—
Digitalization of all spheres of social life has led to rapid growth in the SaaS industry. But to successfully occupy this niche and stay there for a long time, it is not enough for a startup to attract the best IT specialists. Leaders of SaaS companies need to understand the laws of economics and master financial modeling. The development of such models allows for identifying sources of growth and building business strategies aimed at increasing profits. Moreover, financial models supported by well-grounded data serve as an excellent argument when negotiating with investors and partners.
What is Financial Modeling?
Decision-making in business affects the company’s income. Therefore, any action must be based on the calculation of possible profits, losses, risks, etc. Financial models are built to simplify this entire process of decision-making and speed up the procedure of considering and weighing the necessary decisions. They are a numerical representation of a company’s income and expenses, which allow one to evaluate the company’s performance at any given point in time. Get the full details here on how to build a financial model from scratch. Having clear indicators showing the company’s progress towards its strategic business goal, you can always assess what stage of the journey you are at and how any particular decision will affect the overall picture.
Why Is Financial Modeling Essential for SaaS Companies?
Building financial models for SaaS companies has its specifics since their business model is based on a subscription. This means that the regular income that is included in traditional business models will be an unreliable basis for forecasting. Revenue projections for the SaaS sector directly depend on the customer churn rate. Financial modeling in this situation shows the interrelation of factors, which suggest to company management what to do in a given situation. The financial model for SaaS companies should take into account the following factors:
- Costs during the service development stage;
- Subscription cost for different tariff plans;
- Loyalty program that encourages consumer activity;
- Costs of acquiring new customers;
- Measures to curb the outflow of subscribers, etc.
Key Components of a SaaS Financial Model
Revenue Forecasting
The main metric of success for different businesses, including SaaS companies, is the level of income, which is calculated both in the short and long term. For this, two indicators are used:
- MRR — Monthly Recurring Revenue
- ARR — Annual Recurring Revenue
Expense Prediction
The second main pole in the financial planning matrix is the company’s expenses associated with both the launch of a start-up and activities to attract customers, such as advertising, marketing research, etc. In this section of the financial model, such indicators are used as:
- CAC — Cost of Acquiring a Customer
- Operational costs, etc.
Profitability Metrics
Profitability assessment allows you to understand how significantly your income will exceed your expenses. If this difference is small, you should not launch the project until you redesign your consumer policy or find additional sources of income. Among the indicators used in this section, do not forget about the following:
- EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization
- Net margins, etc.
KPIs
Key Performance Indicators allow you to assess the pace of a company’s progress towards its long-term business goal. Low indicators are an alarming signal, forcing company leaders to make changes in the organization of the company’s activities, tariff plans for consumers, etc. High indicators, on the contrary, demonstrate that the planned milestones can be achieved faster. Among the indicators of this type, the most popular are the following:
- MRR growth
- LTV — customer lifetime value
- Customer churn rate, etc.
Benefits of Outsourcing Financial Modeling Services
The calculation of these indicators will require not only the collection and processing of a large amount of data but also professional experience. A mistake can be very costly for the company. This is why many SaaS companies prefer to delegate the task of building financial models to outsourcing. This approach to business provides many advantages:
- Obtaining a high-quality financial forecast from industry experts;
- Cost efficiency: you pay only for the work performed and do not waste your money on full-time hires;
- Scalability: in case a business reaches a new level, you can order new calculations without the need for global in-house expansion;
- Using the latest techniques and up-to-date methods to build financial models.
Things to Consider when Choosing a Financial Modeling Service Provider
- Extensive experience not only with financial modeling; in general; but also with the SaaS industry; in particular;
- Portfolio of previously completed projects and statistics on their success;
- Advanced tools and software that are used to build models;
- Positive customer feedback and reviews posted on the Internet.
Conclusion
Precision financial modeling significantly facilitates the advancement of a SaaS company both toward its immediate goals and toward the implementation of global ones. You can achieve objectivity and accuracy when building models only with the help of expert services, which are provided by well-known outsourcing companies. Done right, the model will become your sails, with the help of which you will achieve success much faster by following the shortest path.
—
