Growing a startup can be nearly impossible if you don’t have any idea where you’re going, this is where SaaS forecasting can be beneficial.
How? Forecasting is a crucial element of creating your company’s roadmap to success. It allows you to plan what will happen in the future and take corrective actions where necessary.
What is forecasting?
Essentially, forecasting is planning the business’s future sales and profitability by combining internal expectations with the economic environment as a whole.
Data-driven forecasting gives decision-makers a broader view of multiple scenarios affecting the financial standing of your business. For a startup, forecasting allows you to make deliberate choices and adapt your strategy before creating a crisis scenario.
Businesses rely on two kinds of forecasting: qualitative and quantitative.
Quantitative forecasting uses historical data and is most beneficial for an existing business’s short-term forecast. Essentially, the company plans future performance based on present conditions.
On the other side of the spectrum, qualitative forecasting is helpful for long-term forecasts and new ventures lacking historical data. Qualitative forecasting methods require significant human input for assumptions of how the business will perform in the future.
SaaS Forecasting is Unique
A SaaS startup’s customers have a high degree of flexibility to adjust to different circumstances or changing needs. While you expect some continuity, customers are typically free to leave at a moment’s notice, making forecasting a challenge.
Of course, a SaaS company forecast gives the complete financial picture and includes the basic income statement, cash flow, and balance sheet.
However, other metrics unique to SaaS businesses are critical for an accurate forecast. Although they aren’t financial metrics, KPIs like churn rate, ARPU (average revenue per user), CAC (customer acquisition cost), LTV (lifetime value), and payback period have significant impacts on the company’s key figures.
Tips for SaaS Forecasting
Start with Past Performance
While past performance isn’t a guarantee of future outcomes, historical data indicates what to expect.
Your goal is to drive plannable growth. Previous financial reports will show the company’s current trajectory and can act as a quantitative check against more qualitative methods of startup forecasting.
Focus on Accuracy
Good business decisions require reliable data and information – both financial and otherwise.
Real-time data can be gathered from customer onboarding systems or black box automation but must be analyzed. Rely on tools to do that for you.
- Web analytics to show how users behave on your website. Improving user experience increases the conversion rate.
- Marketing analytics to indicate how marketing activity drives subscriptions that grow your customer base.
- Subscription analytics to assess customer trials, churn, and LTV of active users.
Your goal should be to improve your forecast accuracy with each iteration. Continually assessing and improving your forecast accuracy helps readjust priorities, risk management, and budgeting.
Don’t Stick to Just One Forecast
Multiple variations of the forecast prove helpful, especially for planning revenues. Since there is no single perfect method, it’s best to explore several different forecast options.
- Lead Driven forecasting uses the relationship between leads coming from paid advertising or referrals and the resulting sales.
- Length of Sales Cycle Forecasting uses historical data to predict how long it takes to close a deal based on your sales processes.
- Opportunity Stage Forecasting predicts which opportunities are likely to become deals.
- Historical Forecasting utilizes historical sales data assuming your business will continue growing at a standard rate.
Don’t Forget Churn Rate
Churn reflects the percentage of customers canceling their subscriptions each month. Although it’s a natural phenomenon, too much churn can create a limiting factor for growth and profitability.
Churn rates can vary drastically depending on your product and your intended customer base. Because of the limiting effect churn can have on your startup’s growth, it’s crucial to include it in your SaaS forecast.
How Forecasting Will Grow Your SaaS Business
You might assume that forecasting is simply a way to throw together numbers for potential investors or internal stakeholders.
But forecasting can be much more than that; it’s a lever for growing your business.
Used correctly, it’s a tool for setting smart goals that are challenging but attainable. By measuring the forecast against the company’s long-term goals, you can constantly determine if the company is on track or not.
If not, you have the opportunity to reassess your methods and take corrective action.
The same applies to making strategic decisions. With a forecast, you have an outlook of how things will play out. The key leaders can make proactive decisions to fuel growth, keep investors on board, and manage uncertainty.
A good forecast can also serve as the basis for building a budget. Knowing the level of expected future revenue allows company management to define how much they can spend.
Taxes can be one of the most significant expenses for a business, and unexpected quarterly payments can create cash flow issues. Forecasting helps with tax planning by allowing the company to set aside the right amount of cash.
Ready to Grow Your SaaS Business?
Although the demand for SaaS solutions is high, running a SaaS business isn’t easy.
SaaS forecasting is unique, but it can help you take control of your business’s growth. You’ll see where the company is going and have the opportunity to make strategic adjustments before problems arise.
The experienced Founder’s CPA accountants can help you implement a robust forecasting process in your startup. We aid by assembling your company’s latest information and projections and identifying opportunities and threats. A true partner will also challenge your assumptions to drive better performance.
Schedule a free consultation with an expert at Founder’s CPA to learn more about how SaaS forecasting can help your startup.