The CFO has become the business model architect for designing their company’s SaaS financial model. However, if you’re relying on manual SaaS financial modeling to accomplish this, you’re going to have a much more difficult time proving business value.
In particular, using manual SaaS financial models is risky because:
- Errors can slip into board presentations: Errors that find their way into a professional presentation are embarrassing in and of themselves. More importantly, errors can prevent you from sharing the reasons behind your strategic decisions and how those decisions are playing out.
- Investors won’t grasp your full potential: One of the appealing aspects of automated SaaS financial models is that they significantly expand your reporting timeframe. This means you’ll be able to prove your company’s value to investors much further into the future.
- Your team morale might drop: Automating your SaaS financial modeling also has internal benefits. When your colleagues have a clear understanding of the company’s trajectory and how they’ve helped shape it, they’ll naturally be more motivated to see that cycle continue.
Why do SaaS companies need a unique financial model? And what are some hurdles that CFOs face when building SaaS financial models? For SaaS business success, there are important factors to consider when building a financial model. There are key ways to tell your story to investors. Below are the most common challenges SaaS companies face, and how a unique financial model can help you overcome them.
What is a good financial model for SaaS?
When a CFO attempts to create an accurate SaaS financial model, they face a number of issues unique to B2B software companies. Good financial models provide business leaders a glimpse into the likely financial future of a company, which is often notoriously hard to determine at software companies.
SaaS companies need a unique financial model that will provide important tools to the enterprise for tracking and monitoring key metrics (KPIs) that are important to them. The best SaaS financial models create insights about the KPIs that can be used to help improve (and prove) the value of a business. For example:
- Uncertainty around recurring revenue: SaaS customers frequently have their pick of differently-priced feature tiers for a product. Or, if that’s not the case, a “pay-as-you-go” model is becoming equally popular. This pricing and billing flexibility is excellent for attracting new customers but can complicate your SaaS financial modeling attempts.
- The unpredictability of customer churn: In an ideal buyer scenario, a subscriber would sign up for your services and be so thrilled they never unsubscribe. But this rarely ever happens in reality. Most customers churn at some point, whether it’s one month or two years. This adds a layer of complexity to creating accurate SaaS financial models.
- The need to closely monitor payback periods: SaaS companies must closely track at least two distinct payback periods. First, the time it takes to recoup upfront software development costs is significant. And secondly, the payback period on the money spent acquiring each subscriber must also be watched and improved.
If this sounds difficult, don’t get discouraged. Your SaaS KPIs give you concrete benchmarks you can use to ensure that your financial modeling leads to heightened profits. (Related: How to Use SaaS KPIs to Survive a Market Downturn.)
The key metrics (KPIs) behind your forecasting models
SaaS financial models are composed of individual KPIs. Think of forecasting models like a building consisting of individual bricks–your metrics.
If you don’t lay your bricks well to develop a solid foundation, you can’t expect a strong building that will last through the years and stand up to harsh weather (market conditions) when necessary.
What are a few of the most useful metrics to include in your SaaS financial model? Glad you asked.
- Customer churn: Churn is one of the most valuable metrics for recurring revenue companies. It tells you how many customers you’re losing over a specific period. Also, be aware of involuntary churn, which occurs when a customer’s credit card expires, and their payment can’t clear.
- Customer acquisition cost: Customer acquisition cost (CAC) measures how much you spend to acquire each new customer. A low CAC is highly attractive to investors and extremely pleasing to board members.
- Customer lifetime value: Your customer lifetime value (CLTV) measures how much money each customer spends on your services before they churn. High annual revenue figures depend on maintaining a high CLTV.
- CAC to CLTV ratio: You always want to aim for a low CAC and a high CLTV. Think of that as the “golden ratio” for SaaS companies. Your CAC to CLTV ratio offers a handy snapshot of your company’s financial health.
Creating a profitable SaaS financial model doesn’t have to be difficult or complex. Accounting automation makes it as simple as plugging in your starting info, and the software does the rest; generate detailed reports and robust forecasts models, instantly.
The SaaS financial model you’ll actually use
Automation gives accounting departments an incredible degree of leverage that isn’t available to manually-based teams. The importance of automation doesn’t end with SaaS financial models, but the crucial takeaway here is that it helps you build a financial model you’ll actually use to make data-driven decisions.
Click here to learn how automation streamlines the close process, turns audits into something you won’t dread, and more.
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