Revolutionizing revenue predictions: 7 KPIs for SaaS companies

Making accurate financial predictions for a SaaS business is TOUGH. But when it comes to predicting your SaaS revenue, your KPIs can clarify your finances and business operations. With one caveat–you need to know what to measure and which tools are best suited to the job.

In this blog, we’ll 1) Discuss why SaaS revenue metrics are vital to your financial success, 2) Explore revenue forecasting best practices that utilize cloud accounting and AI, and 3) Provide you with seven game-changing KPIs that every CFO should know. 

Let’s get started.

Why are SaaS revenue metrics uniquely important?

SaaS revenue metrics play a vital role in helping finance leaders assess and improve their company’s financial performance over time. 

They’re a category of KPIs focused on cash flow, recurring revenue, and subscription growth opportunities and risks.

Your revenue KPIs are a crucial aspect of your financial reporting, and give you visibility into your organization’s:

• Market penetration: Your revenue metrics enable you to gauge your market share relative to your industry competitors.
• Operational efficiency: KPIs allow you to make sure your company uses its resources as intelligently as possible.
• Overall trajectory: When utilized correctly, your revenue metrics provide a comprehensive view of your company’s likely financial future. Just as importantly, they give you much greater influence over your future cash flow.

On that note, let’s look at some revenue forecasting best practices for forward-thinking SaaS CFOs.

Revenue forecasting best practices for SaaS CFOs

Accurate revenue forecasting is crucial for SaaS CFOs to ensure financial stability in their organizations. Finance leaders who prioritize forecasting are more likely to hit their business goals because they’ve been keeping them steadily in view.

You would never get into a car with a blindfold on and confidently expect to reach your destination. But by not regularly forecasting your revenue–or forecasting with risky tools–you’re doing the same thing. You’re just at a SaaS company and not in a car.

Below are some different ways you can remove your financial blindfold and get to your desired destination.

Embrace cloud accounting and automated forecasting. 

If you’re still relying on spreadsheet-based forecasts assembled through email chains, you’re asking for trouble. The SaaS industry moves at a lightning pace, and tools like QuickBooks just can’t keep up. 

Automated forecasting is as simple as keying in your starting data and pressing a button. Even better, forecast models built with machine learning algorithms are dynamic, meaning your forecast results will change in real time to mirror financial conditions.

Match your metrics to your SaaS company’s business goals. 

Hastily selecting your forecast metrics can be another “financial blindfold” if you’re not careful.

To get the most bang for your buck with forecasting, you should stop and ask yourself what you’re trying to learn or achieve in that moment. What specific outcomes are you looking for from this data?

That simple practice can make all the difference in your end results.

Include other stakeholders in the forecasting process when it makes sense. 

Revenue is incredibly important to every department at your company. Everyone has something at stake where cash flow is concerned.

Try to bring other stakeholders into the forecast process when it’s appropriate to do so. Get a sense of their personal goals and how your forecasting efforts can contribute to those objectives.

Now that you know more about the importance of SaaS revenue metrics, let’s dive into our top seven revenue metrics for CFOs.

7 game-changing SaaS revenue metrics

We’ve compiled this list of KPIs with the goal of covering the full spectrum of revenue visibility.

By tracking and forecasting these SaaS metrics, you’ll know how much current and future revenue you can count on, where it’s coming from, and how much money you’re spending to generate new business.

RELATED: Predictive KPIs for SaaS companies

1. Annual recurring revenue

Annual recurring revenue (ARR) is a foundational metric for SaaS companies. It represents your company’s total yearly revenue from its subscription business model.

Your ARR is a critically important metric for investors, and it will undoubtedly be one of the first things they look at if you’re seeking venture funding.

That’s because a strong ARR illustrates that your company has a healthy subscription cash flow and customers love what you do. Both factors single your company out as a great investment.

Running regular ARR forecasts will help you retain a firm sense of your likely future cash flow, which impacts everything from budgeting to FP&A.

2. Monthly recurring revenue

Monthly recurring revenue (MRR) is a crucial companion to ARR. It provides a snapshot of the revenue your organization generates monthly.

Monitoring MRR helps SaaS CFOs assess revenue stability and customer satisfaction–this is essential for getting in front of problems early on.

Your MRR breaks down into sub-metrics. These include:

• Expansion MRR: This is the increase in monthly revenue that your company generates from account upgrades and cross-sells.
• Contraction MRR: This KPI represents the monthly revenue you lost to account downgrades. However, these users haven’t churned, and there’s a chance you can prevent them from doing so.

Keeping a close watch on your MRR is critical for maintaining sustainable subscription cash flow.

3. Revenue churn

Revenue churn, a key metric for SaaS companies, measures the rate at which revenue is lost due to customer attrition, also called logo churn.

This metric provides valuable insights into the effectiveness of your customer retention strategies, so it’s an essential ingredient for maximizing your subscription cash flow.

Frequently forecasting your revenue churn will keep you aware of your company’s overall financial footing. 

Some ways to reduce your revenue churn include:

• Targeting the right users
• Ensuring a strong product-market fit
• Investing in superior customer service
• Prioritizing ease of use and intuitive UX

What other SaaS metrics should you be monitoring and forecasting?

4. Customer acquisition cost

Your customer acquisition cost (CAC) shows the expenses your company incurs in acquiring new customers. 

By forecasting CAC, SaaS CFOs can gain insights into their marketing and sales strategies and make informed decisions on optimizing them. Decreasing your CAC is also a great way to lower your operating expenses.

Even though CAC seems to be about costs rather than revenue, it’s really about both. That’s because subscription cash flow doesn’t turn into actual profits from a specific customer until they’ve reached the end of their CAC payback period.

Your CAC payback period measures how long it takes to recoup the cost of acquiring a customer. Up until that point, you should see the revenue generated by each customer as paying back their acquisition costs rather than truly adding to your bottom line.

That all adds up to this: the lower you get your CAC, the faster your customers will pay back their acquisition costs and the more revenue you’ll generate.

5. Customer lifetime value

Customer lifetime value (CLV or LTV) represents the net revenue your SaaS company generates from a customer throughout their entire relationship with your company.

By analyzing this metric, SaaS CFOs can assess customer profitability and make informed decisions regarding retention strategies. Tracking customer lifetime value is also essential for accurately forecasting revenue and financial performance.

Running automated forecasts on your CLV will help you determine:

• Who your happiest customers are: Knowing which users generate more than their fair share of your revenue shows you who it’s most profitable to do business with. You always want to prioritize high-CLV customers.
• Whether it makes sense to pursue certain users: If you’re not careful, you can waste a lot of time and money chasing the wrong customers. Tracking your CLV lets you step off the hamster wheel and start making actual progress.

By nurturing long-term customer relationships, SaaS companies can increase their lifetime value and drive sustainable growth. 

What else should be on your list of revenue metrics to monitor?

6. Net revenue retention

Your company’s net revenue retention measures how much recurring revenue your company has managed to hold onto over a specific period (typically monthly and annually). 

To find your net revenue retention, add up your total revenue for the period you’re analyzing (be sure to include expansion revenue) and then subtract your revenue churn for that same timeframe.

This metric provides valuable insights into customer loyalty and whether your user retention strategies are having their intended impact. It helps SaaS CFOs identify potential areas for improvement, such as introducing new features that might increase customer engagement and subscription longevity.

Additionally, forecasting your SaaS company’s net revenue retention allows you to determine the future impact of customer churn on your cash flow.

7. MRR growth rate

MRR growth rate is a pivotally important metric for gauging the momentum of your subscription business model.

In contrast to your expansion MRR, which tells you the total dollar amount your MRR grows in a month from subscription upgrades, your MRR growth rate measures the growth percentage of your monthly revenue.

Measuring and forecasting your MRR growth rate will help you ascertain that your SaaS products resonate with users.

Embrace the future of SaaS KPI management

Your revenue metrics act as road signs to help you reach your financial destination quickly and easily. You can’t hit a revenue target you’re not aiming at, and you can’t optimize SaaS processes and metrics you’re not actively monitoring for improvement.

By tracking your revenue metrics, you’ll know what’s working and what isn’t, and you’ll be better equipped to capitalize on opportunities and manage risks. But how you track your metrics is equally important.

Cloud accounting software with predictive analytics gives you much more clarity into your finances and revenue than relying on lagging indicators. It’s truly a night and day difference. To learn more, check out our ebook: Predictive KPIs for SaaS and Software Companies.