Understanding the ins and outs of SaaS finance is foundational to building a solid software business.
Proper financial management lets you acquire better customers, manage uneven growth, and generate self-sustaining capital. It allows detailed financial analytics to help you make informed financial decisions that continuously improve your business’s efficiency, profitability, and value.
Lack of proper financial management can bring liquidity and operational risks, which impacts your SaaS business’s overall productivity and can shorten its longevity.
Best Practices for SaaS Finance
Proper management of finances is the secret to achieving your SaaS business’ short, mid, and long-term goals. Fortunately, learning and implementing financial best practices can help you keep your business on track and moving in the right direction.
1. Establish a Budget and Stick to it
A budget you’ve anchored in your net revenues and expenses can be an essential pillar for the growth of your SaaS project.
Sticking to what you’ve defined lets you track your spending, distribute resources appropriately, and focus on impactful initiatives that keep you on track with your goals. In other words, budgeting is a tool to determine your profits and losses over the appropriate time to scale.
Strict adherence to a well-thought-out budget also helps you improve cash flow – an essential component for generating resources to invest back into the business.
2. Have a Clear Understanding of Your Pricing Model
Before launching a SaaS project, a clear understanding of your pricing model will help you determine how much you can charge for your services and what kind of subscription levels you can offer.
Commonly applied pricing models include:
- Freemium: Customers use some of your software’s basic features for free to get a taste of its capabilities. Ideally, their experience triggers them to upgrade to paid plans (assuming they’re impressed with your product!).
- Flat rate: You set a standard price for your SaaS product with the same features for all customers and bill them monthly or annually.
- Usage-based: This is a “pay as you go” model where customers only pay for the volume of services they use.
- User-based: Clients pay depending on the total number of users who sign up or actively use your SaaS.
- Feature-based. You charge customers depending on the features they access and use.
- Tiered: Customers choose from predefined packages of SaaS features based on which plan best suits their business needs.
- Blended: You combine two or more pricing models into custom templates.
3. Monitor and Analyze Your Financial Data
Decision-making is perhaps the most critical factor in building a successful SaaS project. And the best way to make informed decisions is to keep track of your SaaS finances. Important metrics critical for decision-making include:
- Customer lifetime value (LTV): the total revenue your business earns from a customer during your relationship. This KPI helps you quantify customer satisfaction, retention, brand loyalty, and forecasting.
- Customer acquisition cost (CAC): the total cost of sales and marketing necessary to convince a customer to purchase your product/service.
- Churn rate: the percentage of customers that stop transacting with your business each month. This metric helps you enhance your product or service based on how many people discontinue your software.
- Burn rate shows how your business spends its cash supply or startup capital if it is new. It helps you forecast your cash flow and profitability timelines.
- Recurring revenue (MRR & ARR): Monthly and annual periodic revenue help you predict your business’s short- and long-term financial position.
4. Utilize Financial Management Tools
How you manage your finances plays a massive role in your SaaS business’s fate and financial health. Manual financial management systems can have limited visibility, accuracy, consistency, and a low scaling rate.
Cloud-based financial management tools like Quickbooks and Xero can help you systematically and efficiently manage your finances. These tools can help you track expenses, monitor cash flow, and generate reports.
5. Use Automated Invoicing and Billing
How fast do you want to pay your bills, send invoices, and receive payments? Automated invoicing and billing systems are faster and result in fewer time-consuming errors than manual processes. These tools help you achieve accountability, transparency, accuracy, and consistency with your billing process. Plus, they save time and money.
6. Seek Advice from an Experienced Accounting Partner
Implementing SaaS finance best practices can be pivotal in building a successful business. But SaaS finance and accounting can be challenging, even for savvy founders.
Because financial decisions can make or break your business, it’s worth seeking advice from an experienced SaaS accounting partner like Founder’s CPA.
Our team of experts will help you identify your startup’s current financial position, comply with tax requirements, and make informed decisions while planning for the future. Functional economic systems are a prerequisite for making data-driven decisions. We can help you set up, migrate, integrate, and configure your accounting processes like bookkeeping, payroll, financial reporting, invoicing, and billing. Contact us today and start building sustainable financial systems for your SaaS business.