SaaS Financial Model: The Success your Business Deserves
SaaS Financial Model Template: Essential for Business Planning
SaaS companies are growing exponentially in the World. Some of the World’s largest companies, like Google, Zoom, HupSpot and Figma, are SaaS companies. According to a report, SaaS industry is estimated to be more than US237 billion. In 2023, 47% of venture capitalists invested in SaaS companies. To grow effctively and efficiently, SaaS businesses require a proper business plan and financial model. They also need it to portray their business to investors and grab their interest and well, yes FUNDING. In this article, we will discuss the SaaS financial model in detail and how you can nail SaaS financial model template for your business.
What is SaaS?
SaaS or “Software as a Service” is an internet-based approach for the License distribution of software. Normally, traditional software requires a hefty price for the purchase of the software’s license and for the files. Then they would require space to download the software and then add storage capacity to save data. And that data was also on local servers which could get damaged and/ or destroyed in accidents.
This new SAAS industry has revolutionized the service by providing an online connection to the industrial storage server (also known as Cloud), where all data of the client and even customers of the clients is stored. The client can access those files from anywhere in the world with access identification and password.
The shift to the SAAS industry, making small to enterprise-level software, made things so easy for the business owners that they can see all their company’s sales, marketing, budgeting, customers, and vendors along with account receivables and payables data online from any smart device like mobiles.
Most of the software comes with a pricing plan for 1 year, 2 years, or more. These price plans determine how long the users are allowed to access the software. After the plan expires, users can always extend their software use if they are satisfied with the service. Also, if users are not satisfied with the service they receive, there is always an option for a refund (if the service provider guarantees money back within a specific time).
SaaS and its Benefits
The biggest reason why SaaS is so successful is its cost. The overall cost of a SaaS business environment is very low compared to its traditional method where you have to open a brick-and-mortar company and license every product or service you offer. Let’s look into some benefits of using SaaS.
- Scalability : Unlike the traditional method of business, you don’t need to put in a lot of money and effort if you want to expand your business. You can just ask your SaaS provider to provide you with more cloud space and with one click, it will be done. Therefore, scalability for SaaS is good.
- Availability: With SaaS, your employees are never out of the loop because of its availability. Whether you are at the office, on a plane, or out of the country on a business trip – you will always stay connected through SaaS.
- No Hardware Costs for Cloud-Based SaaS: The cloud provider gives all the process power for SaaS business which means that no additional cost is incurred.
What is a Financial Model?
Financial models are simple tools to analyze the performance of a company’s assets or the whole company. They are comprehensive and can also provide the company with an estimation of the future. A good financial model spreadsheet serves as a crucial financial forecasting tool, helping the businesses to make informed decisions about capital requirements and investment capital. An effective SaaS financial model template includes developing financial projections using a financial modeling tool that ensures accuracy and allows for dynamic scenario planning.
The financial model template is called the model because it allows the user to input information specific to their own company and depending on the information, the financial model will recalculate each formula and give new results. Each financial model is constructed for a specific purpose, and therefore shows the impact of each change in inputs made by the user.
SaaS and Financial Model
The financial model we are discussing in this article is a complete Three Statement Financial Model with additional sheets for Company Valuation in Excel spreadsheet using Discounted Cash Flow (DCF) valuation and EBITDA Multiple valuation bases. The SaaS financial model template under discussion offers a three-statement model that integrates balance sheet, income statement, and cash flow statement, providing a holistic view of business’s financial health. The three-statement model forms the backbone of financial analysis, ensuring all data syncs across the balance sheet statement, income statement, and cash flow statement.
The process of devising a financial model starts by establishing logical assumptions and headcount assumptions to ensure the financial model reflects realistic growth and cost scenarios, including base-case and worst-case scenarios. Financial model spreadsheet for your business needs to be tailored to reflect your business model and predict future growth through detailed revenue forecasts. You need to incorporate key performance indicators like MRR metrics to monitor monthly revenue and growth targets, which are crucial for SaaS businesses at any growth stage.
Those startups which are successful, grow their MMR between 10%-25%. However, the numbers vary for each industry and the size of the business. There is a number of ways that help companies achieve their desired MoM growth rate.
Steps Specific to SaaS Financial Model Template
Creating a financial model is easy but having all relevant information in one place is something with which people may struggle. In the SaaS business, the software developer is usually only investing his time and expertise where the majority of investment comes from either Loan or from Angel Investors. Therefore, it is critical to know your total future worth to negotiate better with the investors.
Before you even think about investors for your startup, you need to put the financial model together so that investors can take you seriously. The financial model is like a path to profitability.
You will find many SaaS financial models on the web. However, ensure you select the model closest to your SaaS startup. Adjust the chosen model to match your specific needs.
Here, we list down steps in order to make your SaaS financial model as effective as possible.
Step 1 – Separate Your Signups
Try separating your Facebook ads, Adwords, etc. from other methods such as word of mouth, public relations, and branding. Online signups are different because they are trackable signups.
You can create a separate category for each acquisition channel. For example, if you get signups from Facebook Ads and Adwords, there should be a separate category for both of these. This way, you can monitor which channel is the most effective and which is the slowest. Ads are probably faster in terms of getting you signups however, you should not rely only on paid Ads.
Step 2 – Calculate Conversion Rates
Calculate Conversion Rates: Include customer churn rates and retention rates to understand the lifecycle and profitability of your customer base. Conversion rate is the time it takes for a user to convert into a paying user. Many companies offer a 30-day free trial period after which they start to charge for the service. The trial period may vary from company to company. You need to ensure that all the converted customers are calculated at the end of the trial period. In order to make things simpler, you can calculate each customer acquisition channel by its percentage or you can calculate all of the sales at once. Here, you also consider customer retention rates and average customer revenue in your SaaS financial model template, which are vital for calculating customer lifetime.
Step 3 – Average Revenue Per Account (ARPA) Calculation
Calculate Average Revenue Per Account (ARPA) by dividing monthly recurring revenue (MRR) or annual recurring revenue (ARR) by the number of users within that specific time. Similarly, you can calculate Average Revenue Per User (ARPU).
This number can show you how much revenue one user is generating. You should separate the categories for new and existing users. For example, if your company put out a new pricing structure – you need a category for old and new price structures.
There is one problem with the ARPA numbers, they tend to make your accounts look good or bad depending on the types of accounts. For example, if you have a few massive accounts, your numbers will project a more profitable amount which might be far from reality. Similarly, if you have few low revenue accounts, your numbers will indicate a bad image, even if the company is doing well.
Likewise, a few accounts with very low revenue can make your ARPA figures look bad, even if you’re doing well. In order to avoid such situations, you should track LTV, CAC ratio (lifetime value: customer acquisition cost) and Net MRR growth rate as your additional key indicators.
Step 4 – Calculate Your Revenues
This step involves driver-based planning to accurately forecast sales based on key drivers like customer acquisition and product improvements. In order to calculate your revenues, you should multiply your ARPA by your ACPM or an average number of customers per month.
Step 5 – Figure in Your Expenses
Make sure to account for all cost modeling aspects, which are crucial for maintaining a healthy cash balance and achieving cash flow positive status. You should have realistic figures for your expenses. As mentioned earlier, you can get the closest figure of the expense budget after doing some research. Make different categories for one-time startup expenses. For example, the phone installation charge will only occur once.
Step 6 – Keep It Simple
For startups, it is best to keep things simple. For example, you can assume your EBIT to be the same as operating cash flow. EBIT figures are operating profit because they show whether the company is able to generate profits or not.
Step 7 – Review Your Assumptions
Your assumptions must be achievable and realistic. Do not rush, do your proper research and add your findings in SaaS financial model template accordingly.
Step 8- Keep Record of KPIs in financial model
In order to successfully show your investors that you know what you are doing, you need a solid financial model. A SaaS financial mode templatel will give you a good estimation of the future and help you in growing your SaaS business. By focusing on key metrics like financial metrics , the LTV:CAC ratio and net MRR growth rate, you can align your financial forecasts and operational strategies to ensure sustained future growth. Ensuring your SaaS financial model aligns with annual plans and adjusts for variables such as deferred revenue and cash burn increases is key to maintaining financial health and making informed decisions. Regular updates to the model to reflect current month activities and comparisons with previous month performance are essential for sustained success and strategic direction.
SAAS Customer Churn
Customer churn refers to the number of users who cancel your subscription after a certain amount of time. In order to calculate the churn rate, you have to divide the number of customers who left your service by the total number of customers at the start of this period.
You need to focus on the churning rate as it indicates the money you are losing as a result of canceled subscriptions. These customers may not be happy with the quality of service. Therefore, you need to ensure that all customers are happy with the service. You can ensure this by keeping in touch with them and asking them if they need help with anything. They might not be happy with little things that are easy to fix. This practice is good because you are proactive in trying to reduce the churn rate. Your customers are the most important part of the company therefore, all your efforts should target keeping them happy.
Customer Churn vs MRR Churn
MMR or monthly recurring revenue churn, is different than customer churn because it calculates the amount of revenue you are losing as a result of cancellations. These numbers provide you will detail about the real costs of losing a customer. Whereas, customer churn will only provide you with a number of customers leaving your service. Consider this example, if you have a loyal customer base at the basic price level, even if u lose your premium subscriptions, your MMR churn would be higher than your customer churn.
Frequently Asked Questions
How to Use the SaaS Financial Model Template?
Begin by entering your historical or projected financial data into the template. Adjust the assumptions such as churn rates and revenue growth to fit your business specifics. Regularly update the figures to maintain accurate forecasts and use the template to monitor key financial metrics like cash flow and profit and loss.
Why Is a Financial Model Template Important for Your SaaS Business?
A financial model template is essential for organizing and forecasting your financial data. It helps in planning, budgeting, and strategic decision-making by allowing you to simulate various business scenarios and track performance against your goals.
Conclusion
A robust SaaS financial model is essential for managing and forecasting a SaaS company’s financial health. It helps in attracting investors, supporting strategic decisions, and guiding long-term growth. Regular updates and customization ensure it remains effective in a dynamic market. The right financial model serves as a critical tool for securing funding and achieving business objectives. Seeking to enhance your financial strategy? Partner with Oak Business Consultant for premier financial modeling services crafted to suit your specific needs. Let our experts guide you toward enhanced profitability and growth. Contact Us Now to start your journey to financial excellence.