With tough times like COVID, the world is slowly grappling with uncertainty. On that note, it becomes more than necessary to gear up and come prepared to navigate uncertainty and build a perfect SaaS financial model that does not throw you off guard. If you are a founding CFO or a CEO, this post has been specifically designed for you. If you are planning to upgrade your SaaS financial model to an operational tool that helps you make more informed decisions, you must know the requisite steps to build a great SaaS financial model. Without any further ado, let us get to the steps right away.
Table of Contents
- Make a Distinction between your Signups
- Keep a track of your Conversion rates
- Find your Average Revenue per Account or ARPA
- Start taking a note of your expenses
- Know and state your Assumptions
- Keep things uncomplicated and simple
#1 Make a Distinction between your Signups
First and foremost, separate your trackable signups. This includes Facebook ads, Google Adwords and might include other forms such as public relations, branding, and word of mouth marketing as well. Note that these are the channels that fetch you your leads. But you will have to work hard to ensure that you adjust your financial model to include a category for each customer acquisition channel. Also, note that you can base better projections on your internet marketing signups than on your other new customers.
#2 Keep a track of your Conversion rates
Make sure that you are keeping a tab of the number of conversions that you get to see on a monthly basis. It can of from any of your channels such as blogs, ads, referrals, etc. Most of the SaaS companies also offer a 15 or a 30 days free trial as well. Once this tenure is over, do keep an account of the number of people who convert into paid or premium customers once they are out of the free membership. You can calculate one conversion rate for your entire sales funnel; better yet, calculate your percentages for each customer acquisition channel.
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#3 Find your Average Revenue per Account or ARPA
ARPA, or average revenue per account can help you ascertain trend lines and average price points. Always take note of creating separate ARPA categories for your new and potential customer accounts. Let us assume that you changed your prices earlier this year, use this “new”/“existing” distinction to compare numbers from both price structures. To find your ARPU, you will have to use this formula:
Total monthly or annual recurring revenue / the total number of paid customers you served during that time
#4 Start taking a note of your expenses
Now, the word expenses just does not refer to your marketing or production funnel expenses only. It can refer to anything and everything from one-time start up expenses to the additional recurring ones. Always take a look at the suggested expense categories on your template, add in expense automations, and adjust them to suit your business. And always be realistic; remember to account for all expenses. Do not leave out on some because you felt that they looked trivial. Taking a note of your expenses is a good way to kick start your SaaS finance model. This will give you a clear cut idea on where to cut your expenses on and where to go a bit spendthrift.
#5 Know and state your Assumptions
The more you scale up your business, you will experience some advantages due to size and market share; however, costs like customer service, HR, management, facilities, and more can crop up at odd intervals. So, this is something that you need to be careful at all times. Therefore, know your assumptions. For instance, if you are expecting your revenues to bounce up on a yearly basis, do take care of the project rising costs in parallel with this advancement. For this, you might as well use the marginal revenue formula to determine the right time to take the plunge and expand your operations.
#6 Keep things uncomplicated and simple
The best way to build a perfect SaaS financial model is to keep things simple and steer away from too much information, complications and more. When you are staring up, you can assume that your EBIT, earnings before interest and taxes as more or less similar to your operational cash flow. These figures will reflect companies’ ability to generate profits – not their financing structures and tax environments. As and when your company grows, you will be in a position to attract investors and start calculating as well as making interest payments. As you become profitable and start paying income taxes, you’ll need to take these costs into account, as well.11
There is no hard and fast rule that applies to building a perfect SaaS financial plan for your company. But make sure that you adhere to some of the steps that we have just mentioned in this blog. This includes making a distinction between your signups, keeping a track of your conversion rates, finding your Average Revenue per Account, starting to take a note of your expenses, knowing and stating your assumptions, and keeping things uncomplicated and simple. The more of these factors you can properly estimate in your business plan, the better prepared you will be for the future – and those all-important investor meetings. Therefore, know your strengths and plan it accordingly when you are drafting the perfect SaaS finance model.
You might also like:
- The Ultimate Guide to SaaS Pricing Models – Take a look at this ultimate guide to SaaS pricing models and learn about different pricing models that can help you grow your business.
- To understand how SmartKarrot can helps SaaS companies keep and grow loyal customers, Request a Demo.
Simran hails from the content marketing backdrop with extensive knowledge in blogs, articles, and technical whitepapers in the non-fictional domain. She uses her ‘gift of the gab’ to explore new possibilities on her way and to make an exquisite impact on her readers. In her spare time, she likes to read journals on artificial intelligence or play with her cute kittens.
Published October 06, 2021, Updated May 05, 2022