial reporting is essential but doesn’t guarantee success on its own. You also need to be able to compare the effects of different business decisions on your future cash flow. This is known as forecasting or scenario planning.
Forecasting the effects of strategic decisions before implementing them enables you to avoid making bad moves you’ll regret later. SaaS finance leaders run forecasts for various purposes, but they all have one thing in common: maximizing cash flow.
Here are some of the most important questions for guiding your SaaS forecasting efforts.
Which billing model will maximize our cash flow and renewals?
When you’re pricing your products and deciding on SaaS billing models, forecasting is crucial. For recurring revenue companies, seemingly minuscule differences in price points can lead to drastically different cash flow results.
Scenario planning around your billing allows you to get granular about your decision-making.
Can we capitalize on any user trends that might be taking shape?
Forecasting enables you to extrapolate your reporting data into the future. This is an effective way to amplify any trends you see forming in your data and analyze their downstream impact.
For instance, if you run a forecast and notice that your company is gaining traction with a new user segment, you could retool your marketing approach to better cater to them.
Forecasting is also a great way to catch negative trends while they’re still young, which brings us to our next question.
Are our churn levels sustainable, and how can we reduce them?
Staying on top of churn is imperative for SaaS finance leaders, and you can’t do that without forecasting.
Some amount of churn is expected, but there comes a point at which your churn levels are no longer sustainable. Forecasting can help you keep a close eye on how churn is impacting your overall cash flow.
3 revenue forecast models to consider
Below are three of the most common forecast models that SaaS CFOs utilize in their financial planning efforts.
- Historical forecasting: Historical forecasting is one of the most common forecast methods. It involves looking at your historical revenue growth between two periods–from one quarter to the next, for example–and assuming that your growth rate will remain consistent.
- Length of sales cycle forecasting: Most SaaS products have a distinct sales cycle encompassing the buyer’s journey from discovery to purchasing. Length of sales cycle forecasting analyzes how likely your leads are to convert based on their sales cycle stage.
- Multivariable analysis forecasting: Because this model considers multiple factors–sales cycle length, win rate by product type, and win rate by sales rep–this is the most complex but accurate forecast method. Multivariable analysis forecasts are best suited to automated forecasting tools.
Reporting and forecasting are indisputably important. But unless you carry these tasks out accurately, they won’t do you any good. What makes accuracy so essential?
The importance of accuracy in financial reporting and forecasting
Stakeholders in every part of your organization rely on your reporting and forecasting data to help them make important decisions. On top of that, your board depends on it to help them gauge the company’s financial trajectory, as do investors.
To help you better appreciate why trustworthy data is so vital, we’ll review the risks of letting errors creep into your reporting. After that, we’ll examine how accurate forecasts help SaaS companies scale more seamlessly.
Risks of inaccurate or ineffective financial reporting
The risks of faulty reporting data or processes are numerous and potentially severe. Manual accounting departments run a particularly high risk of reporting issues on account of employee errors and other process inefficiencies.
Some threats of reporting inaccuracies and inefficiencies include:
- Missed opportunities that you would’ve seen if your data had reflected reality.
- Reporting lag severe enough that your data becomes unusable.
- Revenue leakage if your reporting falls outside the scope of ASC 606.
- Marketing campaigns that flop because they were based on inaccurate data.
- Lack of SaaS metrics integration with legacy tools.
There’s a lot riding on the accuracy of your historical performance data. Opting for cloud financial management will enable you to maintain unbroken trust in your data.
How accurate forecasting contributes to business growth
Accurate SaaS sales forecasting plays a crucial role in achieving business growth. As a SaaS CFO, you’re expected to make growth contributions on par with any other C-level employee–your role is about much more than crunching numbers.
Accurate sales forecasts lay the foundation for effective financial planning and analysis (FP&A). FP&A, in turn, acts as the basis for decision-making that results in growth and increased cash flow.
From knowing which price points will increase signups and renewals to staying ahead of your churn trends, accurate forecasts can help you stay in control and maintain steady growth. The more clearly you can predict the future, the more effectively you can plan for it.
Additionally, prioritizing forecast accuracy will save you from wasting time and money chasing ideas that won’t work. When you implement plans based on faulty forecast data, your results will quickly diverge from what you’d hoped for and might even damage your company.
Challenges in financial reporting and forecasting
In an ideal world, business activities as vital as reporting and forecasting should practically take care of themselves. However, that’s rarely how it works in most CFOs’ day-to-day experience.
Luckily, there are some rather common culprits that interfere with these two important workflows. Let’s review some of them and the steps you can take to solve these issues in your accounting department.
Common challenges in SaaS financial reporting
SaaS financial reporting is fast-paced, and at least in some respects, mistakes can’t be reversed once they’re made. Revenue leakage is a prime example of this.
This makes it crucial to avoid reporting hurdles before encountering them at all. Your company’s long term success and market share depend on it.
Common SaaS reporting challenges include:
- A company culture of data silos: Business leaders need to create a culture of data centralization at their companies. This is especially crucial for SaaS organizations, where data silos can endanger everything from your marketing funnel to your product development initiatives, customer success results, and more. Centralized reporting knocks down data silos, which pose considerable financial risks.
- Reliance on legacy systems: Manual financial reporting exposes companies to a whole swath of potential problems. Manual errors, data lags, and intense employee labor around processes like the monthly close are all reasons to consider automating your reporting.
- Inability to handle ASC 606 requirements: ASC 606 calls for a detailed 5-step process for correctly recognizing revenue. As you scale, you can expect to hit a point where your current revenue recognition practices begin to break down. Cloud software uses AI to centralize SaaS revenue recognition.
As with reporting, SaaS CFOs frequently run into problems with forecasting. After all, it’s a highly complex process. Luckily, there are steps you can take to counter common issues.
Obstacles to accurate and effective SaaS forecasting
Forecasting is one of the most strategically valuable activities in your entire department. It pays dividends to take a moment and check for problems that might be interfering with this pivotal workflow.
Below are some of the most prevalent SaaS forecasting obstacles to be mindful of.
SaaS forecasting becomes harder as you scale.
There’s no getting away from the simple fact that practically everything is harder at scale, if only for logistical reasons. This is certainly true of your forecasting efforts.
Unless you use cloud software that can seamlessly scale with your company, you’re likely to encounter problems sooner rather than later.
And once you cross that threshold, you can expect more forecast variance and manual errors as employees struggle to keep up.
The downstream negative impact will be campaigns and financial plans that don’t work and ultimately cause a hit to your cash flow.
Relying on spreadsheets and email chains is inherently problematic.
Legacy forecast assembly involves compiling financial data via email chains and spreadsheets. This carries multiple risk layers for SaaS organizations.
First, business emails are a favorite haunt of hackers. Using email or similar channels for data distribution puts your sensitive financial and user info in potentially compromising situations.
Just as importantly, you’re throwing strategic caution to the wind when you forecast manually. One tiny error can reduce the accuracy and utility of your entire forecast, causing downstream consequences for other stakeholders.
Manual forecasting limits your strategic horizons, harming your financial success.
We’ve mentioned that legacy forecasting is inefficient and risky. But to get the full story, a side-by-side comparison with automated forecasting is useful.
Legacy forecasting is a one-off process; there’s a one-to-one ratio, meaning you assemble one forecast and get one set of results. Any changes in forecast assumptions have to be dealt with manually. This lack of speed is a significant liability in the high-octane SaaS industry.
That one-to-one ratio doesn’t bind forecasts built with automation. When you build a SaaS sales forecast with AI, you’ll have access to automated scenario analysis. This means your forecast results will update in real time to reflect changes in your financial environment.
Paving the way for future growth is difficult when you have to assemble a new forecast to reflect every financial change. Whether you’re a public company or a small SaaS startup, this quickly grows impractical and can harm the ROI of your revenue forecasting.
Don’t leave your reporting and forecasting to chance
Reporting and forecasting are essential for any business but uniquely crucial for SaaS companies. Faulty reporting makes it impossible to gauge what’s working and what isn’t. Just as alarmingly, it exposes you to regulatory fines and revenue leakage.
And if you can’t get your financial forecasting dialed in, you could end up running on a hamster wheel of high-variance forecasts and campaigns that often miss the mark. To learn how you can save up to 40 hours per month on your financial reporting, check out our datasheet: Sage Intacct Dashboards and Reporting.
Datasheet: Sage Intacct Dashboards and Reporting
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