How to Build a SaaS Financial Model
By Space Coast Daily // February 2, 2023
A financial model is an essential tool SaaS companies should use to forecast their business’s future financial performance.
The model is designed based on the organisation’s historical performance while also containing assumptions about future performance.
Financial models are usually built in Excel, although there are many software packages available for SaaS organisations to be used instead. Even though each company creates its own model, some things should always be illustrated by the end of the development. These include:
- Growth drivers – The key thing about the finance model is that it must give you insights into what levers to focus on to drive business growth, whether this will be a website conversion or upselling.
- Milestones – Alongside insights on growth drivers, your SaaS financial model should provide a clear sense of the milestones you need to boost growth, offering your team actionable and sequenced targets.
- Organisational structure – Although a financial model should be developed at the very beginning, it must represent how your team should look over time, including the number of team members and resources you may need.
What Exactly is a SaaS Financial Model?
A financial model is a document that summarises your business position according to certain metrics, helping forecast its future financial performance.
A SaaS financial model is used by organisations to determine your company’s full financial position and contains predictions regarding the future. It is vital to note that you can use this financial instrument to make projections and hypotheses regarding your business future to be ready for situations that may appear. Even when choosing an expense management card, like Divvy vs Brex, you need to consider all the subtleties of the financial model. A well-thought-out model can help you raise capital, show your business value to investors and make data-based decisions.
In an ideal world, your SaaS financial model should tell the following things about your company:
- Cost of acquiring and retaining clients;
- Costs and reasons for switching to a subscription payment model;
- Benefits of a new subscription;
- Financial stability and sensitivity of your organisation in the status quo;
- Changes your company may need to improve the financial picture.
Gaining those insights will not be easy, thanks to constant changes in variables such as supply and demand, new laws and so on. But try to make this data as predictable as possible so you can have a clear picture of your organisation’s status, etc. This data will be used to position your company better and make informed long-term decisions. Note that the traditional financial model may not suit your business, so explore options before starting its development. Tracking financial situations in the SaaS industry differs from other businesses.
How to Build a Saas Financial Model?
A SaaS financial model will be used to make smart and data-driven decisions about key business areas, such as making acquisitions, raising money, organising the budget and forecasting, which helps grow the business organically. Financial models for SaaS businesses can also become a valuable tool to estimate the business’s value and compare your company to competitors.
Although it is vital for any early-stage SaaS financial model to be as accurate as you can do it, you should always remember that not every projection you make will be accurate and truthful. But the thing is that not all of them should be realised. The most vital thing for your SaaS financial model is to demonstrate that you have accurate and clear projections regarding all elements that can potentially affect your business, like market share, adoption rates and competitors.
To make it effective, your financial model should include reasonable and realistic projections regarding the future of your business according to well-structured, dynamic spreadsheets. Knowing how to build your financial model for a SaaS business depends on several factors, but the process usually looks like this:
- Enter your global controls, such as start date, WACC (weighted average cost of capital), starting cash balance, sales as well as marketing percentage.
- Enter your revenue predictions, such as MRR/ARR, customer churn, suggested customer growth, renewal amount you want by the specific timeline and SaaS negotiation management costs.
- Include your headcount assumptions (this should also cover all expenses relating to wages).
- Include non-wage assumptions as well (all expenses that aren’t linked to wages).
- The last point is to recheck the data and get insights on the basic overview of your business’s financial forecast.
What Makes a Well Financial Model for SaaS?
The financial model should contain assumptions that provide a clear idea of the company’s growth based on the current performance. It works as a good starting point and illustrates the company’s upcoming financial statements. A well-structured financial model should offer accurate, realistic, and quantitative assumptions of your SaaS organisation.
Although some expectations may not be realised in the future, a successful SaaS financial model should be as precise as possible. It is vital to use the same formula each time you make this model, and the numbers should also be accurate. Ensure you keep your values clear and free from fatal errors like intricate models, lack of data, illogical decisions, hiding rows/columns, complicated formulas, etc.
To make your SaaS financial model work as it should, you should keep it flexible and adaptable to situations that may occur in the future. A dynamic and adaptable model will allow you to add several values into cash-flow projections, such as debt services, inflation rate, as well as other useful sections. Additionally, different analysts can add data based on their own experiences and predictions.
SaaS businesses are incredibly popular today, so the competition is high. If you choose to level up your business or run a successful organisation in this market, you will need to know your financial plans and accurately estimate the budget used for the business.
This guide explained what a SaaS financial model looks like and how you can create one.