SaaS CFO: Role and Importance In Scaling up Your SAAS Business

Who is SaaS CFO? 

The SaaS CFO is crucial when approving, projecting, and reporting on the development and success (or lack thereof) of specific development plans. However, the stage of development at which your SaaS company is currently will affect the growth strategies you select.

You may determine priorities for choosing the best product and market fit if you are the CFO of a new SaaS company. Your primary goals are raising initial funding, creating fundamental accounting systems, and identifying key SaaS indicators.

However, if the company has moved past the start-up stage, you should concentrate on creating a repeatable sales strategy to increase profitability and guarantee future scalability.

It is essential to be aware of your company’s stage and your contribution to its overall growth, regardless of where it is. It’s also worth mentioning that your SaaS chief financial officer (CFO)  responsibilities will most likely vary and alter based on your company’s growth stage.

What Role Does SaaS CFO Play in the Company?

Accounting Responsibilities

As ARR (annual recurring revenue) increases, accounting becomes more crucial. Therefore, never undervalue the duties and responsibilities associated with the accounting function.

The SaaS CFO must ensure everything is handled correctly, even though they will likely transfer most accounting duties elsewhere. This is especially important if the accounting firm your company hired lacks or has little to no experience with SaaS.

Develop a Sales Strategy that is Scalable and Effective.

One of your primary responsibilities as the CFO of a SaaS company should be to support the creation and upkeep of an ongoing revenue-focused sales strategy. This necessitates extreme self-control. You’ll almost certainly encounter obstacles when deciding what works and what doesn’t.

To create a consistent, successful, repeatable sales model, implement scalable processes, establish good unit economics, increase Series A/ B investment, and monitor the company’s sales efficiency KPIs. The latter is one of the most crucial SaaS CFO responsibilities since fine-tuning sales efficiency will help you establish a repeatable, successful, and scalable sales strategy.

Work with Other Departments.

The company’s various divisions must work closely with SaaS CFOs. Be willing to work with others if you can. You’ll have trouble assisting the company in growing if you don’t understand business processes. Therefore, working together and cooperating with people outside your area is the only way to understand the various business activities fully. Focus on becoming as knowledgeable about each division. To accomplish broad corporate objectives, learn how they operate, and everything functions together.

Capital Distribution

Controlling capital allocation is one of the SaaS CFO’s duties and is essential to the business’s success. You will plan and carry out capital allocation based on budgeting priorities, strategic financial planning, and analysis. One of your goals in this situation is to increase returns on smaller investments.

You need to be fully aware of the availability of cash and the current capital funding sources. Additionally, you’ll need to monitor internal investment returns, allocate resources to high-growth industries, and periodically review the capital allocation strategy of your business.

Pay state payroll taxes and sales-derived taxes by keeping track of sales taxes. Company registrations are essential for any business that wants to maintain good standing with the government, so don’t forget about them. Do the new business you’re dealing with a legal entity.

Increase SaaS’s Income Sources.

Finding new revenue sources and implementing scalable processes are the duties of a SaaS CFO to position the company for future growth. Increased retention rates are one of every SaaS company’s representative wish list.

As CFO, you must decide how to increase the company’s revenue opportunities. Targeting your current clientele with upsells and cross-sell is one revenue-growth strategy that comes to mind. Tasks for the SaaS CFO include everything from assessing different discount strategies to determining whether premiums impact working capital when creating new income streams.

SaaS CFOs’ Important Metrics

Cost of Goods Sold (COGS)

The income statement’s total expense is the Cost of Goods Sold (COGS). So the first thing taken out of total income is this. It has previously covered all of the product’s direct labor and material costs. With actual items, it’s more straightforward, but SaaS muddles the edges.

10% to 20% of sales is the typical COGS benchmark. SaaS companies that assert to have sold less than 10% of their products are probably skipping a sizable expense. They have to review the category once more. Long-term efficiency can be decreased if the entire company ignores this problem.

The health and success of a business depend on COGS. Additionally, it might reveal a lot about the company’s value, scalability, and profitability.

Gross Merchandise Volume (GMV)

Only peer-to-peer e-commerce platforms are eligible for this financial measure. The number of items sold and the site’s overall activity are shown. GMV, which is not a SaaS statistic, is frequently used by market networks or marketplaces that have been enabled by it to gauge how well or poorly the marketplace’s activity will develop over the coming days or months.

Additionally, GMV can be used to track and contrast historical revenue. However, it is a rudimentary statistic that offers scant information about the values of each sold item.

The products sold on their platforms may or may not be produced by C2C sellers. Most of them work as middlemen who provide commission-based product distribution assistance. In this instance, they never actually own the item up for sale.

Cost of Customer Acquisition (CAC)

Cost of customer acquisition (CAC) refers to all sales and marketing costs associated with acquiring one new client. For each product and each acquisition channel, figure this out. This applies to all items on your profit and loss statement related to attracting new customers, including salaries, taxes, benefits, travel, and meals. Make sure that spending and headcount are recorded on your general ledger at the department level if your accountant or controller hasn’t already done so. This is crucial because without it, it would be challenging to calculate most SaaS metrics, and you wouldn’t know how the company is doing.

Net Negative Churn

Since churn only refers to subscribers who no longer pay a monthly fee, it may seem perplexing when the rate is negative. How is this rate negative?

When a SaaS company’s growth revenue from current users outweighs the loss of existing clients, this is net negative churn.

New customers are not taken into account by Net Negative Churn. Therefore, net Negative Churn has the potential to grow even without gaining new clients.

Annual Recurring Revenue (ARR)

The money a business expects to make from its customers in exchange for providing them with goods or services annually is known as annual recurring revenue (ARR). A measure of predictable and recurrent revenue clients generate over a year is called yearly recurring revenue. The metric is most frequently used by companies that use a subscription-based business model.

Monthly recurring revenue (MRR) and ARR are pretty similar. The period over which the two measurements are adjusted (year vs. month) is the only difference between them. ARR, therefore, provides a long-term assessment of an organization’s success, whereas MRR helps estimate its rapid evolution.

For both management and investors, ARR is a crucial indicator. Management can use the metric to evaluate the company’s overall health. CFOs can also use ARR to assess a company’s long-term business plan.

ARR’s predictability and stability allow for the measurement to be used by a SaaS CFO to evaluate the business’ performance compared to its competitors and over time in terms of its financial performance.

The Rule of 40

Your SaaS company’s overall health and potential are evaluated using the Rule of 40, which combines your growth rate and profit margin. Investors can quickly assess the desirability of your company in comparison to others using the Rule of 40, a high-level KPI.

More people than just investors can benefit from the Rule of 40. SaaS businesses use this statistic to determine whether they should prioritize profitability or growth at any given time.

On the surface, the Rule of 40 seems straightforward, but there is more to it. It’s essential to comprehend and compute this SaaS statistic. You’ll have a precise picture of your company’s health and the knowledge you need to raise performance and valuation if you know the method and how to use it.

A SaaS company’s overall growth rate and profit margin must be 40% or higher by the Rule of 40.

For SaaS organizations, the Rule of 40 is a rigorous health check that enables management to weigh profitability versus growth performance. In addition, general partners in later-stage venture capital firms frequently use the Rule of 40 as a benchmarking method to evaluate the relative attractiveness and financial health of potential SaaS investments.

Uses of the Rule of 40

There are two significant uses for the Rule of 40. It first helps SaaS executives comprehend the trade-off between profitability and growth, two distinct objectives that change over time. Second, investors have a reliable benchmark to assess the viability of different SaaS businesses thanks to the Rule of 40.

Your priorities will change as your SaaS company develops throughout each development cycle. First, your attention will shift from early demand to product/ market fit to pure revenue growth. Then, sales effectiveness, unit economics optimization, and profit margin maximization will come into focus.

Regardless of your growth stage, the Rule of 40 explains how profitability and growth interact. You might be sacrificing profitability in the beginning for the sake of change. The opposite may be true when development slows down in its later stages. In any case, the Rule of 40 helps identify the areas needing the most attention and the best levers.

Why Do You Need a SaaS CFO?

A SaaS CFO Can Reduce Costs and Accelerate Growth

The cost savings brought on by effective financial management are the primary justification for hiring a CFO. A CFO will monitor spending patterns and spot expenses that deplete your budget, like pricey procedures or underutilized software licenses.

If you have more money, you might invest more in your development. The SaaS CFO may help with growth planning and strategy with actionable goals and key performance indicators. In addition, you can scale up services as your business grows, thanks to some fractional CFOs’ variable price options.

To expand subscription services for current customers and find new ones, a SaaS chief financial officer (CFO) will review your marketing and work with your sales team. Additionally, they might be able to help lower the price of acquiring new clients.

Using SaaS CFO Metrics for Budget Planning

With a SaaS chief financial officer (CFO), financials are no longer confusing. First, the CFO will examine your cash flows to determine your monthly and yearly recurring revenue (MRR/ ARR). Then, using this as a starting point, the CFO will look at your variable income to determine its sources and forecast revenue and profit movement over time.

Of course, “prediction” depends a lot on the actual results of your business. Depending on the various strategies your SaaS company can use, your CFO will make multiple predictions.

You can discover New Funding Sources with the Aid of a SaaS CFO.

Unorthodox finance sources will be familiar to a skilled CFO. However, an experienced CFO can use a variety of strategy documents to convince the loan officer that your SaaS company is worthwhile of the financial risk. Furthermore, with the flexibility of a fractional CFO, you may increase their contact time with you to prepare for fundraising rounds.

A SaaS CFO must first create scalable procedures and systems, even though it may be tempting to invest in quick expansion once product/ market fit has been established. Next, focus on unit economics and how profitability and sales efficiency (Magic Number, CAC ratio) are affected by customer acquisition cost (CAC), lifetime value( LTV), and attrition at this time. It will be very challenging for SaaS companies to pivot later if they don’t spend the time to perfect each of these areas before expanding.

By overseeing a fruitful Series A/ B fundraising effort, the CFO may unlock the funds required to test, develop, and develop your sales strategy and team. This will also need accurate and thorough reporting of KPIs and the capacity to assess and comprehend them to make informed decisions.

When Do You Need a SaaS CFO?

A startup CFO will be essential because the CEO is frequently on fire looking for investors, so a lot of financial planning is involved. The economic model will be developed by a CFO, who will also use angel and venture capital relationships and monitor key performance indicators. After the funding stage, an interim CFO’s workload significantly lessens. The CFO then compares the financials and KPIs to the investor-friendly financial model and provides thorough updates on this development at quarterly board meetings. Guidance on equity pay, venture debt, and investor interactions are just a few of the sporadic startup CFO questions.

A SaaS CFO’s Role is Shifting

Today, CFOs are expected to perform duties typically performed in the back office and be responsible for critical business decisions. As a result, they play a much more significant role in advancing the company.

 This transition has been fueled by introducing new business models (growing acceptance of recurring revenue models). Access to real-time data made possible by our capacity to develop a full tech stack. As a result, the finance department must actively contribute to the business’s scalability and growth support in addition to compliance and budget planning.

The subscription model is gaining popularity as consumers increasingly rely on product flexibility. Every action taken in a subscription business impacts the customer’s life cycle. The modern CFO is aware of how vital business factors may affect growth.

Nowadays, a good CFO collaborates cross-functionally to help the company evaluate the effectiveness of programs and make better investment decisions.

Finance sees every part of the value chain generated more than any other department. CFOs have complete visibility into the company’s activities, from client interactions to back-office operations. They can identify operational bottlenecks and collaborate with appropriate executives to turn these insights into action items.

Conclusion

The CFO’s role has evolved for many years and is undergoing even more radical change. The modern CFO must therefore manage corporate strategy. They should also monitor past and future trends while looking (laterally) at traditional financial tasks.

You are in a good position as strategic CFOs to oversee enterprise-wide change, usher in game-changing automation into your business, dismantle data silos, and build internal processes and people bridges. Modern CFOs actively promote hypergrowth in rapidly expanding businesses, not just surviving.