A SaaS business financial model is different from a traditional business financial model. In a conventional business, you create a product with predictable revenue, costs per unit sold, and overheads.
With a SaaS business, you typically have significant upfront costs to develop and market your software, but variable costs per additional user are relatively low. What’s important is how many active users the product has.
Profitability in a SaaS business requires attracting (and keeping) an ever-growing user base.
Why Is It Important To Evaluate Your SaaS Business Financial Model?
A financial model is a tool that allows you to measure the financial performance of your business and can help you make important decisions about your product, marketing, and customer experience.
A SaaS financial model is essential for determining how much you can spend on product development and marketing. It includes revenue generated, how much money comes in, how much money goes out (and where it goes), and what those numbers mean for your goals.
If the model you chose is no longer sufficient, you must make quick adjustments.
Also, when evaluating your SaaS business financial model, there are several essential things to consider. Using your model correctly and leveraging it to its fullest potential will help you grow your company in the best way possible.
The Power of Accurate Data
A business model can serve several purposes for a SaaS business. It can assist with planning your financial trajectory and help measure your performance, indicating that you’re on the right track.
But a SaaS business financial model can also help you make complex decisions about the future of your business. For example:
- When should you start to hire customer support reps?
- How much can you spend on marketing each month?
- Is your churn acceptable, or do you need immediate corrective actions?
The accuracy of your financial model depends on the reliability of the input data and the calculations it uses are critical for making good decisions. Therefore, your data must be accurate before evaluating your financial model.
Your model and the essential metrics it generates rely on data from your financial documents – so this info has to be correct. Your accountant could be a powerful resource to help ensure the data and calculations you rely on to make decisions are working correctly.
Evaluating Your SaaS Business Financial Model
Because your financial model plays such a vital role in your business decisions, it’s important to reevaluate it regularly.
Review Your Metrics
When reviewing your business’s financial model, metrics are an essential first point to check. Start by reviewing your metrics and understanding their uses.
The most common metrics in a SaaS financial model include the following:
- Monthly recurring Revenue (MRR) — The amount you receive from your customers each month.
- Annual contract value (ACV) is the total value of all contracts you have signed multiplied by the number of years each contract is valid.
- CAC (customer acquisition cost) — How much money was spent acquiring new customers, divided by the number of new customers.
- LTV (lifetime value) — This estimates how much money an average customer will spend with you over their lifetime with your product, including upgrades and additional services purchased.
- Churn (in percent) — The percentage of users who stop paying for your product each month.
When you’re evaluating your SaaS business financial model, you should review the metrics that are important to you. Are any of these not applicable to your current stage of business and not necessary to be tracked? Any metrics you should add?
Ensure you have the tools to track these metrics and that everyone on your team understands how they can contribute.
Explore Other Options
Have you recently shifted your business model? Made any significant changes?
Your financial model may no longer fit with the new direction of your business. An outdated model may focus on irrelevant metrics and not support you in making critical decisions for your business’s future.
Keep this in mind when evaluating your financial model so that you’re focusing on something other than irrelevant metrics. Sometimes it can help to see how others are doing this or get advice from a trusted third party, like an accountant familiar with SaaS businesses.
Reach Out to Your Accountant
Evaluating your SaaS business financial model is crucial for building a robust SaaS company. But it can be a challenge to evaluate your model on your own.
At any stage in building your business, an accountant is essential for developing a model that fits your business. They can help you with an in-depth review of your model and give guidance based on best practices from other SaaS companies.
At Founder’s CPA, our startup accounting experts can evaluate your SaaS business financial model and help you define a model that works for your business. Contact Founder’s today for professional advice with your SaaS startup.