SaaS Finance: 10 Financial Metrics Every Business Needs to Track
There are many KPIs out there you can track when it comes to understanding the financial health of your company. SaaS finance leaders shouldn't feel overwhelmed at the thought of choosing which to focus on. These 10 SaaS financial metrics are important, regardless of the size of your business.
Finance sits at the intersection of all company data for SaaS businesses, putting it in the best position to assess the overall health, performance, and growth potential of the business.
SaaS finance refers to the collection of financial models, plans, and operational key performance indicators (KPIs) that keep subscription-based software businesses running smoothly. It’s a particularly complicated area of finance because of the challenges that come with modeling and reporting on recurring revenue. And the complexity of that SaaS finance metric has ripple effects for reporting across the rest of the business.
There are many KPIs that can provide insight into your business model, but choosing which ones to focus on can be overwhelming. Having the right financial metrics at your fingertips helps keep your company’s leadership team aligned when strategizing, whether the decisions they’re making relate to marketing tactics, staffing levels, employee training, customer service, or your SaaS product.
But what should you focus on? The following 10 SaaS financial metrics are essential to understanding your company’s performance as well as how you can improve (or sustain) your company’s revenue growth.
1. Recurring Revenue (MRR and ARR)
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are two financial metrics that will help you predict your SaaS company’s revenue. MRR helps you understand how your growth might look in the short term, while ARR gives you an idea of your long-term growth.
Tracking your MRR and ARR is an easy way to understand how consistent you can expect your revenue stream to be, how and why your revenue changes over time, and if your revenue is growing.
How to Calculate Recurring Revenue
To calculate your MRR, start by dividing the total value of each customer’s contract by the total months of their contract. Then add the sum for each of your customers together to calculate your total MRR.
You can calculate ARR by adding all of the revenue from each customer contract that is 12 months or longer and is still active at the end of the time frame that you’re calculating.
If you have a lot of customers whose contract length varies but isn’t short-term or one-time, it may be helpful to calculate your annualized MRR as an alternative to ARR. To do this, multiply your current MRR by 12.
2. Customer Lifetime Value (LTV)
Customer lifetime value (LTV) is the amount of revenue you can expect to earn from each of your subscribers over the lifespan of their time with your business. This financial metric helps you understand if your SaaS product is a good fit for the market, if your customers are loyal to your company, whether you’re losing money acquiring customers, and who will give you repeat business or only be a short-term customer.
How to Calculate Customer LTV
Calculate LTV by taking the average revenue you earn per customer within a year, multiply it by your gross margin, and then divide it by your churn rate.
3. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the amount of money your company is spending on average to gain each new customer. You can use CAC to understand whether or not the sales you’re making are high enough to cover the amount you’re spending to attract customers. If you’re spending more on marketing campaigns aimed at getting new subscribers in the door than the average customer contract brings in, you’re losing money on them.
How to Calculate CAC
Add together all the money you spent on sales and marketing to acquire customers within a given period, then divide it by the number of new customers who signed contracts within the same time period.
4. CAC Payback Period
Your CAC payback period is the length of time in months that it takes for your company to break even on the amount it has spent per customer acquisition. The shorter your CAC Payback Period is in relation to contract length, the more profit you’re earning per customer. If the CAC payback period is the same amount of time or longer than the length of the contract, you’re either breaking even or losing money on customers.
How to Calculate CAC Payback Period
You can calculate your CAC Payback Period by dividing your CAC by the total of your MRR multiplied by your gross margin.
5. Average Revenue Per User (ARPU)
Average revenue per user (ARPU) is the amount of revenue you can expect to make from each of your individual customers on average. This number can be used to track the growth or loss in revenue you’re earning per customer over time.
Additionally, by calculating the ARPU at each of your subscription levels, you can tell which of your offerings is the most profitable and help you decide where you should focus to gain new customers.
How to Calculate ARPU
To calculate ARPU, take your total revenue in a specific period of time and divide it by the total number of users within that same time period.
If you want to calculate ARPU by subscription level, take the sum of your total revenue in a specific time period for a single subscription level, then divide it by the number of users within that same time period who were at that subscription level.
6. Churn Rate
Your company’s churn rate is the percentage of customers who stop using your product or services within a specific time period. In addition to calculating your customer churn rate, you can also calculate the churn rate of your revenue, which is the monetary amount that has churned over a specific time period.
Your churn rate can help you understand your customer retention, customer satisfaction, and whether or not your customer success and marketing efforts are working. Because it’s cheaper to keep or upsell an existing customer than acquire a new one, having a high churn rate can mean your customers are unhappy and that more can be done to keep them.
How to Calculate Churn Rate
To calculate your Churn Rate, divide the number of customers that you lost in a given month by the number of customers you had at the beginning of that month.
To figure out your revenue churn rate, first, take your MRR from the beginning of the month and subtract your MRR from the end of the month. From that number, subtract the MRR in customer upgrades from the same month and then divide the result by your MRR from the beginning of the month.
7. Burn Rate
Your burn rate is the rate at which your company is spending your supply of cash on hand or your startup capital if you’re a new business. Understanding your company’s burn rate helps you forecast your overall cash flow, including how long you can operate before you run out of money or how long you have until reaching profitability.
It can be calculated in gross burn rate, which is the amount you’re spending in operating costs on a monthly basis, and net burn rate, which is the amount you’re losing on a monthly basis.
How to Calculate Burn Rate
You can calculate your gross burn rate by dividing the total amount of cash you have by the amount you spend on operating expenses each month.
To calculate your net burn rate, divide the total amount of cash you have by the amount of operating losses you incur each month.
8. Gross Margin
Your company’s gross margin is the total amount of revenue you’re taking in from your customer base after subtracting the cost of goods for your product or service, including web hosting fees and the cost of your customer support and account management services. The higher your company’s gross margin, the more money you’re retaining from each of your sales.
How to Calculate Gross Margin
Calculate your gross margin by taking your total revenue for a time period, subtracting the cost of goods sold within that same period, and then dividing the total by your original total revenue.
Bookings are the value of the contracts that your customers have signed showing they are committed to purchasing your product or service. Bookings help your sales team know how well they’re performing and help your CFO and finance team plan for the future by giving an estimate of how much revenue will be coming in from new customers. Because contracts can fall through, this number can be higher than your actual revenue for the same time period.
How to Calculate Bookings
At its most basic level, a booking is the contract value for each customer.
Figure out your company’s total bookings for a specific time period by adding together the revenue earned from new contracts, contract renewals, and upgrades or add-ons, then subtract the revenue from customers who have downgraded or churned within that time period.
10. Sales Rep Ramp
Sales ramp is the amount of time that it takes for a new sales representative to reach their full productivity. Understanding this figure is key because it directly impacts the growth of your company.
The shorter the Sales Rep Ramp, the more revenue you’ll earn. The more precise you can be when calculating your Sales Rep Ramp, the more accurately you can calculate your models when planning for the future.
How to Calculate Sales Rep Ramp
There are a few different ways to measure sales rep ramp. The first is by taking hire dates or length of employment from your HR system and combining sales performance data like targets and quotas from your CRM for each of your sales representatives to get an accurate historical view of your ramp rate.
The second is by taking your sales representatives’ performance data from your CRM and seeing how long it takes them on average to reach their full sales quotas or targets. You can also analyze your ramp rate by separating your sales representatives by experience level, so you have a better idea of the ramp rate of new hires based on their experience level.
Make Tracking Your Company’s Key SaaS Financial Metrics Easy
While there are many other key metrics out there, the 10 metrics listed here are important to track regardless of the size and maturity of your business. They can indicate the health of your company’s current performance, as well as provide you with insight on what your business can expect in the months to come. With this information, you can be well-prepared to make critical decisions that will have the most beneficial impact on your business’s long-term success.
Tracking these SaaS financial metrics can be tedious, but you don’t have to be overwhelmed by the need to constantly update your numbers. Mosaic can streamline the data from your company’s CRM and HR software to make capturing important metrics easy. By syncing your existing systems to your Mosaic account, your data will be pulled in and updated automatically in real time, so you no longer have to pull data from multiple places and calculate formulas.
Click here for a demo to see how Mosaic can make tracking your top metrics easy.
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