Data is essential when making decisions or plotting a strategic course. These financial metrics are extremely useful to get your SaaS company ahead of the pack.
One of the benefits of being a SaaS company is that you are sitting on a goldmine of data. While traditional companies sometimes struggle to measure how well they are doing, for your SaaS company, measuring is everyday practice. It’s not even something you have to try, it just comes with the job.
So if you want to know how well your SaaS is doing from a financial point of view, a huge array of KPIs can be accessed easily. You could easily build a SaaS metrics spreadsheet with ten, twenty, or more financial metrics.
The problem is that the more data you present, the more confusing the report becomes. Sure, some people thrive in an ocean of data, but as a manager or decision-maker, you require a SaaS metrics spreadsheet that gives you a quick overview. What you need is a couple of truly essential indicators. Let’s have a look at a number of financial metrics you should include in your KPI report.
SaaS metrics Spreadsheet
Building a SaaS metrics spreadsheet for your SaaS company isn’t all that hard. Of course, you could download one of the (often free) metrics spreadsheets that can be found all over the internet, but these spreadsheets have a clear downside: they are generic. Quite honestly, I would never build my corporate decision-making processes on some generic spreadsheet I found online. However, if you are still working on getting your SaaS company started, these spreadsheets can save you some time.
Within a few months of using such a SaaS metrics spreadsheet, you will know exactly what you like, and what you don’t like when it comes to financial metrics. Time to build your own spreadsheet. It may be inspired by the work of others, but the metrics spreadsheet you build will be perfectly tailored to YOUR SaaS company.
SaaS Business Metrics
Traditional companies measure their revenues on a month-by-month basis. Many SaaS companies are subscription-based, which means you can actually make a pretty good revenue forecast. That is why the Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) have become the financial metric almost every single SaaS company uses. The MRR is little more than the total sum of subscription fees for a given month. The ARR is (surprise!) 12x your MRR.
As a decision-maker in a SaaS company, keeping your MRR as high as possible is crucial. How? By ensuring your clients continue to see that you are adding value to their lives. Keep your customers happy and they extend their contract for another 12 months.
Lowering your prices is a way to please your customers, but it is not always a proper long-term strategy. You would not be the first to sell your products too cheap, ending up with an MRR/ARR which is insufficient to fund your organic growth ambitions.
But how much do you *really* need to keep your SaaS company financially healthy? That’s where the next SaaS financial Metric comes in.
If you are a manager, having gone through business school, or at least having some training in finance, is quite useful. However, some truths about business don’t require a degree. The most fundamental truth of doing business is this: to keep your company alive, your revenue needs to exceed your cost.
So when we have the MRR to calculate your revenues, we will also need a financial metric to see how much we’re spending. The Average Cost of Service (ACS) is a handy little metric that determines how profitable your SaaS products are.
The ACS includes all the costs to deliver the software, provide support, and so forth. It also includes less obvious costs as the amortization of research and development, account management, hosting and servers, and so forth.
It will come as no surprise that your aim is to keep your ACS below your MRR.
The Cost of Acquiring a Customer (CAC) tells you exactly how much money you have invested in a client. This financial metric includes your sales and marketing budget, as well as other costs you incur to land a client.
The easiest way is to calculate this financial metric is by adding up all the costs for a month and dividing it by the number of new customers acquired. However, one note of warning: the CAC might be misleading. Many of your costs are relatively stable, while the number of clients gained may vary. What’s more: clients come with a delay, meaning that efforts made in January (and the associated cost) result in a client joining in February or March. CAC, therefore, is not the Holy Grail. But it can be quite useful to recognize trends.
Customer Live time Value
The customer live time value (LTV) is an estimate of the economic value a customer brings to your SaaS company. To calculate this financial metric you need to start by determining how much a client adds to your bottom line each month. How? Simple: just take your MRR and subtract the ACS (MRR – ACS)
Multiply this amount by the average amount of months a client sticks around, and you know your LTV.
There is just one little problem with this metric. As Yogi Berra said: it is hard to make predictions, especially when they are about the future. In other words: you often do not know how long a client will stay with your SaaS.
Luckily, we have churn to help us out.
Another interesting metric is “churn”. Simply put, churn tells you how many of your clients decide to cancel their subscriptions. The lower, the better. You can learn more about churn in this article. And yes, the article also explains how churn can be used to determine your clients’ LTV.
It may come as a surprise, but the most important financial metric for your SaaS company is probably the oldest one around: cash. Cash makes the world go round. Cash pays the salaries for your developers. As the saying goes: “cash is fact, profit an opinion”. In the end, cash is all that matters. So don’t underestimate the importance of cash management. Know how much cash you have, how much will come in, and how much is going out. With a good cash flow forecast, your SaaS company can avoid some nasty (and expensive) surprises.
Use your financial metrics wisely
These financial metrics are crucial to any SaaS management team. However, don’t forget that financial indicators are just part of doing business. Use them wisely, not as some way of keeping score in a race with competitors, but as an internal tool to help your company grow and thrive. Also, make sure that you don’t focus on financial indicators too much. Other indicators, for instance about marketing success, growth, et cetera, must not be neglected.
Understand your business. Understand your market. Financial metrics help, but they are a tool. Nothing more, nothing less.