SaaS financial models are some of the most difficult to create because of the nuances associated with recurring revenue models. Templates can help give you a head start. But you can't rely on them entirely. Here's what you need to know to go from a template starting point to a fully custom SaaS financial model that guides your business to strong growth.
Doing FP&A at a SaaS startup? If so, you know every move counts. And you also know that the way you modeled out the business at your last company probably won’t carry over exactly to this one.
There may be hundreds of templates available online for SaaS financial models, but the truth is that there’s no such thing as “one-size-fits-all” in this line of work.
The type of model you use depends not only on your industry and maturity level but also on the idiosyncrasies of your individual SaaS business. As you’ll see, certain aspects just can’t be made to fit into the templates you might find on Google.
Read on to learn how you can build a reliable, robust financial model that’s specifically designed for your SaaS startup.
Table of Contents
What Is a SaaS Financial Model?
A financial model is a detailed breakdown of your company’s current and future financial position. Based on three components — historical data, assumptions made about future conditions, and relevant KPIs — financial models help you plan revenue growth, manage risk, and build targeted, strategic budgets.
A SaaS financial model is a financial model that’s built specifically for a SaaS business — and that’s a lot more important than you may realize.
It goes without saying the way a SaaS business operates is very different from your “typical” company that revolves around one-time expenses. With the need to space out funding rounds, keep a close eye on customer acquisition cost and churn, and manage increasing development costs, things are arguably a lot more complicated for SaaS companies.
But the most obvious factor that differentiates a SaaS business model from a more traditional model is that SaaS companies depend on recurring revenue. And that’s the real kicker – financial models designed for more typical businesses don’t capture the nuances of recurring revenue.
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SaaS Financial Model Template
In order to be useful to you, your SaaS startup financial model needs to keep track of all these KPIs. Let’s take a closer look at some of the most important SaaS financial metrics.
SaaS Startup Metrics
While there are countless financial metrics that will matter to your SaaS business, the following are most critical to your financial model.
- Monthly recurring revenue (MRR):the total amount earned in a specific month from contracts. Useful for a short-term view of how subscriptions are rising (or falling) from month to month.
- Annual recurring revenue (ARR):the amount earned in a year from contracts.
- Customer acquisition cost (CAC):the average amount of money spent to gain a new customer. This metric tells you how cost effective your marketing is.
- Customer lifetime value (LTV):how much you earn per customer over the entire course of their relationship with your business, on average.
- CAC payback period:the average length of time (in months) it takes to break even on your customer acquisition cost. Keeping this number low in relation to your average contract length indicates you’re earning a healthy profit per customer
- Average revenue per user (ARPU):shows how much revenue is generated from your average customer over a specific timeframe, typically a month or year. An ideal metric for benchmarking.
- Revenue per head: the amount of revenue you earn in terms of the size of your employee base.
- Gross margin:the amount of money you’re retaining after subtracting the cost of goods sold. Important for valuation.
- Logo retention rate: the rate at which you’re retaining customers. Useful to determine product market fit and overall customer satisfaction.
Keep in mind it’s not only the metrics that are important, but the relationships between them. A good example is your LTV:CAC ratio. If the ratio is 1 to 1, it means you earned the same amount from a customer that you paid to bring them in — not ideal. It’s best to aim for at least a 3:1 ratio, where you’re earning three times more per customer than it cost to onboard them.
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Why Is Financial Modeling Important?
Financial modeling is important for plenty of reasons! The most obvious is that models provide a roadmap for the future, helping guide the decisions you make today. Looking to increase headcount or launch a new marketing campaign? Your financial model will show you if that’s a good idea.
While it’s important for any business to think this way, we’d argue it’s doubly important for startups, who often have limited resources. FP&A teams need to be quite sure they’re allocating those resources in a way that promotes steady – but not too rapid – growth.
From your model you can set, and then achieve, realistic goals. You’ll be able to plot out a tight plan that shows when you need to raise funding, when you should expand, and when you should scale back – all in a balanced way that keeps your cash runway at an optimal length.
Building solid financial models has the added bonus of attracting investors, who will be able to get a good sense of revenue (and how long it’ll take the startup to achieve profitability) as well as risks. By building models based on realistic assumptions, you show them you understand your industry – that your vision is grounded in reality.
Finally, financial models are also used for valuation of early-stage startups.
When Financial Model Templates Don’t Work for SaaS
So you’re convinced — financial models are important for your SaaS business, and you want to get started building one. But there’s a trap that’s very easy to fall into— relying heavily on a SaaS financial model template.
After all, why not? They’re freely available on Google. The problem is each business is unique. Remember how we said financial models are built partly on assumptions? Well, the assumptions in the template won’t reflect the reality of your startup. You’ll then spend hours tearing it up, rearranging it, trying to build the house you want with someone else’s blueprints.
It’s also difficult to collaborate using spreadsheets. With templates, you’re the only one who understands the assumptions that are powering the outputs, which can be difficult to break down for stakeholders.
Finally, SaaS companies need to be able to pivot on a dime. If you don’t have a real-time view – something that’s impossible to achieve with spreadsheets — that can be unnecessarily difficult.
So, what’s a better option than financial model templates? Building financial models from scratch, so that they match your customer acquisition strategies, revenue streams, and unique business dynamics from the get-go.
We realize that sounds intimidating, but it’s not as bad as you may think – with the right software, part of the process is already done for you. We’ll walk you through the steps below.
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Build Your Customized SaaS Financial Model
Build a Three-Statement Model
First things first: before you build your targeted SaaS financial model, you’ll need to create a three-statement model. The three-statement model combines your balance sheet, cash flow statement, and income statement. It’s a foundational model that provides a quick snapshot of your business, and makes it possible to build more complicated models (like DCF or IPO models).
To build one, you’ll have to forecast your financial statements based on certain assumptions you make about the trajectory of your business.
Determine Your Objective
Next, you’ll need to ask what your objective is. Is it to secure a new round of funding? Is it to boost marketing costs while increasing revenue? Your objective will inform what type of model you make.
Regardless of what stage you’re at in your startup, though, your financial model relies on four building blocks: headcount, revenue, expenses, and the balance sheet. Your goal is to (no pun intended) balance this all out in a way that lets you acquire new customers, make new hires, and attract funding in a strategic, sustainable way.
Build a Revenue Model
Understanding revenue growth is the key to financial planning. Accurate sales forecasting helps you set realistic targets and budgets, assess profitability, and determine when it’s better to raise funding or grow revenue naturally. There are multiple methods of SaaS revenue forecasting – which model you should use depends on your size and sales history.
For instance, if you’re an early-stage startup without much historical data you might use an ARR snowball model. If you do have some history, along with sales-heavy go-to-market motions, you might use a quota capacity model.
Regardless of which model type you use, you’ll need to collect data from your CRM. Mosaic connects your financial model to your CRM , so that your top-line forecasts are continuously updated based on real-time information. From there, you can plan out price points by tweaking your sales price, and test your assumptions by altering the number of opportunities.
It’s here in your revenue model that you’ll be able to see some of those critical SaaS metrics mentioned above like CAC, LTV, and average revenue per user. You’ll also be able to view new bookings, average sales price, and the average length of your sales cycle.
Plan Headcount
Let’s start with one of your biggest costs – headcount. For a SaaS business, it can cover as much as 75% of expenses.
It’s no secret many SaaS companies overestimate how fast they’ll grow and make too many hires — on the other hand, they could make too few hires, getting into a situation where they’re understaffed.
To forecast your needs and achieve the right balance between too many and too few employees, you’ll need robust headcount modeling. Headcount modeling can be top-down (based on objectives communicated by company leaders) or bottom-up (based on headcount needs expressed by department heads).
Whichever you opt for, you’ll need a holistic view of different functions and their capacity needs. You’ll also need to understand the fully-loaded costs of employees — it’s not just salaries and benefits!
Mosaic can help. By integrating with your HRIS, you’ll see the exact breakdown of employee costs across salaries, taxes, sign-on costs, and more. You can also test specific hiring plans and see how they affect growth.
Chart Expenses
For expenses, you’ll have to look to your ERP.
If you’ve ever tried to build a financial model from scratch, you’ll know going through and entering data from hundreds of GL accounts isn’t the fastest (or most entertaining) task. Nevertheless, doing so is crucial to get a handle on the unique nature of your business.
Here, automation can be a particularly big time-saver. Mosaic connects to ERPs like QuickBooks to map GL accounts into customizable categories. Pre-built model methods include per month, per head, and percentage of account. Historical averages update dynamically, saving dozens of hours each month and helping you build a tight rolling forecast.
Here, you can test assumptions at the department and account levels – for instance, if you know your sales and marketing departments travel more than your function, that’s easy to model.
Browse Your Balance Sheet
The final piece is working capital, the focus of your balance sheet. It’s by observing your balance sheet that you can understand your cash flow rhythm and build solid financial projections that guide spending in your SaaS financial model.
With Mosaic’s balance sheet you can also project large inflows and outflows like a funding round or an investment in equipment to see how they affect your bottom line.
The balance sheet is also connected to the headcount planner, the top-line planner, and the expense planner. By testing assumptions in one – say, to add 5 new employees within the next 6 months – you’ll see how that affects your overall liquidity position.
Don't Neglect Design
So we’ve gotten through the four building blocks, but there’s more to it than that.
Financial models are meant to make complicated situations easy to understand, something you can quickly look at and get a sense of what’s going on (especially important for potential investors!) That means the design is just as important as the data
Make sure everything is clearly laid out, with obvious connections in how you structure things from one point to the next. For example, you might put assumptions right below the historical and/or market data they’re based on. You’ll especially want to make sure assumptions are highlighted – stakeholders might notice they’re off, forming backup validation.
Based on the purpose of your model, you might want to bring attention to different details. If it’s to secure investment, highlight revenue drivers. If it’s for budgeting, highlight expenses and spending priorities.
Once your model is complete, you can dynamically plan for different scenarios. This is a good way to test the vulnerability of the assumptions you’ve made. Build your model so that alternative assumptions can be input easily.
How Mosaic Can Help
For startups, flexibility and testability are key concepts.To get the most out of your SaaS financial model, then, you need one that continuously updates based on actuals, that allows you to pivot if you need to.
Rapid growth can make it difficult to stay on top of all the data in your CRM or ERP, especially if you have low headcount. When stakeholders want to get the company’s latest projections ASAP, that can be a problem.
This difficulty is one reason so many people use financial templates in Excel. But, if you’ve read this post up until here, you know how that can be an issue for SaaS financial modeling.
With software like Mosaic, you get two benefits: all this information is sourced for you automatically, from your pre-existing systems. It also builds those connections automatically, so you don’t have to worry about hard-coded cells mucking up the whole model. You get a holistic view of your financial situation based on all the indicators that matter.
Mosaic also includes a large metrics catalog that makes it easy to track your progress towards specific goals – specific, realistic goals enabled by that holistic view.
Get your startup off to a good start with a powerful, custom-built SaaS financial model today.
