Budgeting For Your SaaS Business
At a Glance
Budgeting for your SaaS enterprise is much more than just allocating money under different heads. You need to prioritize your spending in a way to extract the maximum value for money.
There are some important financial concepts which you must understand before undertaking budgeting for your SaaS business.
A great idea, immaculate execution, and the end result…an exciting SaaS product. But the business eventually failed and had to shut shop in under a year despite having a huge marketing budget!! Well, what could have gone wrong when everything with the product and its launch went as per the plans?? The answer is budgeting. It is one of the most crucial yet ignored aspects by SaaS developers. No matter how great your product is, your organization would not be able to sustain the momentum without proper budgeting.
Budgeting does not mean spending huge amounts of money as per a plan; it rather relates to maximizing the returns from every penny you spend, as Crazy Egg did. Crazy Egg is one of the leading heatmap analysis platforms on the web, with over 300,000 active users. How much do you think the company spent to get its 100,000 users? $ 10,000!! Yes, with a meager marketing budget of $ 10,000, the company achieved for which many big corporations might need to spend hundreds of thousands, if not millions of dollars. How was the Crazy Egg able to achieve it?
Simple, by creating a sign-up driven homepage, it offered a solid value proposition for its target customers. A free heatmap analysis of their website and the cost being…their email address only. How did they generate the traffic? They focused on where their target customers were, i.e., instead of spending huge amounts on PPC campaigns; they placed their ads on CSS gallery sites where they were able to target numerous web designers. This focused spending allowed them to have a database of over 20,000 target users by the time they were ready for a launch. This translates into 50 cents per lead! Since then, the company has gone from strength to strength and has managed to create partnerships with various partners who are driving more users to their platform. A win-win for all! Hence, for your SaaS enterprise, you also need to prioritize your spending instead of blindly following the others.
Need For SaaS Budgeting
SaaS business budgeting is one of the most important tasks that you need to undertake even when your product is in the development stage. After every month, it is important to check the cash burn or operating income to ascertain where most of your money is going. Moreover, if you are a startup, the chances are that you don’t have unlimited capital to spend. So, if you do not track your money, your SaaS business is in real trouble. Even if you have a high sales efficiency or growth rate, every business needs to have a flexible budget and check from time-to-time if you are able to maintain it.
In your SaaS business or a startup in general, every single penny should be invested judiciously. So, sit down with your financial team to discuss every section of your business, where more cash outflow is required and where excess cash outflow needs to be checked.
Importance Of A Business Budget?
A business budget is a detailed strategic plan that assigns a particular job for every penny you have. Your business budget will check how you are spending your financial resources on a monthly or yearly basis. When you compare your monthly business budget to how you have spent the money, you can understand your performance. A good business budget helps you to predict a number you can expect to earn, followed by planning how to spend your revenue. Sometimes a few investments might seem easier to make than they actually are. So, making a business budget helps you to focus more on reality and make decisions accordingly.
Must Include Elements In Your SaaS Business Budget
You need to make a precise budget for your SaaS business, which comprises simple calculations yet helps you to understand the current financial scenario of your company. Here are some key components that will form the core of your SaaS budget: –
– Expected Revenue
Your estimated revenue is the amount of money that you expect your company to make. It does not matter how much money you have spent to earn that revenue, but that is the first line on your budget, and you should have a precise understanding of what you expect and the actual revenue earned. Your annual revenue is basically the money you earn after selling your SaaS product during the whole year. You can predict your annual revenue by looking at the previous year’s revenue of your company and adding to it your growth expectations. If you are predicting the quarterly revenue, you should compare it with the revenue from the same quarter in the previous year.
– Fixed Cost
Fixed costs of your company remain consistent no matter how much you are making monthly or annually. Some of the examples of fixed costs are advertising (website hosting and media campaigns), salaries of your employees, mortgage payment, insurance money, internet expense, utilities (electricity, water), etc. Every month calculate all of these costs and add them up to find out the total fixed cost. Most of the companies overlook some of these basic costs and forget to add them up to their budget.
– Variable Costs
The variable cost is closely related to your production and the number of units of your product you are selling monthly or annually. So, the sales volume of your company determines the variable costs of your SaaS business budget. Some of the factors that are responsible for the changing of the variable costs are raw materials, shipment charge, packaging cost, etc. If the cost of your raw materials increases, this means your total production cost increases as well, bringing down the profit. In this situation, whether you should increase your product price or continue to sell for a low profit depends on other economic factors.
– One-off Costs
One-off costs generally refer to the one-time cost that you paid while setting up the new business. Now, starting your SaaS startup from your basement is a whole different story, but when you actually rent an office and start hiring employees, there is a list of the one-off cost that you must take note of. You do not need to check your one-off costs every month, as costs like buying laptops for your business or furniture for the office is a one-time cost. But if your business is opening more offices in other regions, then these one-off costs must be incurred again.
– Cash Flow
The calculation of your cash flow is one of the most important tasks you need to do while calculating your SaaS business budget. The cash flow factor determines if your company is getting more inflow of cash or is in some serious trouble. The cash blow is basically determining how much money is going out of your company’s account and how much money is getting in. So, you can understand your SaaS business should have a positive cash flow, which means more money should come into your company than leaving. If the situation is otherwise soon, your company will run in the loss.
The amount which is left after deducting all your expenses from the annual revenue is your annual profit. If your profit is increasing every quarter or, say, yearly, this means your business is making positive growth. You have an expected revenue for your company. So, deduct all the costs and check your expected profit. If you see the difference in your revenue and expense does not have a good number, then you need to rethink your cost. In this stage, you should discuss what all the extra costs are and at the same time spread the word about your product to increase sales. Make sure you factor in all the applicable taxes here as well.
Maintaining spreadsheets is very crucial for proper budget planning. Make a summary page where each category of your costs and income is mentioned along with the respective amounts. This is best done in excel, though you may use some other professional accounting software as well. Irrespective of what approach you are taking, budgeting for your SaaS business is a task that must not ever be overlooked.