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:
- Recurring Revenue: It can be difficult to predict future recurring revenue.
- Churn Rate: Your customer churn rate will directly affect your revenue projections.
- Costs: Costs are significantly different from traditional business operational costs for SaaS companies.
- Value to Acquisition Cost Ratio: It can be difficult to determine an accurate customer lifetime value to acquisition cost ratio in recurring revenue models.
The good news is that there are tools that bring simplicity to developing a SaaS financial model.
Why Is It Important for Your SaaS Business?
SaaS financial models are important for both SaaS startups and established SaaS companies for several reasons. Among the most important include:
- Financial Planning: These models give you a better understanding of your company’s financial stability and where you may find hurdles in your financial plan. As a result, SaaS financial models are effective tools in financial planning.
- Service Pricing: When you build your financial models, you’ll have a better understanding of how much money it costs you to acquire and provide services to customers. You’ll also learn about the lifetime value of a customer. This gives you crucial data as you determine and adjust pricing for your services.
- Fundraising: Your SaaS financial models show where your company is and where it’s likely headed. They provide crucial information investors need to determine a fair valuation for equity in your company while showing investors that your interests are aligned with theirs, an interest in proper financial management.
- Business Planning: SaaS financial modeling can also uncover inefficiencies in your business plan, giving you the opportunity to improve operational efficiency and profitability.
What are the Main Types of Financial Models?
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:
- Server Expenses: Server expenses may be considered one of many in the cost of goods sold (COGS) column. SaaS companies typically require high levels of bandwidth, and the cost of that bandwidth will grow as more users sign up.
- Subscription Management Expenses: You’ll likely need a subscription management solution that adds simplicity to billing, client relationship management, and other aspects of running your SaaS business.
- Development Expenses: All companies have expenses associated with developing products and services, but SaaS companies must continue to innovate or they’ll be left behind by their competition. So, these expenses are likely quite a bit higher than what a more traditional company spends on innovation.
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:
- Balance Sheet: Your balance sheet outlines your company’s assets, liabilities, and shareholders’ equity.
- Income Statement: Income statements, also known as profit and loss statements or P&Ls, are financial documents that show how much income your company generated and how much it retained over a predetermined period of time, typically one quarter or one year.
- Cash Flow Statement: A cash flow statement is a financial document that tracks the inflows and outflows of cash that your company experiences from operations, investing, and financing activities.
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:
- MRR: MRR, or monthly recurring revenue, is the amount of money your company generates on a residual basis every month from sales.
- ARR: ARR, or annual recurring revenue, is the amount of money your company generates on a residual basis every year from sales.
- ARPU: Annual revenue per user is the amount of money you make each year for each individual user on your platform.
Your recurring revenue financial model gives you the data to make more accurate revenue growth projections and create effective financial and business plans.
Key Metrics to Include in Your Startup SaaS Financial Model
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.
Average Revenue per User
It’s important for SaaS companies to know how much revenue they generate per user on average at different time increments. Those include:
- ARPU per Month
- ARPU per Year
- Average Revenue Over a Customer’s Lifetime
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:
- Revenue from Upgrades: If 10% of your customers upgrade their services after working with you for three months, revenue per user increases after three months.
- Revenue from Add-Ons: You likely have multiple add-ons. It’s important to include the revenue you generate from add-ons in your ARPU calculations to get a complete view of the money your company generates from sales.
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.
Customer Acquisition Cost
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.
LTV: CAC Ratio
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.
How to Build a SaaS Financial Model
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.
How to Use Our Template
We’ve made creating a SaaS financial model easier than it’s ever been before. Simply follow the steps below to use our template:
- Download the Template: Navigate to our SaaS financial model template webpage and click “Download Template.”
- Answer a Few Questions: Answer a few general questions about your business, including who you are, who the founder of the company is, and your SaaS company website.
- Click Download the Scorecard: When you click this button, the download will begin.
- Open the Template: Use Google Sheets or Microsoft Excel to open our SaaS Financial
- Fill In Fields: Fill in all empty fields with accurate information from your business.
- Review Your Financial Models: Our template does all the math and builds the financial models for you. Once you fill in all fields, you’ll be able to view accurate financial models for your SaaS company.