The capital budgeting steps for Software as a Service (SaaS) businesses are different from traditional capital budgeting decisions. The reason for this is the value of SaaS is its high internal rate of return (IRR) and low operating cost.
With many companies, investments are often made into fixed assets or developing new products, more efficient production processes, and other physical aspects. However, there isn’t a physical product being offered in a SaaS business. Because of this, capital budgeting projects must evaluate the potential in other areas of business that will bring the highest rate of return each year.
Capital Budgeting Process Steps
Below are the steps to consider when Capital Budgeting for SaaS:
- Create Goals
The process of capital budgets does involve a high degree of numbers and figures. Still, the board that will accept or reject the budgeting plan does not need merely to see numbers. They need to hear goals.
What defines long term success? What steps will be taken this year towards that goal? Planning each step of the big picture by year will ensure that you are on target long term. These short term goals should be flexible and adjustable to each investment project.
A capital budgeting plan should lead to goals and direction before getting into the details of the budget.
The best way to ensure that your SaaS business sees success in the upcoming year is to collaborate between departments towards a shared vision and goals. Each department should be transparent in financial planning. Companies have a higher success rate when competition between departments is expressed in the open rather than closed-fisted about sharing information.
It is helpful to know how many departments might benefit from the project before determining the net present value (NPV). This knowledge will aid in the decision-making and allocation process.
This step is where the numbers of capital budgeting come into play. The ultimate deciding factor of investment is deciding which present value of cash will lead to higher future cash flows. When deciding which projects to fund, one key is determining the time value of each potential investment’s money.
Which project estimates a higher return if invested now vs. later in the future? Essentially, which investments are more time-sensitive? These projections for your potential investments are the most significant determining factor in which direction to set your budgeting decisions.
Once it is determined which projects will be most beneficial to this budgeting cycle, it is essential to implement tracking procedures to measure success. Recording costs and benefits along each project will help determine if a course correction is needed or if a project needs a significant adjustment.
Having detailed tracking will also help in subsequent years of budgeting to determine future project success and give board members or capital investors presentation materials.
- Securing Capital
This step is undoubtedly the most crucial for capital budgeting. It is not the last step in the budgeting process, but should be considered throughout each stage along the way. Many SaaS businesses are working with existing capital when developing a budgeting plan. They often conclude that they need to seek new investment opportunities to grow to the next step.
Likewise, start-up SaaS companies need to have these previous steps in place before seeking investment capital. Knowing your goals, estimations, and business procedures before seeking capital will ensure a more efficient process. It is also essential to consider your capital investments and payback periods in the capital budgeting process.
Your Partner for the Capital Budgeting Process
At RevTek Capital, it is our goal to assist you in securing capital for your SaaS business. Whether you are an established brand seeking the next step in growth or a relatively new start-up, our expert staff of experienced entrepreneurs can assist. We not only assist in your capital needs, but are available to answer questions about the capital budgeting process and can help set your business up for success long term.
Contact us at (602) 730-4558 to schedule an appointment and consider partnering with us for your capital budgeting needs.