SaaS financial models are documents that outline your SaaS business’s financial performance and projections for you and your investors. This can be challenging for entrepreneurs (and even some CFOs) because the SaaS business model poses unique challenges in terms of traditional financial modeling.
SaaS poses challenges like:
The good news is that there are tools that bring simplicity to developing a SaaS financial model.
SaaS financial models are important for both SaaS startups and established SaaS companies for several reasons. Among the most important include:
There are five types of financial models that you should build for your SaaS business. Each different financial model provides unique insights into your business and may reveal opportunities to make improvements.
Find the details on the five different types of financial models and what each type tells you below.
The operating expense financial model is designed to outline your SaaS company’s operating expenses. These models are unique to SaaS businesses because your operating expenses are likely significantly different from the types of operating expenses a more traditional company might have.
Of course, you’ll have administrative, sales, and other expenses, but you’ll also have operating expenses that are unique to SaaS businesses, like:
This model is important because it gives you the opportunity to prepare for expenses ahead of time.
A financial forecast model uses current data about your company to make financial projections. For example, this type of modeling results in earnings and revenue forecasts, both of which are significant factors for investors in your fundraising rounds.
Moreover, you can create forecasting financial models to forecast growth or lack thereof in metrics like gross margins, net margins, expenses, and more.
There are few seasoned investors who are willing to make an investment in a company without seeing its financial statements. These are statements that report how well (or how poorly) your company is doing to its stakeholders. Reporting financial models typically include three key financial statements:
As the number of customers your business serves grows, economies of scale begin to take effect. With a higher headcount, you’ll need more server bandwidth, but that bandwidth may become less expensive on a per-user basis thanks to increased volume.
A headcount planning financial model gives you the opportunity to plan for these changes ahead of time by forecasting future headcounts based on current growth and how higher numbers of members will relate to changes in operational finances.
A recurring revenue financial model gives you more details on three key aspects of any SaaS business:
Your recurring revenue financial model gives you the data to make more accurate revenue growth projections and create effective financial and business plans.
One of the biggest difficulties business owners have when developing financial models for their Saas businesses is that it can be difficult to decide which metrics are important to include. SaaS metrics differ significantly from the metrics you’d expect to include in a retail business.
However, financial models built using the wrong metrics do nothing for you.
The good news is that, while the SaaS industry is a relatively new one, the most important metrics for these businesses are already pretty well-established. These include average revenue per user, churn rate, customer acquisition cost, lifetime value (LTV) to customer acquisition cost ratio, and payback period.
Below you will find the details of each of these important metrics to use in your financial models.
It’s important for SaaS companies to know how much revenue they generate per user on average at different time increments. Those include:
When you determine your average revenue per user metrics it’s important to remember that subscription fees aren’t your only source of revenue. Make sure to also include sources of revenue like:
Customer churn rates tell you and your investors what percentage of your customers cancel their services over specific time periods.
Customer churn rates tell you a bit about what percentage of revenue you’re likely to retain as recurring revenue because of renewals. If your three-month customer churn rate is 11%, you can count on retaining 89% of your recurring revenue every three months, even if you don’t bring any new customers in.
Investors also pay close attention to customer churn rates because they help determine how quickly your business can grow, or if it can grow at all. Your customer acquisition and retention rates must outpace your churn rate for your company to be successful.
Your customer acquisition cost is the amount of money you pay to acquire new customers. For example, if you run an ad with a $10,000 budget over the course of three months, and that ad directly results in 1,000 new subscribers, your customer acquisition cost is $10, meaning you paid $10 in advertising costs per paying customer.
It’s a good idea to track your customer acquisition cost with each advertisement to get a gauge for the advertisements that do better than others. However, from a business and investment perspective, it’s also important to average your customer acquisition cost over all campaigns to get an accurate number of how much it costs for you to acquire a new customer in general.
The customer LTV to CAC ratio may seem foreign, but it compares two metrics we’ve already talked about: the lifetime value of a customer and your customer acquisition cost. In order for your SaaS business to be successful, your customer lifetime value must be reasonably higher than your customer acquisition cost.
It’s wise to shoot for a minimum benchmark in this metric of three to one. That means you earn three times your customer acquisition cost over the lifetime of your relationship with your customers. For example, if it costs you $10 to acquire a new customer, you should earn at least $30 over the lifetime of that customer.
The payback period, often referred to as the CAC payback period, is the amount of time it takes for you to recuperate your customer acquisition costs after you’ve acquired a new customer. The longer this period, the more difficult it may be for you to scale in the future.
For example, Company A and Company B both have a three-to-one LTV to CAC ratio.
However, Company A’s payback period is four months while company B’s payback period is nine months. Company A will be able to grow far faster than Company B because it receives a return on its customer acquisition costs more quickly. This allows Company A to reinvest in growth faster than Company B.
The best way to build a SaaS financial model is to take advantage of spreadsheet software like Microsoft Excel or Google Sheets. However, you don’t have to be a spreadsheet whiz to build your SaaS financial models; we’ve put together a template to make the process as simple as possible.
You can use our SaaS financial model as a Google Sheets or Excel template. Just follow the steps below.
We’ve made creating a SaaS financial model easier than it’s ever been before. Simply follow the steps below to use our template: