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Running a successful SaaS enterprise without a robust financial management framework in place is virtually impossible. Whether it be plugging revenue leaks or optimizing the marketing spend, financial planning has an important role in every SaaS business.
Companies need to prove their worth — day after day, month after month, year after year.
Kaiser Mulla Feroze
Optimal management of finances is extremely crucial for the success of any SaaS enterprise. This can be achieved through active monitoring of key financial metrics.
If you ever have plans to start your own SaaS Business, the entire point will revolve around earning and growing with your products to offer a decent return to your shareholders. Then, there are some indispensable expenses while there are various expenditures that you could also say no to. Then there is all the activity going-on at the back end for which you require a regular flow of money. Whatever may be the aspect, management of finances for your SaaS business is crucial for its survival.
Managing finance for your SaaS business is not that straightforward. A certain level of revenue might be too good for one company but might not cut another SaaS business. To keep a tab on your SaaS enterprise’s financial health, you need to constantly monitor several key SaaS benchmarking metrics. These metrics will help you ascertain your SaaS company’s ongoing performance and take any corrective actions as required.
Importance Of SaaS Financial Metrics
Strength and growth only come through continuous efforts and struggles.
In market terms, only a profitable business can be regarded as a healthy one. Any SaaS enterprise cannot last long in the market without implementing efficient financial management techniques. The more surplus revenue a SaaS Business has, the better its chances of achieving its growth and expansion goals.
Even if your goal is to be acquired by a large company, the best way to ensure it is to run a profitable business. With higher profitability, SaaS businesses can raise more money, attract new investors, and fuel their growth in a quick time.
By monitoring top financial benchmarking metrics for your SaaS business, you can easily ascertain your annual growth and set the growth targets for the next year.
Top Financial Metrics To Manage Your SaaS Enterprise
When it comes to financial management for a SaaS enterprise, various important metrics need to be considered. Here are some of the top financial metrics that will help with the monitoring of the financials for your SaaS business: –
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue refers to the number of sales accounts that you are gaining or losing each month. In a SaaS business, this is the most common way to measure your sales team’s efficiency. If you are offering your SaaS product on a monthly subscription model, this KPI will help you determine the exact number of customers paying for the product.
To generate additional SaaS business finance, one-off sales are great, but they are ineffective in the long run. MRR helps you to plan the necessary steps to increase your monthly subscriptions even further. The easiest way to calculate your MRR is to subtract non-recurring revenue from total monthly revenue. MRR is regarded as the top finance benchmarking metric in the SaaS business finance index by more than 60% of the entrepreneurs.
Monthly Churn Rate
The second Metric for your SaaS business finance would be the monthly churn rate. This is closely related to MRR, so they both need to be analyzed and calculated together. To find out the monthly churn ratio, you would have to calculate the number of customers you lost in a month and then divide it by total monthly customers.
This financial metric will help you find out the number of customers you have lost in a given month. Your monthly churn rate can’t be zero. There will always be a customer using your services on as and when needed basis. Though, experts suggest that the monthly churn rate should preferably be under 10.
Average Revenue Per Customer (ARPU)
This is regarded as one of the most important financial metrics for a SaaS Business. ARPU helps you to cross-sell and upsell your existing customers. When the monthly recurring revenue and monthly churn rate are settled, it becomes important to increase the revenue you earn from each existing customer. ARPU is derived by dividing your total monthly revenue by your total monthly customers. Calculating this metric every month will help you identify gaps in your upselling and cross-selling strategy and take the necessary steps as required.
Lifetime Value Of Customer (LTV)
This top finance metric helps you determine the long-term chances of success of your SaaS business. It measures the total amount of revenue you expect to make on each customer, from their first purchase to their last purchase. LTV is derived by multiplying your average revenue per customer and average subscription length. This will give you the expected total earnings you should make from each customer.
Afterward, you must multiply this amount by the number of recurring customers you already have to see how much money you will make over the business’s lifetime.
Cost Per Acquisition (CPA)
This financial metric will help your SaaS Business with its finance and accounting requirements. CPA is regarded as the linchpin of any SaaS business. You can have a great product and might be adding new customers every month, but if you spend too much money to acquire each customer, what is the use? Your business might erode its net worth as a result. This is where CPA comes in handy. It is calculated by adding total market expense and total sales expense and then dividing the sum by new monthly customers acquired.
CPA measures the marketing and sales costs needed to onboard and acquire customers. This is an important KPI. If your CPA is higher than LTV, your business can not succeed, irrespective of the financial resources at your disposal.
Financial management holds the key to success for all SaaS businesses. By monitoring the key finance metrics mentioned above, you will be able to effectively monitor your SaaS business’s health. If required, you will also be able to take corrective actions as and when required.