Starting your own SaaS (Software as a Service) business is a great way to start your career as an entrepreneur and enter into the world of business. All you need is to fire your software solution, work on it, and give your fellow competitors a good competition.
Of course not! Turning your idea into a working plan is not as easy as it seems to be. You need to put in a huge amount of effort and hard work to introduce a service/product that the customers are willing to pay for.
They should have a comprehensive understanding of the cash flow of the business that is coming in and going out. There is a long list of finance-related metrics that every SaaS founder should be acquainted with. Here are some of them.
Once the business plan is ready, SaaS founders should immediately turn the table and shift toward the finances that come along. In fact, SaaS founders should be abreast of other finance-related aspects that go beyond the cash balance.
Top 10 Financial Tips Every SaaS Founder Should Know
1. Gross Margin
Gross margin is the net revenue generated by the sales after knocking off the cost of the production of products or services. Usually, it is also termed as Cost of Goods Sold.
The gross margin does not include the expenses for operational activities such as sales and marketing. It is the most initial financial metric that an investor looks upon before investing in your business idea. It indicates the degree of efficiency required to produce your product.
Lower gross margins reflect that you have quite less money left to operate your business and grow it which includes developing new features, hiring the employees, etc.
The runway is the total number of months before all the capital of the business is exhausted. It is determined by the expenses made and the revenue generated. A startup will eventually fail with a short runway.
As a SaaS founder, one should have the foresight to make sense of how long the runway is. This will help them to determine if any changes are needed to be done to smoothen the workflow before the cash is drawn out completely.
3. Annual Recurring Revenue (ARR)
Annual recurring revenue is the amount of recurring revenue received annually which is often used in SaaS businesses. It provides the founders with a holistic view of the recurring income. ARR thus helps in making the long-term and farsighted growth predictions for the business.
4. Burn Rate
Burn rate is the most simple finance metric for a startup and is the amount of the total capital expenditure of a business every month. For businesses that are in the early stage of expanding, it is crucial to consistently track the burn rate. This metric is looked upon by the investors before making an investment.
A high burn rate reflects that either the startup has expensive operational activities and thus requires a huge amount of revenue generation to keep pace, or the startup is overspending.
5. Customer Acquisition Cost (CAC)
Customer acquisition cost is the metric that indicates the cost of the customer to a business. In simple words, it is an indication of how much it costs you to influence and win over a customer.
However, spending too much to grab a new customer means that your business is on the verge of sinking, and your capital will exhaust before you will know about it.
6. Monthly Recurring Revenue (MRR)
Monthly recurring revenue is one of the most important metrics that a SaaS founder should track. It is the amount of the recurring revenue received monthly from the subscription customers. This helps you to draft an accurate plan for the marketing campaigns, new features, hiring procedures and also helps you predict future growth.
7. Customer acquisition Cost (CAC) Payback
CAC payback, as the term suggests is the time consumed for the payback of the acquisition cost by the customers themselves. Simply it is the total number of months it takes for the revenue generation by the new customers to meet the customer acquisition cost.
It is the point when you are no longer with a red flag and you have made back all your money that you have spent to win over a new customer. Lesser the payback period, the swifter will be the financial flow of the business.
8. Monthly Recurring Revenue (MRR) Churn
MRR churn allows the SaaS founders to understand the potential future growth of the business and as to where they should be investing time on the product. For instance, if the customer is churning frequently on a certain product, then it is important for you to rectify the issue before it’s too late.
9. Average Revenue Per Account (ARPA)
It represents the average monthly recurring revenue per customer, which is vital to plan and draft the pricing strategy with the rest of the business. It means that your product’s cost must reflect the level of hard work you are investing in to provide solutions for the customer’s pain points.
You might end up digging a well for yourself if you are unable to balance between the average revenue per account and the cost acquisition cost.
10. Customer Lifetime Value (LTV)
It is the average anticipated revenue amount received from a customer before they churn. Talking specifically about the SaaS companies, keeping the existing customers happy and satisfied is just as important as acquiring new customers.
It helps the founders to understand and determine the amount of money they can afford to spend to win over the customers and acquire them. If your acquisition cost is more than the customer lifetime value, then you are probably losing money on every customer acquiring process, which in turn will hamper the growth of your business.
Wrapping It Up
Not every SaaS business is the same but their metrics are. The metrics mentioned above in the blog will always remain consistent no matter what type of business you are in.
These metrics will only serve as the starting blocks to track the finances and measure them accurately. It is, therefore, the thin line that exists between success and failure.