As a SaaS (software-as-a-service) founder, you already know that the SaaS financial model presents a win-win scenario for both customers and companies.
All you need is to build an excellent SaaS product. Then, the company will collect monthly (or annual) revenue from its customers for the rest of eternity. Or at least as long as the users continue to perceive the value.
Imagine that your product is ready and released. The first customers are already on board and loving it. Everything is going great.
You’ve achieved success, right?
Yes and no. That’s a great start, but consider a few points before celebrating too much.
What’s your pricing strategy? When does the company reach profitability? How long can you continue to operate without securing additional investment?
For those answers, your SaaS business needs a financial model.
A financial model combines your current finances with the business’s forecast.
In short, a model is a plan for the company’s finances that can also serve as a decision-making tool.
But, like most things in life, the “garbage in, garbage out” principle also applies to financial modeling. An economic model is only as good as the information you put in it.
The validity of the model’s assumptions significantly impacts the value of the information generated by the model. Using the model as a decision-making aid requires the numbers behind it to be anchored in reality.
A startup needs to grow to achieve profitability and succeed.
Forecasts help founders grow startups by allowing the team to get clear about expectations.
Through forecasting, you have the opportunity to plan your company’s future. Modeling multiple scenarios allows you to simulate how internal and external events will impact the business and its trajectory.
The SaaS financial model can also be used to value the business and compare it to others in the industry.
Once your model is in place, use it to make decisions about the company’s direction. According to your growth plans, you’ll know in advance how you need to build the team and underlying infrastructures to achieve the startup’s goals.
SaaS companies typically incur the most cost at the start of the business. Unlike physical product businesses, a SaaS product typically has no variable cost per user.
Once you have the product, aside from hosting, customer service, and product improvements, there’s minimal additional cost per unit delivered.
However, profit doesn’t start to occur until later down the line.
SaaS products require a considerable upfront investment paid off through a high per-unit margin.
This business model relies heavily on customer-related metrics. To name a few, a useful SaaS financial model needs to include:
When combined, these customer metrics will show how the customer base will develop and how tweaks to each one can drastically impact your model.
For a good model, you need to make sure you’re tracking these metrics:
A financial model is an essential tool for getting your startup’s financials on track and keeping them there. Defining your roadmap to success can be a significant challenge without a model outlining where you’re going.
But, building your own SaaS financial model can be highly complex. There are a lot of moving parts and many interdependent factors that need to come together.
At Founder’s CPA, our experienced accountants can help build a financial model that reflects the intricacies and challenges of your startup.
Set up a free consultation with our startup finance experts if you’re ready to get started.