If you are already in the Software as a Service business, odds are you’re familiar with the financial models necessary to run a successful SaaS business. But for those who are in the early-stage development of a new start-up, financial statements and projections can seem overwhelming.
At RevTek Capital, we have structured our funding model so that when you win, we win. Therefore, we want our SaaS partners to thrive. Below, we have put together a basic guide to understanding SaaS Financial Models.
What is a SaaS Financial Model?
A Software as a Service Financial Model is a digital balance sheet used to track growth rates and any business model aspect that can be tracked in numbers. These models are used to track actual numbers, but are more importantly used to make projections and hypotheses for future numbers.
Every SaaS startup needs to understand these financial models to grow monthly recurring revenue (MRR) and assess where you land on target growth at the end of each quarter.
Like with any business, it is essential to track financial goals and successes. But for SaaS companies, it’s not as simple as Dollars Received – Dollars Spent = Revenue. Because most services involve some type of recurring subscription, it is important to track other SaaS metrics such as CAC and LTV ratios.
Recurring revenue is the most important aspect of your SaaS model. Every SaaS business’s goal is to increase their monthly recurring revenue until they are turning a profit. Having an easy-to-understand financial model is the best way for any start-up to track where they currently stand. It also allows them to project where tweaks need to be made in the revenue model to grow that percentage.
In addition to tracking pure incoming numbers, your financial model should also track Lifetime Value ratios. These ratios represent the value a customer will bring to your business over the lifetime of their interaction with you. These numbers can help assess what type of customers you seek to acquire, how much money you can spend per customer, and the importance of gaining new and retaining current customers.
Customer churn is the term for the customers or revenue lost in a particular quarter of business. The ability to reduce churn directly affects your growth of income. Some level of churn is always to be expected, but keeping that number low and predictable is a crucial aspect of having a sound financial model.
Tracking this number is essential when calculating Customer Acquisition Costs. That is the amount of money spent to gain a new customer. This can be money spent on advertising, upselling, cold calling, customer service, etc.
It is essential to have a working financial model that produces specific numbers and predictions on how much it costs to retain customers and secure new customers. This helps you know where to focus business and advertising, thus producing growth.
Models for Securing Capital
You might be a brand new or early-stage start-up that is developing a business plan and doesn’t yet have a history of numbers. Still, you are not off the hook when it comes to building a model. To secure capital from investors, you must be able to present financial models that prove you are a company worthy of the risk of investment.
In this case, your financial model may be a pure scenario-based model. It could be based on percentages and growth of companies like yours, or numbers that financial experts develop.
The key here is less about convincing an investor that your numbers are correct and more about proving that you understand an excellent financial model’s workings and what drives growth. Essentially, the financial model is used to prove that you know what you are doing. At this point, their investment is you and your idea. Producing a professional financial model with a professional presentation may be the key you need to secure funding.
Where to Start?
Most SaaS business owners are experts in their field, not experts in financial projections and spreadsheets. If that’s you, don’t worry, you are in good company. As stated above, you must have a good understanding of growth in your business. Still, there are many resources to help you track your finances without having to spend significant time and energy inputting data and poring over numbers.
Most start-up financial models begin with simple excel model templates or templates in google sheets. There are many free downloads available online from financial services that integrate with both of these options. There is also an entire sector of SaaS business owners, such as Alexander Jarvis, that specialize in the service of offering free advice and downloads or detailed SaaS Financial Models at low costs. A quick google search will show many available options that suit you and your knowledge level and financial availability.
Working with RevTek
At RevTek Capital, we not only desire to lend capital, but also to help our partnerships thrive. We have a team of professionals who are well versed in tech, finances, and Software as a service. We can be involved as much or as little as you like when developing growth strategies, connecting you with a business network, and offering access to marketing partnerships.
If you are working on your SaaS Financial Model and are ready to discuss funding steps, contact us today at (602) 730-4558 to schedule an appointment with RevTek Capital.